Do bidders pay cash for underleveraged targets?

Magnus Blomkvist (), Karl Felixson () and Anders Loflund ()
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Magnus Blomkvist: Audencia Business School - Nantes
Karl Felixson: Hanken School of Economics
Anders Loflund: Hanken School of Economics

Economics Bulletin, 2019, vol. 39, issue 1, 547-553

Abstract: The relationship between acquirer capital structure and the payment choice in acquisitions is well documented. However, the target firm's capital structure has been overlooked. We find that acquisitions of underleveraged targets are more likely to be financed by cash than by equity. A 1% increase of the target firm's deviation from normal leverage decreases the proportion of cash used by 0.76%. We conclude that target firm capital structure is important for the choice of payment.

Keywords: Mergers and acquisitions; method of payment; leverage deviation; credit rating; capital structure (search for similar items in EconPapers)
JEL-codes: G2 G3 (search for similar items in EconPapers)
Date: 2019-03-16
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