Corporate Financing Decisions When Investors Take the Path of Least Resistance

Posted: 25 Jun 2008 Last revised: 12 Jan 2009

See all articles by Joshua D. Coval

Joshua D. Coval

Harvard Business School - Finance Unit; National Bureau of Economic Research (NBER)

Jeremy C. Stein

Harvard University - Department of Economics; National Bureau of Economic Research (NBER)

Malcolm P. Baker

Harvard Business School; National Bureau of Economic Research (NBER)

Multiple version iconThere are 3 versions of this paper

Date Written: June, 25 2008

Abstract

We argue that inertial behavior on the part of investors can have significant consequences for corporate financial policy. One implication of investor inertia is that it improves the terms for the acquiring firm in a stock-for-stock merger, because acquirer shares are placed in the hands of investors, who, independent of their beliefs, do not resell these shares on the open market. In the presence of a downward-sloping demand curve, this leads to a reduction in price pressure and, hence, to cheaper equity financing. We develop a simple model to illustrate this idea and present supporting empirical evidence.

Keywords: mergers, inertia, equity issuance

JEL Classification: G32, G34

Suggested Citation

Coval, Joshua D. and Stein, Jeremy C. and Baker, Malcolm P., Corporate Financing Decisions When Investors Take the Path of Least Resistance (June, 25 2008). Journal of Financial Economics (JFE), Vol. 84, No. 2, pp. 266-298, May 2007. Available at SSRN: https://ssrn.com/abstract=1151287

Joshua D. Coval

Harvard Business School - Finance Unit ( email )

Boston, MA 02163
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
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Jeremy C. Stein

Harvard University - Department of Economics ( email )

Littauer Center
Cambridge, MA 02138
United States
617-496-6455 (Phone)
617-496-7352 (Fax)

HOME PAGE: http://post.economics.harvard.edu/faculty/stein/stein.html

National Bureau of Economic Research (NBER)

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Malcolm P. Baker (Contact Author)

Harvard Business School ( email )

Boston, MA 02163
United States
617-495-6566 (Phone)

HOME PAGE: http://www.people.hbs.edu/mbaker

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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