Acquisition finance and market timing

Theo Vermaelen and Moqi Groen-Xu

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: Bidders have an incentive to pay with stock when their shares are overvalued, but target firms should be reluctant to accept such overvalued payment. In a sample of 2978 acquisitions, we find that stock payment is readily accepted only when the bidder can justify the financing decision in terms of such economic fundamentals as optimal capital structure. Yet even when the fundamentals justify stock payment, paying with cash is common. In that way, firms can preclude paying with undervalued stock and are more likely to experience positive long-term excess returns.

Keywords: capital structure; G14; G34; market timing; mergers and acquisitions; mispricing (search for similar items in EconPapers)
JEL-codes: G0 (search for similar items in EconPapers)
Date: 2014-04
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Citations: View citations in EconPapers (13)

Published in Journal of Corporate Finance, April, 2014, 25, pp. 73-91. ISSN: 0929-1199

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Journal Article: Acquisition finance and market timing (2014)
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