An Analysis of Merger Financing

This research analyzes a theory of merger financing that indicates that the terms of payment for target shares should be used to optimally influence the post‐merger liquidity and capital structure of the combined firm. In an empirical test on a large sample of mergers, the stock market reaction to the announcement of acquisition financing is support the theory. The empirical results also indicate that a large portion of the cross‐sectional return differences on acquirers' shares can be explained by financing theory.