Abstract
Bidders have an incentive to pay with stock when their shares are overvalued, but target firms should be reluctant to accept such overvalued payment. In a sample of 2,978 acquisitions, we find that stock payment is readily accepted only when the bidder can justify the financing decision in terms of such economic fundamentals as optimal capital structure. Yet even when the fundamentals justify stock payment, paying with cash is more common. In that way, firms can preclude paying with undervalued stock and are more likely to experience positive longterm excess returns.
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