Corporate Control and the Choice of Investment Financing: The Case of Corporate Acquisitions

YAKOV AMIHUD*, BARUCH LEV, NICKOLAOS G. TRAVLOS

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

Abstract

We test the proposition that corporate control considerations motivate the means of investment financing—cash (and debt) or stock. Corporate insiders who value control will prefer financing investments by cash or debt rather than by issuing new stock which dilutes their holdings and increases the risk of losing control. Our empirical results support this hypothesis: in corporate acquisitions, the larger the managerial ownership fraction of the acquiring firm the more likely the use of cash financing. Also, the previously observed negative bidders' abnormal returns associated with stock financing are mainly in acquisitions made by firms with low managerial ownership. 1990 The American Finance Association

Original languageEnglish
Pages (from-to)603-616
Number of pages14
JournalJournal of Finance
Volume45
Issue number2
DOIs
StatePublished - Jun 1990

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