Capital Structure and the Market for Corporate Control: The Defensive Role of Debt Financing

Have changing takeover defense rules and strategies entrenched management and damaged shareholders? The case of defeated takeover bids

“…17 For instance, key shareholders in Cass City, Michigan supported Walbro in its takeover fight for fear of impact on the community, and chicken farmers who owned a substantial stake of stock supported WLR Foods in its takeover fight against Tyson Foods for fear of how Tyson might treat them. 18 The increased cost can arise from any synergistic improvement going to coinsure risky debt (see Israel, 1991) or increased leverage allowing retirement of stock that allows a management block to increase its percentage voting block (see Stulz, 1988). ascertain the impact of the takeover contest on the value of a target stock from the commencement through the end of the contest, we calculate two revaluation measures.…”

Growth options and acquisition likelihood in high tech

“…Firm liquidity, leverage, free cash flow, and size Palepu (1986), Israel (1991), and Powell (1997) examine the effect of liquidity and leverage on the likelihood of being acquired. We expect that low liquidity increases the likelihood of being acquired.…”

“…Liquidity (LIQ) is measured as cash and short term investments to total assets. Israel (1991) finds that high levels of debt are defensive and significantly reduce the likelihood that a firm is acquired. However, Powell (1997) found that leverage increased the likelihood of being acquired.…”

The effect of change-in-control covenants on takeovers: Evidence from leveraged buyouts

“…Expropriation of bondholders appears to be of little concern for these transactions, and target bondholders often gain due to the coinsurance effect (Billett et al, 2004). If these debtholder gains reduce the remaining gains leftover for target and acquirer shareholders, we would expect that the probability a firm is targeted to be decreasing in its debt's potential for such gains (see Israel, 1991). CIC covenants do not distinguish between LBOs and other takeovers, and require bondholders to be paid off in either case.…”