Financing and Takeovers

Erwan Morellec and Alexei Zhdanov ()
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Erwan Morellec: University of Lausanne, Swiss Finance Institute and CEPR

No 06-22, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: This paper analyzes the interaction between financial leverage and takeover activity. We develop a dynamic model of takeovers in which the financing strategies of bidding firms and the timing and terms of takeovers are jointly determined. In the paper, capital structure plays the role of a commitment device, and determines the outcome of the acquisition contest. We demonstrate that there exists an asymmetric equilibrium in financing policies with endogenous leverage, bankruptcy, and takeover terms, in which the bidder with the lowest leverage wins the takeover contest. Based on the resulting equilibrium, the model generates a number of new predictions. In particular, the model predicts that the leverage of the winning bidder is below the industry average and that acquirers should lever up after the takeover consummation. The model also relates the dispersion in leverage ratios to various industry characteristics, such as the volatility of cash flows, effective tax rates, and bankruptcy costs.

Keywords: takeovers; option games; real options; capital structure (search for similar items in EconPapers)
JEL-codes: G13 G32 G34 (search for similar items in EconPapers)
Pages: 44 pages
Date: 2006-10
New Economics Papers: this item is included in nep-bec and nep-cfn
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Citations: View citations in EconPapers (2)

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Related works:
Journal Article: Financing and takeovers (2008)
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Persistent link: https://EconPapers.repec.org/RePEc:chf:rpseri:rp0622

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