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Capital structure and the optimal payment methods in acquisitions

Author

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  • Attaoui, Sami
  • Cao, Wenbin
  • Six, Pierre

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.

Suggested Citation

  • Attaoui, Sami & Cao, Wenbin & Six, Pierre, 2021. "Capital structure and the optimal payment methods in acquisitions," International Review of Law and Economics, Elsevier, vol. 66(C).
    • Handle: RePEc:eee:irlaec:v:66:y:2021:i:c:s0144818821000107
    DOI: 10.1016/j.irle.2021.105986
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    More about this item

    Keywords

    Leverage deficit; Default; Acquisition; Means of payment;
    All these keywords.

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

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