We examine the motivations for different financing methods of U.S. acquirers that buy divested assets. In contrast to the widely held opinion in the mergers and acquisitions (M&As) literature that acquirers use more equity payment in countries with high investor protection and low economic restrictiveness, this study finds that acquirers prefer cash payment in those countries. However, several deal, acquirer, and target characteristic significantly influence the financing methods, as suggested in the M&A literature. We also measure the announcement effects on acquirer’s value. Acquirers realize more pronounced wealth effects in domestic transactions compared to the effects in foreign transactions. Moreover, the effects for acquirers are more favorable when the relative size of the transaction is high, a proportion of the price is paid with equity, the assets are from bankrupt targets, and the acquirers’ size is relatively small.
investors, financing methods, assets, acquisitions, terms oftransactions, the econometric model.
I. Introduction
In the recent years, corporate restructuring is a popular strategy for businesses in the United States as well as globally. Depending on the actual situation of corporations, managers can expand or refocus their businesses. Among several strategies for corporate restructuring, a divestiture is an important method that is widely used by corporations’ management team. The finance literature mentions three main reasons for corporate divestitures: (i) the efficiency explanation, which is to shift specific assets to those who can operate them most efficiently; (ii) the focusing explanation, which is to intensify the corporation’s efficiency by reducing its degree of diversification; and (iii) the financing explanation, which is to relax credit constraints. Despite the motivation for divestitures, the existing literature finds positive effects for U.S. acquirers in both domestic and international transactions. Moreover, the previous studies that investigate the method of financing in divestitures suggest the different outcomes for bidders, given that different methods of financing have different signaling implications. Therefore, the approach that acquirers choose to finance their divestiture deserves to be investigated.
The choice of payment method in mergers and acquisitions (M&As) has gained much attention from the literature. The existing literature explains the choice of financing by focusing on information asymmetry, growth opportunity, pre-emptive bidding, and corporate control hypotheses. Besides, the effect of the corporate governance environment on financing decision also gained a great deal of attention recently. For example, Rossi and Volpin (2004) claim that, in a country with low investor protection, target shareholders prefer cash over the bidder’s equity as the takeover currency, due to the risk of expropriation for being minority shareholders.
In this study, we retest the information asymmetry, growth opportunity, pre-emptive bidding, and corporate governance hypotheses under in the context of divestiture transactions. We exclude the corporate control hypothesis because there is a fundamental different between M&As and divestitures, which is integration. M&As and divestitures are both strategic alternatives along a continuum of governance modes, in which, M&As represent greaterintegrationat one end of the continuum, whereas divestitures represent less integration at the other end (Mulherin and Boone, 2000). Hence, corporate control should be less affected by divestitures. Furthermore, to our awareness, no attention has been paid to the choice of financing in divestitures. Since most studies consider the choice of financing method in M&As, these results may not hold for divestitures.
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