Means of Payment in Takeovers: Results for the U.K. and U.S.

Robert S. Harris, Julian Franks, Colin Mayer

NBER Working Paper No. 2456
Issued in December 1987
NBER Program(s):Monetary Economics

This paper examines means of payment in over 2,500 acquisitions in the UK and US over the period 1955 to 1985. Data on financing proportions, bid premia and postmerger performance are used to test the validity of tax and information hypotheses. It is difficult to explain many of the results in terms of tax effects. Capital gains tax does not appear to be a primary determinant of financing patterns in the UK in a period in which there were substantial variations in the tax rate. As well the tax motivated "trapped equity" model is inconsistent with several observations on financing patterns. In both countries much larger acquiree bid premia are associated with cash than equity bids, consistent with information models suggesting that high valuing bidders make cash offers and low valuing bidders make securities offers. Even after controlling for the form of takeover (tender versus merger) and whether the bid is contested, cash offers provide substantially higher wealth gains to target shareholders. In the US bidders using all equity suffer significant abnormal losses at the time of the bid announcement consistent with the findings on the wealth effects of seasoned new equity offerings in the US. In the UK, however, no such losses are evident, perhaps reflecting the fact that in the UK equity bids are typically underwritten. Finally, we find that acquirors making cash offers have better postmerger shareprice performance than do those using equity. These results are consistent with the hypothesis that bidders are motivated to use overvalued equity to acquire other firms.

download in pdf format
   (576 K)

download in djvu format
   (464 K)

email paper

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w2456

Users who downloaded this paper also downloaded* these:
Franks, Harris, and Mayer Means of Payment in Takeovers: Results for the United Kingdom and the United States
Myers and Majluf w1396 Corporate Financing and Investment Decisions When Firms Have InformationThat Investors Do Not Have
Auerbach and Reishus The Impact of Taxation on Mergers and Acquisitions
Moeller, Schlingemann, and Stulz w9523 Do shareholders of acquiring firms gain from acquisitions?
Kimball w3403 Precautionary Saving and the Marginal Propensity to Consume
NBER Videos

National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email:

Contact Us