Financing bidders in takeover contests

This paper studies how bidders' choice of financing for cash bids affects takeover prices. Endogenizing this choice shows that takeover premia are lower than when bidders are not cash-constrained for equity-like financing, but higher for debt financing. Intuitively, unlike debt (which leads to overbidding), equity financing is used only when bidders cannot raise financing at competitive terms (which leads to underbidding). Endogenizing also the method of payment in takeovers, reveals that takeover premia are lower for equity than for cash bids. These insights could help align the results from the prior theoretical literature with the seemingly contradictory empirical evidence.