The Deterring Role of the Medium of Payment in Takeover Contests : Theory and Evidence from the UK

The deterring role of the medium of payment in a takeover contest is analyzed from the point of view of the bidder. Cash, debt and equity are considered as alternative mediums of payment, and the bidder equilibrium strategies are specified following the Perfect Bayesian Equilibrium requirements for a signaling game. The model predicts notably that cash offers signal a high-valuing bidder, strongly determined to acquire the target firm. Moreover, cash offers deter competition better than debt or equity offers. The theoretical results are validated with data from the U.K. over 1995-96