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Corporate financing decision when investors take the path of least resistance

Author: Malcolm Baker; Joshua Coval; Jeremy C Stein; National Bureau of Economic Research.
Publisher: Cambridge, MA : National Bureau of Economic Research, ©2004.
Series: Working paper series (National Bureau of Economic Research : Online), working paper no. 10998.
Edition/Format:   eBook : Document : EnglishView all editions and formats
Summary:
"We explore the consequences for corporate financial policy that arise when investors exhibit inertial behavior. One implication of investor inertia is that, all else equal, a firm pursuing a strategy of equity-financed growth will prefer a stock-for-stock merger to greenfield investment financed with an SEO. With a merger, acquirer stock is placed in the hands of investors, who, because of inertia, do not resell it  Read more...
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Additional Physical Format: Print version:
Baker, Malcolm (Malcolm P.).
Corporate financing decision when investors take the path of least resistance.
Cambridge, MA : National Bureau of Economic Research, ©2004
(OCoLC)57424098
Material Type: Document, Internet resource
Document Type: Internet Resource, Computer File
All Authors / Contributors: Malcolm Baker; Joshua Coval; Jeremy C Stein; National Bureau of Economic Research.
OCLC Number: 57362084
Notes: Title from PDF file as viewed on 1/3/2005.
Reproduction Notes: Electronic reproduction. [S.l.] : HathiTrust Digital Library, 2011. MiAaHDL
Description: 1 online resource.
Details: Master and use copy. Digital master created according to Benchmark for Faithful Digital Reproductions of Monographs and Serials, Version 1. Digital Library Federation, December 2002.
Series Title: Working paper series (National Bureau of Economic Research : Online), working paper no. 10998.
Responsibility: Malcolm Baker, Joshua Coval, Jeremy C. Stein.

Abstract:

"We explore the consequences for corporate financial policy that arise when investors exhibit inertial behavior. One implication of investor inertia is that, all else equal, a firm pursuing a strategy of equity-financed growth will prefer a stock-for-stock merger to greenfield investment financed with an SEO. With a merger, acquirer stock is placed in the hands of investors, who, because of inertia, do not resell it all on the open market. If there is downward-sloping demand for acquirer shares, this leads to less price pressure than an SEO, and cheaper equity financing as a result. We develop a simple model to illustrate this idea, and present supporting empirical evidence. Both individual and institutional investors tend to hang on to shares granted them in mergers, with this tendency being much stronger for individuals. Consistent with the model and with this cross-sectional pattern in inertia, acquirers targeting firms with high institutional ownership experience more negative announcement effects and greater announcement volume. Moreover, the results are strongest when the overlap in target and acquirer institutional ownership is low and when the demand curve for the acquirer's shares appears to be steep"--National Bureau of Economic Research web site.

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