The Timing and Method of Payment in Mergers when Acquirers are Financially Constrained
Alexander S. Gorbenko
London Business School
MIT Sloan School of Management
April 26, 2016
While acquisitions are a popular form of investment, the link between firms' financial constraints and acquisition policies is not well-understood. We propose a model that connects bidders' financial constraints to their incentives to initiate deals, bids, and payment method. Because of ability to pay in stock, financial constraints do not affect bidders' maximum willingness to pay. However, both own and rivals' constraints discourage a bidder from approaching the target. In equilibrium, auctions are initiated by bidders with low constraints or high synergies. The use of cash in the payment is positively related to synergies, acquirer's gains from the deal, and negatively to financial constraints.
Number of Pages in PDF File: 46
Keywords: Auctions, financial constraints, mergers and acquisitions, real options, security design
JEL Classification: D44, G32, G34
Date posted: February 18, 2013 ; Last revised: April 27, 2016
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