The Impact of Target Capital Structure and Market Mispricing on Takeover Financing: Empirical Evidence from China

Jinglin Li and Simon S. Gao

The dynamic trade-off theory and the market timing theory of capital structure are applied to analyze 5,923 Chinese takeover events from 2007 to 2014 with a view to identifying the influence of target capital structure (TCS), market mispricing and their interactions on takeover financing methods. It was found that leverage deviation from TCS had a significant effect on the choice of takeover financing methods and the choice was affected by market timing. Overleveraged bidders and overvalued bidders tended to choose equity financing, compared to underleveraged and undervalued counterparts. Also, the influence of TCS on takeover financing had the market timing effect. The results suggested both the dynamic trade-off theory and the market timing theory of capital structure had explanatory power in interpreting takeover financing choice, although the dynamic trade-off theory seemed to be more influential.

DOI : https://doi.org/10.21102/graf.2016.09.72.07