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

49 Pages Posted: 18 Feb 2013 Last revised: 31 Oct 2017

See all articles by Alexander S. Gorbenko

Alexander S. Gorbenko

University College London - Department of Economics and School of Management

Andrey Malenko

University of Michigan, Stephen M. Ross School of Business; Centre for Economic Policy Research (CEPR)

Date Written: October 30, 2017

Abstract

While 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 decide when to approach the target, how much to bid, and whether to bid in cash or stock. Because of ability to pay in stock, financial constraints do not affect the identity of the winning bidder. However, they lower a bidder's incentives to approach the target. In equilibrium, auctions are initiated by bidders with low constraints or high synergies. The use of cash is positively related to synergies, acquirer's gains from the deal, and negatively to financial constraints.

Keywords: Auctions, financial constraints, mergers and acquisitions, real options, security design

JEL Classification: D44, G32, G34

Suggested Citation

Gorbenko, Alexander S. and Malenko, Andrey, The Timing and Method of Payment in Mergers when Acquirers Are Financially Constrained (October 30, 2017). Available at SSRN: https://ssrn.com/abstract=2220006 or http://dx.doi.org/10.2139/ssrn.2220006

Alexander S. Gorbenko

University College London - Department of Economics and School of Management ( email )

Drayton House, 30 Gordon Street
30 Gordon Street
London, WC1H 0AX
United Kingdom

Andrey Malenko (Contact Author)

University of Michigan, Stephen M. Ross School of Business ( email )

701 Tappan Street
Ann Arbor, MI MI 48109
United States

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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