The Timing and Method of Payment in Mergers when Acquirers Are Financially Constrained

Alexander S Gorbenko and Andrey Malenko

The Review of Financial Studies, 2018, vol. 31, issue 10, 3937-3978

Abstract: Although acquisitions are a popular form of investment, the link between firms’ financial constraints and acquisition policies is not well understood. We develop a model in which financially constrained bidders approach targets, decide how much to bid and whether to bid in cash or in stock. In equilibrium, financial constraints do not affect the identity of the winning bidder, but they lower bidders’ incentives to approach the target. Auctions are initiated by bidders with low constraints or high synergies. The use of cash is positively related to synergies and the acquirer’s gains from the deal and negatively to financial constraints. Received March 3, 2016; editorial decision August 18, 2017 by Editor Itay Goldstein. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.

Date: 2018
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