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Preemptive Bidding and the Role of the Medium of Exchange in Acquisitions

Michael J. Fishman
The Journal of Finance
Vol. 44, No. 1 (Mar., 1989), pp. 41-57
Published by: Wiley for the American Finance Association
DOI: 10.2307/2328274
Stable URL: http://www.jstor.org/stable/2328274
Page Count: 17
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Since scans are not currently available to screen readers, please contact JSTOR User Support for access. We'll provide a PDF copy for your screen reader.
Preemptive Bidding and the Role of the Medium of Exchange in Acquisitions
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Abstract

The medium of exchange in acquisitions is studied in a model where (i) bidders' offers bring forth potential competition and (ii) targets and bidders are asymmetrically informed. In equilibrium, both securities and cash offers are observed. Securities have the advantage of inducing target management to make an efficient accept/reject decision. Cash has the advantage of serving, in equilibrium, to "preempt" competition by signaling a high valuation for the target. Implications concerning the medium of exchange of an offer, the probability of acceptance, the probability of competing bids, expected profits, and the costs of bidders are derived.

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