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Rev Fin 1990; 3:651-675
© 1990 the Society for Financial Studies

Article

Asymmetric information and the medium of exchange in takeovers: theory and tests

BE Eckbo, RM Giammarino and RL Heinkel
Faculty of Commerce, University of British Columbia, Vancouver, BC, Canada V6T 1Y8

Abstract

In a model of takeovers under asymmetric information, we identify a separating equilibrium in which the value of the bidder firm is revealed by the mix of cash and securities used as payment for the target. The model predicts that the revealed bidder value is monotonically increasing and convex in the fraction of the total offer that consists of cash. We examine the model restrictions using data from Canada, where mixed offers are both relatively frequent and free of the confounding tax-related options characterizing mixed offers in the United States. We find that the average announcement-month bidder abnormal return in mixed offers is large and significant. However, maximum likelihood estimates of parameters in both linear and nonlinear cross-sectional regressions fail to support the model predictions.


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