Are Stock-Financed Takeovers Opportunistic?

51 Pages Posted: 25 Apr 2017

See all articles by B. Espen Eckbo

B. Espen Eckbo

Tuck School of Business at Dartmouth; European Corporate Governance Institute (ECGI)

Tanakorn Makaew

Securities and Exchange Commission (SEC)

Karin S. Thorburn

Norwegian School of Economics; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI)

Multiple version iconThere are 2 versions of this paper

Date Written: April 2017

Abstract

The more the target knows about the bidder, the more difficult it is to pay with overpriced shares. Thus, under bidder opportunism, the fraction of stock in the deal payment is lower with better-informed targets. We test this simple prediction using information proxies reflecting industry relatedness and geographic location specific to the merging firms. We find instead that public bidders systematically use more stock in the payment when the target knows more about the bidder. While inconsistent with opportunism, this is as predicted when bidders are primarily concerned with adverse selection on the target side of the deal. Moreover, tests based on exogenous variation in bidder market-to-book ratios, identified using aggregate mutual fund outflows, also fail to support bidder opportunism. Finally, "cash-only" targets and potential competition from private bidders appear to place significant external pressure on public bidders to pay in cash.

Keywords: cash payment, governance, information asymmetry, mispricing, mutual fund flow, opportunism, payment method, stock payment, Takeover bidding

JEL Classification: G3, G34

Suggested Citation

Eckbo, B. Espen and Makaew, Tanakorn and Thorburn, Karin S., Are Stock-Financed Takeovers Opportunistic? (April 2017). CEPR Discussion Paper No. DP11974. Available at SSRN: https://ssrn.com/abstract=2957513

B. Espen Eckbo (Contact Author)

Tuck School of Business at Dartmouth ( email )

Hanover, NH 03755
United States
603-646-3953 (Phone)
603-646-3805 (Fax)

HOME PAGE: http://www.tuck.dartmouth.edu/eckbo

European Corporate Governance Institute (ECGI)

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

Tanakorn Makaew

Securities and Exchange Commission (SEC) ( email )

450 Fifth Street, NW
Washington, DC 20549-1105
United States

Karin S. Thorburn

Norwegian School of Economics ( email )

Helleveien 30
N-5045 Bergen
Norway
+4755959283 (Phone)

HOME PAGE: http://www.nhh.no/cv/thorburn

Centre for Economic Policy Research (CEPR)

London
United Kingdom

European Corporate Governance Institute (ECGI)

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

HOME PAGE: http://www.ecgi.org

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