Target Financial Independence and Takeover Pricing
63 Pages Posted: 26 May 2012 Last revised: 28 May 2015
Date Written: May 26, 2015
In a large sample of U.S. takeovers, we find that acquisitions of targets with greater financial independence are associated with higher takeover premiums and lower acquirer announcement returns. This empirical result is most consistent with targets’ deriving bargaining power from their financial independence. Raising external funds is costly. Targets that do not depend on external funds do not need new external capital and have no reason to acquiesce potential takeover premium to acquirers that can provide capital. Therefore, more financially-independent targets should be in stronger bargaining positions vis à vis potential acquirers, leading to the effect on takeover pricing that we observe.
Keywords: Mergers, acquisitions, financial independence, raising capital, bargaining
JEL Classification: G34
Suggested Citation: Suggested Citation