Abstract
A model of the equity takeover premium is developed that demonstrates a direct link between the percentage premium paid to target shareholders and the target firm's capital structure and asset structure. We test the model using a sample of 145 cash tender offers and find that target abnormal returns increase with the target's liability to equity ratio and decrease with the target's financial asset to equity ratio. The addition of these variables dramatically improves the explanatory power of regressions explaining percentage takeover premiums paid to target shareholders.
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