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| Author: | Morellec, E. Zhdanov, A. |
| Title: | Financing and takeovers |
| Journal: | Journal of Financial Economics
2008 : MAR, VOL. 87:3, p. 556-581 |
| Index terms: | financing capital structure of companies options games models |
| Freeterms: | takeovers |
| Language: | eng |
| Abstract: | In this paper, the interaction between financial leverage and takeover activity is analysed. A dynamic model of takeovers is developed in which bidding firms' financing strategies and the timing and terms of takeovers are jointly determined. Capital structure plays the role of a commitment device, determining the outcome of the acquisition contest. It is shown that there exists an asymmetric equilibrium in financing policies with endogenous leverage, bankruptcy, and takeover terms, where the bidder with the lowest leverage wins the takeover contest. A number of new predictions are generated by the model. Especially, it is predicted that the leverage of the winning bidder is below the industry average and that acquirers should lever up after the takeover consummation. |
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