Signaling, Financial Slack and Corporate Acquisitions

Signaling, Financial Slack and Corporate Acquisitions This paper shows that under certain conditions a firm's decision concerning the optimal medium of exchange to use in acquiring another firm is related to the decision of which source of capital should be used to finance long-term projects. An example of this type of interaction occurs when the firm's only source of financing a positive net present value project is an equity issue. In a Myers and Majluf (1984) world of asymmetric information the value maximizing strategy for the firm is to forego the public equity offering and instead use a stock offer to acquire a firm possessing financial slack. The process is modeled using an extension of the Myers and Majluf (1984) model and demonstrates how the acquisition alternative allows managers to separate the signals regarding the investment and financing decisions. Including net pension assets into our measure of financial slack, we provide empirical supports for the ability of the extended model to explain observed merger activity. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Review of Quantitative Finance and Accounting Springer Journals

Signaling, Financial Slack and Corporate Acquisitions

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Publisher
Kluwer Academic Publishers
Copyright
Copyright © 2000 by Kluwer Academic Publishers
Subject
Finance; Corporate Finance; Accounting/Auditing; Econometrics; Operation Research/Decision Theory
ISSN
0924-865X
eISSN
1573-7179
D.O.I.
10.1023/A:1008373205675
Publisher site
See Article on Publisher Site

Abstract

This paper shows that under certain conditions a firm's decision concerning the optimal medium of exchange to use in acquiring another firm is related to the decision of which source of capital should be used to finance long-term projects. An example of this type of interaction occurs when the firm's only source of financing a positive net present value project is an equity issue. In a Myers and Majluf (1984) world of asymmetric information the value maximizing strategy for the firm is to forego the public equity offering and instead use a stock offer to acquire a firm possessing financial slack. The process is modeled using an extension of the Myers and Majluf (1984) model and demonstrates how the acquisition alternative allows managers to separate the signals regarding the investment and financing decisions. Including net pension assets into our measure of financial slack, we provide empirical supports for the ability of the extended model to explain observed merger activity.

Journal

Review of Quantitative Finance and AccountingSpringer Journals

Published: Oct 8, 2004

References

  • Information Asymmetries, Financial Structure, and Financial Intermediation
    Leland, H.; Pyle, D.
  • To Purchase or to Pool, Does it Matter?
    Lindenberg, E.; Ross, M.
  • Taxation and Corporate Pension Policy
    Tepper, I.
  • Corporate Takeover Bids, Methods of Payment, and Bidding Firms' Stock Returns
    Travlos, N.

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