Asymmetric Information and the Medium of Payment in US Takeover Bids

We investigate whether asymmetric information affects the choice of the medium of payment (pure equity vs. pure cash) in U.S. takeover bids during the 1986-2008 period. To this end, we combine proxies for asymmetric information with proxies for the financial characteristics of both the bidding and the target companies in the pre-bid period. Our novel results indicate that acquirers with a high level of asymmetric information, who are either overvalued or have high growth opportunities, are more likely to make a pure equity offer. Acquirers with the opposite characteristics are more likely to make a pure cash offer. These results are largely consistent with Myers and Majluf's hypothesis (JFE, 1984). Targets' asymmetric information does not seem to significantly affect the mode of payment. Also, in line with the existing literature, the probability of a pure equity offer is positively related with the level of the targets' growth opportunities and/or their overvaluation, while the probability of a pure cash offer is positively related with the profitability and liquidity of the acquirers