This article examines the motives underlying the payment method in corporate acquisitions. The findings support the notion that the higher the acquirer's growth opportunities, the more likely the acquirer is to use stock to finance an acquisition. Acquirer managerial ownership is not related to the probability of stock financing over small and large ranges of ownership, but is negatively related over a middle range. In addition, the likelihood of stock financing increases with higher preacquisition market and acquiring firm stock returns. It decreases with an acquirer's higher cash availability, higher institutional shareholdings and blockholdings, and in tender offers. * New Mexico State University. I would like to thank James Cotter, Ren6 Stulz (the editor), Michael Ferri, an anonymous referee, and the participants of the finance workshops at the University of Iowa, New Mexico State University, and Oklahoma State University for helpful comments regarding this article. This article is a substantially revised version of the one presented at the 1994 Financial Management Association meeting in St. Louis, Missouri, and the 1995 meetings of the Allied Social Sciences Association in Washington, D.C. 1228The Journal of Finance stock typically experiences a negative price reaction in stock-financed acquisitions. For example, Travlos (1987), Wansley, Lane, and Yang (1987), Franks, Harris, and Mayer (1988), Asquith, Bruner, and Mullins (1987), and Servaes (1991) report either significantly negative returns to bidders or significantly higher bidder returns for cash offers compared to stock offers. In addition, Amihud, Lev, and Travlos (1990) report significantly negative bidder returns for stock-financed acquisitions, but only for those bidders with low management ownership.Poor acquiring firm performance is not confined just to the announcement period. Agrawal, Jaffe, and Mandelker (1992) note that in both tender offers and mergers, postacquisition returns are lower for stock-financed acquisitions than for cash-financed acquisitions. Linn and Switzer (1994) find that acquiring firms experience significantly worse industry-and size-adjusted operating performance for up to five years following an acquisition. Thus, an important issue in this study is the motivation of acquiring firms to use stock vis-a'-vis cash financing.Previous theoretical studies examining the method of payment in corporate acquisitions focus on the role of asymmetric information about the bidder's or target's value. For example, because the bidder is uncertain about the target's value, Hansen's (1987) model includes a role for common stock due to its "contingency pricing effect." Stock financing forces target shareholders to share the risk that the acquirer may have overpaid. Fishman's (1989) model incorporates bidder competition. Cash not only signals a high value for the target, but also preempts other firms from bidding. Eckbo, Giammarino, and Heinkel (1990) include a role for mixed financings in which higher-valued bidders are more likely to use m...
This paper examines the hypothesis that an important role of corporate takeovers is to discipline the top managers of poorly performing target firms. We document that the turnover rate for the top manager of target firms in tender offer-takeovers significantly increases following completion of the takeover and that prior to the takeover these firms were significantly under-performing other firms in their industry as well as other target firms which had no post-takeover change in the top executive. We interpret the results to indicate that the takeover market plays an important role in controlling the nonvalue maximizing behavior of top corporate managers.ECONOMIC ANALYSIS IDENTIFIES TWO broad motives for value maximizing corporate takeovers. Either they are undertaken to achieve synergies between the bidder and the target firms, or they are undertaken to discipline the target firm's managers. In synergistic takeovers, gains are generated by efficiencies that result from combining the physical operations of the bidder and the target firm. In disciplinary takeovers, gains can be achieved without combining the physical operations of the two firms. Rather, the gains are generated by altering the nonvalue maximizing operating strategies of the target firm's managers.' Some observers give more -weight to the importance of takeovers as a disciplinary mechanism than do others, but, regardless of the weight assigned to takeovers in performing this task, it is generally presumed that firms that are performing poorly are more likely to be the target of a disciplinary takeover than are firms that are performing well.2 *Kenneth J. Martin is at the University of Iowa. Professor, John J. McConnell is at the Krannert Graduate School of Management of Purdue University. We thank Michael Bradley and E. Han Kim for providing us with their tender offer database. Martin acknowledges financial support received from the Richard D. Irwin Foundation. We also thank ClaudioLoderer for many helpful suggestions and comments and Steve Buser for his help in moving the paper toward completion. The paper has benefited from presentations at Boston College and Kansas University.1Nonvalue maximizing behavior on the part of the target's managers can take a variety of forms. For example, it could include the excessive consumption of corporate perquisites, excessive compensation, overpayment for supplies and raw materials, or the deployment of corporate resources to self-enriching or self-aggrandizing projects. It could -also be that the target's managers are simply ineffective at or incapable of operating the target firm efficiently.2See, for example, Fama (1980), Manne (1965), and Morck, Shleifer and Vishny (1988) for discussions of the disciplinary role of corporate takeovers. 671
This paper examines the hypothesis that an important role of corporate takeovers is to discipline the top managers of poorly performing target firms. We document that the turnover rate for the top manager of target firms in tender offer-takeovers significantly increases following completion of the takeover and that prior to the takeover these firms were significantly under-performing other firms in their industry as well as other target firms which had no post-takeover change in the top executive. We interpret the results to indicate that the takeover market plays an important role in controlling the nonvalue maximizing behavior of top corporate managers.ECONOMIC ANALYSIS IDENTIFIES TWO broad motives for value maximizing corporate takeovers. Either they are undertaken to achieve synergies between the bidder and the target firms, or they are undertaken to discipline the target firm's managers. In synergistic takeovers, gains are generated by efficiencies that result from combining the physical operations of the bidder and the target firm. In disciplinary takeovers, gains can be achieved without combining the physical operations of the two firms. Rather, the gains are generated by altering the nonvalue maximizing operating strategies of the target firm's managers.' Some observers give more -weight to the importance of takeovers as a disciplinary mechanism than do others, but, regardless of the weight assigned to takeovers in performing this task, it is generally presumed that firms that are performing poorly are more likely to be the target of a disciplinary takeover than are firms that are performing well.2 *Kenneth J. Martin is at the University of Iowa. Professor, John J. McConnell is at the Krannert Graduate School of Management of Purdue University. We thank Michael Bradley and E. Han Kim for providing us with their tender offer database. Martin acknowledges financial support received from the Richard D. Irwin Foundation. We also thank Claudio Loderer for many helpful suggestions and comments and Steve Buser for his help in moving the paper toward completion. The paper has benefited from presentations at Boston College and Kansas University.1Nonvalue maximizing behavior on the part of the target's managers can take a variety of forms. For example, it could include the excessive consumption of corporate perquisites, excessive compensation, overpayment for supplies and raw materials, or the deployment of corporate resources to self-enriching or self-aggrandizing projects. It could -also be that the target's managers are simply ineffective at or incapable of operating the target firm efficiently. 2See, for example, Fama (1980), Manne (1965), and Morck, Shleifer and Vishny (1988) for discussions of the disciplinary role of corporate takeovers. 671 672 The Journal of FinanceIn this paper, we investigate the disciplinary role of corporate takeovers with a sample of 253 successful tender offer-takeovers that occurred over the period 1958 through 1984. For this sample, a takeover is classified as disciplinary if there...
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