Financing Bidders in Takeover Contests

This paper argues that endogenizing how acquirers finance their cash bids is just as important for understanding bidding in takeovers as endogenizing acquirers' payment method choice. The paper shows that acquirers finance their cash bids with equity only if they lack access to competitive financing. This leads to underbidding and lower takeover premiums. Conversely, competitive financing results in debt financing for cash bids and overbidding. Endogenizing the payment method reveals that premiums are lower when acquirers offer securities instead of cash financed at competitive terms. These insights find empirical support and could help explain existing evidence, which contradicts prior theory