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What determines the financing decision in corporate takeovers:Cost of capital, agency problems, or the means of payment?

Marina Martynova a,b, Luc Renneboog b,
代写留学生企业管理论文a Cornerstone Research, 699 Boylston Street, MA 02116 Boston, USA
b Tilburg University, the Netherlands
a r t i c l e i n f o a b s t r a c t
Article history:
Received 30 January 2008
Received in revised form 22 December 2008
Accepted 23 December 2008
Available online 20 January 2009
How is a takeover bid Financed and what is its impact on the expected value creation of thetakeover? An analysis of the sources of transaction financing has been largely ignored in thetakeover literature. Using a unique dataset, we show that external sources of financing (debtand equity) are frequently employed in takeovers involving cash payments. Acquisitions withthe same means of payment but different sources of transaction funding are in fact quitedistinct. Acquisitions financed with internally generated funds significantly underperformthose financed with debt. The takeover financing decision is influenced by the bidder's peckingorder pReferences, its growth potential, and its corporate governance environment, all of whichare related to the cost of external capital. The choice of equity versus internal cash or debtfinancing also depends on the bidder's strategic preferences with respect to the means ofpayment.
Keywords:Mergers and acquisitions Takeovers Means of payment Financing decision Cost of capital Sources of financing Agency problem Pecking order Corporate governance regulation Nested logit

1. Introduction
The empirical literature has given notable attention in recent years to the choice of the means of payment in corporate takeovers
(see e.g. Travlos, 1987; Amihud et al., 1990; Martin, 1996; Ghosh and Ruland, 1998; Faccio and Masulis, 2005). In this literature, the
term ‘means of payment’ is usually considered as synonymous to the ‘sources of takeover financing’. Proxying the sources of financing
by the means of payment may induce some inaccuracies which may be particularly severe for all-cash offers which are usually
assumed to be entirely financed with cash. In actual fact, of the acquisitions entirely paid with cash (which stand for about 63% of all
takeovers), one-third is at least partially financed with external funds. Seventy percent of the takeovers with external funding are
financed with debt and 30% with equity. Of the firms opting tomake an offer consisting of a combination of equity and cash (20% of all
takeovers), 37% borrow to finance the cash component of the offer. Therefore, the conclusions about the validity of the theories
explaining the firm’s financing decision may be incomplete or even incorrect if they are derived from the analysis of motives
underlying the choice of the means of payment. This paper contributes to the takeover literature by explicitly investigating the
(differing) motives underlying the bidder's decision on how to finance a takeover bid and on what to offer the target's shareholders.
By classifying takeovers by their sources of financing (rather than by their means of payment), we test the predictions derived
from the dominant theories of how companies fund their investment projects. This is a novel way to test whether the bidder's
Journal of Corporate Finance 15 (2009) 290–315
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