Corporate Control and the Choice of Investment Financing: The Case of Corporate Acquisitions
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- Author(s): YAKOV AMIHUD, BARUCH LEV, NICKOLAOS G. TRAVLOS
- Published: Apr 30, 2012
- Pages: 603-616
- DOI: 10.1111/j.1540-6261.1990.tb03706.x
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.