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Do bidders pay cash for underleveraged targets?

Author

Listed:
  • Magnus Blomkvist

    (Audencia Business School - Nantes)

  • Karl Felixson

    (Hanken School of Economics)

  • Anders Loflund

    (Hanken School of Economics)

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.

Suggested Citation

  • Magnus Blomkvist & Karl Felixson & Anders Loflund, 2019. "Do bidders pay cash for underleveraged targets?," Economics Bulletin, AccessEcon, vol. 39(1), pages 547-553.
    • Handle: RePEc:ebl:ecbull:eb-18-00753
    as

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    References listed on IDEAS

    as
    1. Karampatsas, Nikolaos & Petmezas, Dimitris & Travlos, Nickolaos G., 2014. "Credit ratings and the choice of payment method in mergers and acquisitions," Journal of Corporate Finance, Elsevier, vol. 25(C), pages 474-493.
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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Mergers and acquisitions; method of payment; leverage deviation; credit rating; capital structure;
    All these keywords.

    JEL classification:

    • G3 - Financial Economics - - Corporate Finance and Governance
    • G2 - Financial Economics - - Financial Institutions and Services

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