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Capital structure and the optimal payment methods in acquisitions

Sami Attaoui, Wenbin Cao and Pierre Six

International Review of Law and Economics, 2021, vol. 66, issue C

Abstract: Based on a trade-off model of capital structure with immediate liquidation, and infinite debt maturity, we analyze the impact of prior-to-acquisition leverage levels on the optimal payment method used in an acquisition. Consistent with existing empirical studies, our model optimally yields three payment methods: Full cash, full equity, and a mix of cash and equity. The optimal level of cash in the transaction stems from the interplay between the magnitude of leverage deficit of one or both firms and the scale of synergies, in particular financial, that can be reaped from the acquisition. Finally, we emphasize the key role played by the capital structure of the target firm.

Keywords: Leverage deficit; Default; Acquisition; Means of payment (search for similar items in EconPapers)
JEL-codes: G32 G33 G34 (search for similar items in EconPapers)
Date: 2021
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DOI: 10.1016/j.irle.2021.105986

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International Review of Law and Economics is currently edited by C. Ott, A. W. Katz and H-B. Schäfer

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