Do Bidders Pay Cash for Underleveraged Targets?

The relationship between acquirer capital structure and the payment choice in acquisitions is well documented. However, the target firm's capital structure has been overlooked. We find that acquisitions of underleveraged targets are more likely to be financed by cash than by equity. A 1% increase of the target firm's deviation from normal leverage decreases the proportion of cash used by 0.76%. We conclude that target firm capital structure is important for the choice of payment.