Are Stock-Financed Takeovers Opportunistic?
B. Espen Eckbo
Dartmouth College - Tuck School of Business; European Corporate Governance Institute (ECGI)
University of South Carolina - Moore School of Business
Karin S. Thorburn
Norwegian School of Economics; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI)
ECGI - Finance Working Paper No. 393/2013
Tuck School of Business Working Paper No. 2013-121
The estimated probability that a bidder offers all-stock as payment in takeovers increases with measures of market overvaluation of bidder shares. However, when we instrument the bidder pricing error using aggregate mutual fund flows, the reverse happens: greater bidder overvaluation reduces the all-stock payment propensity. Since the price pressure created by aggregate fund flows is exogenous to bidder fundamentals -- while directly impacting bidder pricing errors -- this evidence rejects the notion that all-stock financed takeovers are opportunistic. Bidders paying with stock tend to be small, non-dividend paying growth companies with low leverage, suggesting that financing constraints play an important role in the all-stock payment decision. Moreover, all-stock payment is more likely in high-tech industries, when the two firms operate in highly complementary industries, and when the target is geographically close, indicating that targets in all-stock bids are relatively informed about bidder value. Overall, our evidence does not suggest a particular role for bidder mispricing in driving the all-stock payment decision in takeovers.
Number of Pages in PDF File: 60
Keywords: Takeovers, payment method, mispricing, capital structure, industry relatedness, geographic location
JEL Classification: G32, G34, L2working papers series
Date posted: November 21, 2013 ; Last revised: January 26, 2014
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