The Mode of Acquisition in Takeovers: Taxes and Asymmetric Information

Authors

  • DAVID T. BROWN,

  • MICHAEL D. RYNGAERT

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    • Graduate School of Business Administration, University of Florida at Gainesville. We benefited from the comments and suggestions of Mark Flannery, Dave Hirshleifer, Rob Heinkel, Joel Houston, Chris James, M. P. Narayanan, Greg Niehaus, Dave Sappington, and Rich Romano. We also thank René Stulz, the editor, and an anonymous referee.

ABSTRACT

We develop a model in which the mode of acquisition conveys information concerning the value of the bidder. The model incorporates the possibility that offers containing both cash and stock can be made in a setting consistent with the U.S. tax code. We demonstrate that bidders with unfavorable private information about their equity value choose offers containing some stock to avoid the capital gains tax consequences of cash offers. The model yields a number of unique predictions about the construction of acquisition offers. We present evidence consistent with the model.

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