The Timing and Method of Payment in Mergers when Acquirers Are Financially Constrained
49 Pages Posted: 18 Feb 2013 Last revised: 31 Oct 2017
Date Written: October 30, 2017
While acquisitions are a popular form of investment, the link between firms' financial constraints and acquisition policies is not well-understood. We develop a model in which financially-constrained bidders decide when to approach the target, how much to bid, and whether to bid in cash or stock. Because of ability to pay in stock, financial constraints do not affect the identity of the winning bidder. However, they lower a bidder's incentives to approach the target. In equilibrium, auctions are initiated by bidders with low constraints or high synergies. The use of cash 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