Corporate financing decisions when investors take the path of least resistance

We argue that inertial behavior on the part of investors can have significant consequences for corporate financial policy. One implication of investor inertia is that it improves the terms for the acquiring firm in a stock-for-stock merger, because acquirer shares are placed in the hands of investor...

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Bibliographic Details
Published in:Journal of financial economics 2007-05, Vol.84 (2), p.266-298
Main Authors: Baker, Malcolm, Coval, Joshua, Stein, Jeremy C.
Format: Article
Language:English
Subjects:
Acquisitions
Decision making
Demand curves
Economic models
Equity financing
Equity issuance
Financial policy
Inertia
Investment decision
Investment policy
Investments
Investors
Mergers
Stocks
Studies
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Summary:We argue that inertial behavior on the part of investors can have significant consequences for corporate financial policy. One implication of investor inertia is that it improves the terms for the acquiring firm in a stock-for-stock merger, because acquirer shares are placed in the hands of investors, who, independent of their beliefs, do not resell these shares on the open market. In the presence of a downward-sloping demand curve, this leads to a reduction in price pressure and, hence, to cheaper equity financing. We develop a simple model to illustrate this idea and present supporting empirical evidence.
ISSN:0304-405X
1879-2774
DOI:10.1016/j.jfineco.2006.03.005