Financial Constraints and the Method of Payment in Mergers and Acquisitions

41 Pages Posted: 21 Mar 2009 Last revised: 27 Feb 2011

Abdullah A. Alshwer

University of Wisconsin - Milwaukee

Valeriy Sibilkov

University of Wisconsin - Milwaukee - Department of Finance

Nataliya S. Zaiats

Suffolk University Sawyer Business School

Date Written: February 25, 2011

Abstract

Financially constrained bidders are more likely to use stock in acquisitions and are significantly more sensitive to stock valuations and growth opportunities in their method of payment decisions than are unconstrained bidders. Furthermore, in stock-swap transactions, constrained acquirers with high stock valuation offer higher acquisition premiums and capture smaller shares of acquisition gains than low valuation acquirers. The findings indicate that financing frictions affect payment method and are not alleviated in acquisitions. Moreover, the pecking order of capital structure is violated for constrained firms, as they save internal resources to reduce their future financing uncertainty and maintain financial flexibility.

Keywords: Financial constraints; cash holdings; financial flexibility; corporate control transactions; mergers; acquisitions; method of payment

JEL Classification: G31, G34

Suggested Citation

Alshwer, Abdullah A. and Sibilkov, Valeriy and Zaiats, Nataliya S., Financial Constraints and the Method of Payment in Mergers and Acquisitions (February 25, 2011). Available at SSRN: https://ssrn.com/abstract=1364455 or http://dx.doi.org/10.2139/ssrn.1364455

Abdullah A. Alshwer

University of Wisconsin - Milwaukee ( email )

Bolton Hall 802
3210 N. Maryland Ave.
Milwaukee, WI 53211
United States

Valeriy Sibilkov (Contact Author)

University of Wisconsin - Milwaukee - Department of Finance ( email )

Milwaukee, WI 53201-0742
United States

Nataliya S. Zaiats

Suffolk University Sawyer Business School ( email )

8 Ashburton Plance
Boston, MA 02108
United States

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