The Deterring Role of the Medium of Payment in Takeover Contests: Theory and Evidence from the UK

Cornu, Philippe; Isakov , Dušan

doi:10.2139/ssrn.231839

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The Deterring Role of the Medium of Payment in Takeover Contests: Theory and Evidence from the UK

27 Pages Posted: 26 Jun 2000

See all articles by Philippe Cornu

Dušan Isakov

University of Fribourg (Switzerland) - Faculty of Management, Economics and Social Sciences

Date Written: June 2000

Abstract

The deterring role of the medium of payment in a takeover contest is analyzed from the point of view of the bidder. Cash, debt and equity are considered as alternative mediums of payment, and the bidder equilibrium strategies are specified following the Perfect Bayesian Equilibrium requirements for a signaling game. The model predicts notably that cash offers signal a high-valuing bidder, strongly determined to acquire the target firm. Moreover, cash offers deter competition better than debt or equity offers. The theoretical results are validated with data from the U.K. over 1995-96.

Keywords: Takeover, Competition, Medium of Payment

JEL Classification: G34, C72

Suggested Citation: Suggested Citation

Cornu, Philippe and Isakov, Dušan, The Deterring Role of the Medium of Payment in Takeover Contests: Theory and Evidence from the UK (June 2000). Available at SSRN: https://ssrn.com/abstract=231839 or http://dx.doi.org/10.2139/ssrn.231839