Managerial incentives and the medium of exchange in takeovers

Abstract

This paper presents a model of the medium of exchange in takeovers in which managerial incentives influence the choice of an offer by a bidder manager. We consider a framework where the offer is proposed to the target depending on the bidder manager's private information on synergy and private benefits. We identify the case where the choice of the medium of exchange in the offer reveals whether the proposed merger is intended to create a synergy or to pursue empire building. We demonstrate that the perception of the bidder manager with a high appetite for increasing firm size raises the proportion of cash in the offer. Moreover, an increase in the cash flow rights held by the bidder manager leads to a reduction in the proportion of cash in the offer.