Capital Structure and Corporate Financing Decisions: Theory, Evidence, and Practice

P1: TIX/XYZ P2: ABC

JWBT436-c01 JWBT436-Baker February 11, 2011 7:53 Printer Name: Hamilton

12 Capital Structure: An Overview

include: (1) the method of payment (i.e., paying with either stock or cash); (2) the

financing of the transaction (i.e., using internal funds or issuing new equity or debt);

and (3) the interaction between the financing requirements and the firm’s long-term

target capital structure. This chapter analyzes these financial aspects of M&As

and the interactions among them. The crucial factors for the method of payment

decision are generally agency problems and particularly transaction risks such as

overpayment and ownership considerations. Cash payments are mostly financed

with internally generated funds and by issuing new debt, whereasequity payments

are mainly associated with equity offerings. Nevertheless, the financing decision

may also depend on the bidder’s current financial leverage. Consequently, firms

often adjust their capital structure before and after an M&A to minimize deviations

from their optimal capital structure. The analysis suggests that financing corporate

M&As involves a complex system of dependencies and interactions among many

factors.

SUMMARY AND CONCLUSIONS

Despiteextensive research, financialeconomists stillview capital structureasa puz-

zle in which all the pieces do not fit perfectly into place. Surveys by Graham and

Harvey (2001); Bancel and Mittoo (2004); and Brounen, Dirk, de Jong, and Koedijk

(2004, 2006) report gaps between theory and practice involving