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Rev Fin 1990; 3:153-174
© 1990 the Society for Financial Studies

Article

Competition and the medium of exchange in takeovers

E Berkovitch and MP Narayanan
School of Business Administration, The University of Michigan, Ann Arbor, MI 48109-1234, USA

Abstract

The role of the medium of exchange in competition among bidders and its effect on returns to stockholders in corporate takeovers are investigated. Consistent with recent empirical evidence, our model shows that stockholders of both acquiring and target firms obtain higher returns when a takeover is financed with cash rather than equity, and that returns to target shareholders increase with competition. The model predicts that the faction of synergy captured by the target decreases with the level of synergy. Finally, it is shown that, as competition increases, the case component of the offer as well as the proportion of case offered increases.


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