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Asymmetric Information and the Medium of Exchange in Takeovers: Theory and Tests

33 Pages Posted: 12 Nov 2008  

B. Espen Eckbo

Tuck School of Business at Dartmouth; European Corporate Governance Institute (ECGI)

Ron Giammarino

University of British Columbia (UBC) - Sauder School of Business

Robert L. Heinkel

University of British Columbia (UBC) - Division of Finance

Date Written: 1990

Abstract

In a model of takeovers under asymmetric information, we identify a separating equilibrium in which the value of the bidder firm is revealed by the mix of cash and securities used as payment for the target. The model predicts that the revealed bidder value is monotonically increasing and convex in the fraction of the total offer that consists of cash. We examine the model restrictions using data from Canada where mixed offers are both relatively frequent and free of the confounding tax-related options characterizing mixed offers in the U.S.. We find that the average announcement-month bidder abnormal return in mixed offers is large and significant. However, maximum likelihood estimates of parameters in both linear and non-linear cross-sectional regressions fail to support the model predictions.

Keywords: Takeovers, method of payment, separating equilibrium, mix cash-stock payment, all-stock payment, all-cash payment, maximum likelihood estimation, bidder announcement returns

JEL Classification: G3, G32, G34

Suggested Citation

Eckbo, B. Espen and Giammarino, Ron and Heinkel, Robert L., Asymmetric Information and the Medium of Exchange in Takeovers: Theory and Tests (1990). Review of Financial Studies, Vol. 3, pp. 651-675, 1990. Available at SSRN: https://ssrn.com/abstract=1299862

B. Espen Eckbo (Contact Author)

Tuck School of Business at Dartmouth ( email )

Hanover, NH 03755
United States
603-646-3953 (Phone)
603-646-3805 (Fax)

HOME PAGE: http://www.tuck.dartmouth.edu/eckbo

European Corporate Governance Institute (ECGI)

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

Ronald Giammarino

University of British Columbia (UBC) - Sauder School of Business ( email )

2053 Main Mall
Vancouver BC V6T 1Z2
Canada
604-822-8357 (Phone)
604-822-4695 (Fax)

Robert L. Heinkel

University of British Columbia (UBC) - Division of Finance ( email )

2053 Main Mall
Vancouver, BC V6T 1Z2
Canada
604-822-8347 (Phone)
604-822-8521 (Fax)

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