The Determinants of the Medium of Payment in U.S. Takeover Bids

This study thoroughly investigates the factors which determine the choice of the medium of payment (pure equity vs. pure cash) in takeover bids. For this objective, we combine for the first time in the relevant literature a set of proxy variables controlling for the information asymmetry/uncertainty status, as well as the financial characteristics of both the bidding and the target companies in the pre-bid period. We test the explanatory power of these variables in a large sample of completed takeovers in the U.S. market during the 1986-2008 period by the use of a probit model. Preliminary results suggest that a high level of growth opportunities in target companies, combined with a low level of information asymmetry in acquiring firms increase the probability of a pure equity offer, while a low level of information asymmetry in acquiring firms combined with a high level of growth opportunities in target firms increase the probability of a pure cash offer. Moreover, the probability of a pure equity offer is positively related with the gearing of the bidders, while the probability of a pure cash offer is positively related with the profitability and liquidity  of bidders in the one year period before the bid.