Skip to main content Accessibility help
Hostname: page-component-5bf98f6d76-nn2qz Total loading time: 0.578 Render date: 2021-04-20T21:06:04.926Z Has data issue: true Feature Flags: { "shouldUseShareProductTool": true, "shouldUseHypothesis": true, "isUnsiloEnabled": true, "metricsAbstractViews": false, "figures": false, "newCiteModal": false, "newCitedByModal": true }

Financial versus Strategic Buyers

Published online by Cambridge University Press:  06 March 2019


This article introduces the impact of debt misvaluation on merger and acquisition activity. We show the potential for debt misvaluation to help explain the shifting dominance of financial acquirers (private equity firms) relative to strategic acquirers (operating companies). Fundamental differences in governance and project coinsurance between the two types of acquirer would interact with debt misvaluation, resulting in variation in how assets are owned that depends on debt market conditions. We find support for our theory in merger data using a novel measure of debt misvaluation.

Research Article
Copyright © Michael G. Foster School of Business, University of Washington 2019 

Access options

Get access to the full version of this content by using one of the access options below.



We thank Stephen Brown and Jennifer Conrad (the editors) and Ulf Axelson, Murillo Campello, Alexander Gorbenko, Victoria Ivashina (the referee), Matthias Kahl, Rich Mathews, Ramana Nanda, Thomas Philippon, Gordon Phillips, Jeremy Stein, Per Stromberg, S. Viswanathan, and Gregor Weiss for fruitful discussions and comments, and we thank seminar participants at the 2013 American Finance Association meetings, the 2012 Western Finance Association meetings, the 2012 European Finance Association meetings, the first ECCCS (European Center for Corporate Control Studies) workshop, the 2012 Campus for Finance, the 2012 LBS Private Equity Findings Symposium, Harvard University, Claremont McKenna College, London School of Economics, U. Carlos III Madrid, and the 2012 UC Davis Symposium on Financial Institutions & Intermediaries. All errors are our own.


Andrade, G.; Mitchell, M.; and Stafford, E.. “New Evidence and Perspectives on Mergers.” Journal of Economic Perspectives, 15 (2001), 103120.CrossRefGoogle Scholar
Ang, J. S., and Cheng, Y.. “Direct Evidence on the Market-Driven Acquisitions Theory.” Journal of Financial Research, 29 (2006), 199216.CrossRefGoogle Scholar
Axelson, U.; Jenkinson, T.; Stromberg, P.; and Weisbach, M. S.. “Borrow Cheap, Buy High? The Determinants of Leverage and Pricing in Buyouts.” Journal of Finance, 68 (2013), 22232267.CrossRefGoogle Scholar
Axelson, U.; Stromberg, P.; and Weisbach, M. S.. “Why Are Buyouts Levered: The Financial Structure of Private Equity Funds.” Journal of Finance, 64 (2009), 15491582.CrossRefGoogle Scholar
Baker, M.; Greenwood, R.; and Wurgler, J.. “The Maturity of Debt Issues and Predictable Variation in Bond Returns.” Journal of Financial Economics, 70 (2003a), 261291.CrossRefGoogle Scholar
Baker, M.; Stein, J.; and Wurgler, J.. “When Does the Market Matter? Stock Prices and the Investment of Equity-Dependent Firms.” Quarterly Journal of Economics, 118 (2003b), 9691006.CrossRefGoogle Scholar
Barberis, N., and Thaler, R. H.. “A Survey of Behavioral Finance.” In Handbook of the Economics of Finance, Constantinides, G., Harris, M., and Stulz, R. M., eds. Amsterdam, The Netherlands: North Holland: MacMillan (2003).Google Scholar
Bargeron, L. L.; Schlingemann, F. P.; Stulz, R. M.; and Zutter, C. J.. “Why Do Private Acquirers Pay So Little Compared to Public Acquirers?Journal of Financial Economics, 89 (2008), 375390.CrossRefGoogle Scholar
Bertrand, M., and Mullainathan, S.. “Are CEOs Rewarded for Luck? The Ones without Principals Are.” Quarterly Journal of Economics, 116 (2001), 901932.CrossRefGoogle Scholar
Bolton, P.; Scheinkman, J.; and Xiong, W.. “Pay for Short-Term Performance: Executive Compensation in Speculative Markets.” Journal of Corporation Law, 30 (2005), 721747.Google Scholar
Bolton, P.; Scheinkman, J.; and Xiong, W.. “Executive Compensation and Short-Termist Behavior in Speculative Markets.” Review of Economic Studies, 73 (2006), 577610.CrossRefGoogle Scholar
Campbell, J. Y., and Taksler, G. B.. “Volatility and Corporate Bond Yields.” Journal of Finance, 58 (2003), 23212349.CrossRefGoogle Scholar
Campello, M., and Graham, J. R.. “Do Stock Prices Influence Corporate Decisions? Evidence from the Technology Bubble.” Journal of Financial Economics, 107 (2013), 89110.CrossRefGoogle Scholar
Dittmar, A.; Li, D.; and Nain, A.. “It Pays to Follow the Leader: Acquiring Targets Picked by Private Equity.” Journal of Financial and Quantitative Analysis, 47 (2012), 901931.CrossRefGoogle Scholar
Dong, M.; Hirshleifer, D.; Richardson, S.; and Teoh, S. H.. “Does Investor Misvaluation Drive the Takeover Market?Journal of Finance, 61 (2006), 725762.CrossRefGoogle Scholar
Faure-Grimaud, A., and Inderst, R.. “Conglomerate Entrenchment under Optimal Financial Contracting.” American Economic Review, 95 (2005), 850861.CrossRefGoogle Scholar
Fruhan, W. E. Jr. “The Role of Private Equity Firms in Merger and Acquisition Transactions.” Harvard Business School Case 9-206-101 (2010).Google Scholar
Galai, D., and Masulis, R. W.. “The Option Pricing Model and the Risk Factor of Stock.” Journal of Financial Economics, 3 (1976), 5381.CrossRefGoogle Scholar
Gervais, S.; Heaton, J.; and Odean, T.. “Overconfidence, Compensation Contracts, and Capital Budgeting.” Journal of Finance, 66 (2011), 17351777.CrossRefGoogle Scholar
Gilchrist, S.; Himmelberg, C.; and Huberman, G.. “Do Stock Price Bubbles Influence Corporate Investment?Journal of Monetary Economics, 52 (2005), 805827.CrossRefGoogle Scholar
Goel, A. M., and Thakor, A. V.. “Overconfidence, CEO Selection and Corporate Governance.” Journal of Finance, 63 (2008), 27372784.CrossRefGoogle Scholar
Gorbenko, A. S., and Malenko, A.. “Strategic and Financial Bidders in Takeover Auctions.” Journal of Finance, 69 (2014), 25132555.CrossRefGoogle Scholar
Gorton, G.; Kahl, M.; and Rosen, R.. “Eat or Be Eaten: A Theory of Mergers and Merger Waves.” Journal of Finance, 64 (2009), 12911344.CrossRefGoogle Scholar
Greenwood, R., and Hanson, S. G.. “Issuer Quality and the Credit Cycle.” Review of Financial Studies, 26 (2013), 14831525.CrossRefGoogle Scholar
Haddad, V.; Loualiche, E.; and Plosser, M.. “Seeing the Forest through the Trees: The Impact of Aggregate Discount Rates on Buyout Activity.” Working Paper, University of Chicago (2011).Google Scholar
Harford, J.What Drives Merger Waves.” Journal of Financial Economics, 77 (2005), 529560.CrossRefGoogle Scholar
Hege, U.; Lovo, S.; Slovin, M. B.; and Sushka, M. E.. “Asset Sales and the Role of Buyers: Strategic Buyers versus Private Equity.” Working Paper, HEC Paris (2012).CrossRefGoogle Scholar
Higgins, R., and Schall, L.. “Corporate Bankruptcy and Conglomerate Merger.” Journal of Finance, 30 (1975), 93113.CrossRefGoogle Scholar
Hirshleifer, D.Investor Psychology and Asset Pricing.” Journal of Finance, 56 (2001), 15331597.CrossRefGoogle Scholar
Holmstrom, B., and Kaplan, S. N.. “Corporate Governance and Merger Activity in the United States: Making Sense of the 1980s and 1990s.” Journal of Economic Perspectives, 15 (2001), 121144.CrossRefGoogle Scholar
Holmstrom, B., and Tirole, J.. “Financial Intermediation, Loanable Funds, and the Real Sector.” Quarterly Journal of Economics, 112 (1997), 663691.CrossRefGoogle Scholar
Ivashina, V., and Kovner, A.. “The Private Equity Advantage: Leveraged Buyout Firms and Relationship Banking.” Review of Financial Studies, 24 (2011), 24622498.CrossRefGoogle Scholar
Jensen, M.Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers.” American Economic Review, 76 (1986), 323329.Google Scholar
Jensen, M.Agency Costs of Overvalued Equity.” Financial Management, 34 (2005), 519.CrossRefGoogle Scholar
Jovanovic, B., and Rousseau, P.. “The Q-Theory of Mergers.” American Economic Review, Papers and Proceedings, 92 (2002), 198204.CrossRefGoogle Scholar
Kaplan, S. N., and Stromberg, P.. “Leveraged Buyouts and Private Equity.” Journal of Economic Perspectives, 23 (2009), 121146.CrossRefGoogle Scholar
Kim, E. H., and McConnell, J.. “Corporate Mergers and the Co-Insurance of Corporate Debt.” Journal of Finance, 32 (1977), 349365.CrossRefGoogle Scholar
Landier, A., and Thesmar, D.. “Financial Contracting with Optimistic Entrepreneurs.” Review of Financial Studies, 22 (2009), 118150.CrossRefGoogle Scholar
Lehn, K.; Netter, J.; and Poulsen, A.. “Consolidating Corporate Control: Dual-Class Recapitalization versus Leveraged Buyouts.” Journal of Financial Economics, 27 (1990), 557580.CrossRefGoogle Scholar
Leland, H.On Purely Financial Synergies and the Optimal Scope of the Firm: Implications for Mergers, Spin-Offs, and Structured Finance.” Journal of Finance, 62 (2007), 765807.CrossRefGoogle Scholar
Lewellen, W. G.A Pure Financial Rationale for the Conglomerate Merger.” Journal of Finance, 26 (1971), 521537.CrossRefGoogle Scholar
Maksimovic, V., and Phillips, G.. “The Market for Corporate Assets: Who Engages in Mergers and Asset Sales and Are There Efficiency Gains?Journal of Finance, 56 (2001), 20192065.CrossRefGoogle Scholar
Mitchell, M. L., and Mulherin, J. H.. “The Impact of Industry Shocks on Takeover and Restructuring Activity.” Journal of Financial Economics, 41 (1996), 193229.CrossRefGoogle Scholar
Morck, R.; Shleifer, A.; and Vishny, R. W.. “Do Managerial Objectives Drive Bad Acquisitions?Journal of Finance, 45 (1990), 3148.CrossRefGoogle Scholar
Morellec, E., and Zhdanov, A.. “Financing and Takeovers.” Journal of Financial Economics, 87 (2008), 556581.CrossRefGoogle Scholar
Mulherin, J. H., and Boone, A. L.. “Comparing Acquisitions and Divestitures.” Journal of Corporate Finance, 6 (2000), 117139.CrossRefGoogle Scholar
Müller, H. M., and Panunzi, F.. “Tender Offers and Leverage.” Quarterly Journal of Economics, 119 (2004), 12171248.CrossRefGoogle Scholar
Myers, S. C., and Majluf, N. S.. “Corporate Financing and Investment Decisions When Firms Have Information That Investors Do Not Have.” Journal of Financial Economics, 13 (1984), 187221.CrossRefGoogle Scholar
Polk, C., and Sapienza, P.. “The Stock Market and Corporate Investment: A Test of Catering Theory.” Review of Financial Studies, 22 (2009), 187217.CrossRefGoogle Scholar
Povel, P.; Singh, R.; and Winton, A.. “Booms, Busts, and Fraud.” Review of Financial Studies, 20 (2007), 12191254.CrossRefGoogle Scholar
Rhodes-Kropf, M.; Robinson, D.; and Viswanathan, S.. “Valuation Waves and Merger Activity: The Empirical Evidence.” Journal of Financial Economics, 77 (2005), 561603.CrossRefGoogle Scholar
Rhodes-Kropf, M., and Viswanathan, S.. “Market Valuation and Merger Waves.” Journal of Finance, 59 (2004), 26852718.CrossRefGoogle Scholar
Shivdasani, A., and Wang, Y.. “Did Structured Credit Fuel the LBO Boom?Journal of Finance, 66 (2011), 12911328.CrossRefGoogle Scholar
Shleifer, A. Inefficient Markets: An Introduction to Behavioral Finance, 1st ed. Oxford: Oxford University Press (2000).CrossRefGoogle Scholar
Shleifer, A., and Vishny, R. W.. “Stock Market Driven Acquisitions.” Journal of Financial Economics, 70 (2003), 295311.CrossRefGoogle Scholar
Stein, J. C.Rational Capital Budgeting in an Irrational World.” Journal of Business, 69 (1996), 429455.CrossRefGoogle Scholar
Tirole, J. The Theory of Corporate Finance, 1st ed. Princeton, NJ: Princeton University Press (2005).Google Scholar
Wang, T. Y.; Winton, A.; and Yu, X.. “Corporate Fraud and Business Conditions: Evidence from IPOs.” Journal of Finance, 65 (2010), 22552292.CrossRefGoogle Scholar

Martos-Vila et al. supplementary material

Martos-Vila et al. supplementary material 1

File 194 KB

Full text views

Full text views reflects PDF downloads, PDFs sent to Google Drive, Dropbox and Kindle and HTML full text views.

Total number of HTML views: 17
Total number of PDF views: 492 *
View data table for this chart

* Views captured on Cambridge Core between 06th March 2019 - 20th April 2021. This data will be updated every 24 hours.

Send article to Kindle

To send this article to your Kindle, first ensure is added to your Approved Personal Document E-mail List under your Personal Document Settings on the Manage Your Content and Devices page of your Amazon account. Then enter the ‘name’ part of your Kindle email address below. Find out more about sending to your Kindle. Find out more about sending to your Kindle.

Note you can select to send to either the or variations. ‘’ emails are free but can only be sent to your device when it is connected to wi-fi. ‘’ emails can be delivered even when you are not connected to wi-fi, but note that service fees apply.

Find out more about the Kindle Personal Document Service.

Financial versus Strategic Buyers
Available formats

Send article to Dropbox

To send this article to your Dropbox account, please select one or more formats and confirm that you agree to abide by our usage policies. If this is the first time you use this feature, you will be asked to authorise Cambridge Core to connect with your <service> account. Find out more about sending content to Dropbox.

Financial versus Strategic Buyers
Available formats

Send article to Google Drive

To send this article to your Google Drive account, please select one or more formats and confirm that you agree to abide by our usage policies. If this is the first time you use this feature, you will be asked to authorise Cambridge Core to connect with your <service> account. Find out more about sending content to Google Drive.

Financial versus Strategic Buyers
Available formats

Reply to: Submit a response

Your details

Conflicting interests

Do you have any conflicting interests? *