57 Pages Posted: 18 Feb 2013 Last revised: 29 Dec 2016
Date Written: December 28, 2016
While acquisitions are a popular form of investment, the link between firms' financial constraints and acquisition policies is not well-understood. We propose a model that connects bidders' financial constraints to their incentives to initiate deals, bids, and payment method. Because of ability to pay in stock, financial constraints do not affect bidders' maximum willingness to pay, unless they also affect synergies. However, both own and rivals' constraints discourage a bidder from approaching the target. In equilibrium, auctions are initiated by bidders with low constraints or high synergies. The use of cash in the payment is positively related to synergies, acquirer's gains from the deal, and negatively to financial constraints.
Keywords: Auctions, financial constraints, mergers and acquisitions, real options, security design
JEL Classification: D44, G32, G34
Suggested Citation: Suggested Citation
Gorbenko, Alexander S. and Malenko, Andrey, The Timing and Method of Payment in Mergers when Acquirers are Financially Constrained (December 28, 2016). Available at SSRN: https://ssrn.com/abstract=2220006 or http://dx.doi.org/10.2139/ssrn.2220006