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This paper argues that endogenizing the choice of financing for cash bids is just as important as endogenizing the payment method in takeovers. The paper shows that acquirers issue equity to finance their cash bids only if they lack access to competitive financing. This leads to underbidding and lower takeover premiums. The opposite holds for debt financing, which leads to overbidding. Endogenizing the payment method reveals that equity bids carry lower premiums than cash bids financed at competitive terms.
We argue that stronger debt enforcement in bankruptcy can reduce indirect costs of financial distress: (i) by increasing the likelihood of restructuring outside bankruptcy and (ii) by improving the recovery rate of stakeholders, such as trade creditors, through explicit legal provisions. Consistent with these predictions, we find that when debt enforcement is stronger, financially distressed firms are less exposed to indirect distress costs in the form of reduced access to trade credit and forgone sales. We
We analyze how relationship finance, such as venture capital and relationship lending, affects growth firms' capital structure choices. We show that relationship investors that obtain a strong bargaining position due to their privileged information about the firm, optimally cash in on their dominance by pushing it to finance follow-up investments with equity. The firm underinvests if its owner refuses to accept the associated dilution. However, this problem is mitigated if the firm's initial relationship fi