Does payment method matter in cross-border acquisitions?

Abstract

In this study, we focus on 1300 completed deals (545 cross-border and 755 domestic deals) by Canadian acquirers between 1993 and 2002 to examine the effect of payment methods in the context of cross-border M&A deals. Our results show a significant and positive effect for stock-financed deals in the cross-border acquisitions. This result is robust to a set of commonly used control variables in the literature. In order to find a justification for such positive reactions for stock financed deals, we investigate the long-term operating performance of cross-border cash- and stock financed deals. Our results do not show any significant difference. It appears that market is overenthusiastic about the cross-border stock financed deals and overestimates the synergy gains. Market corrects for this overreaction for cross-border stock financed deals in the subsequent periods. We carry out a detailed buy-and-hold abnormal return (BHAR) analysis to evaluate the long term stock returns for these firms. Our results show that cross-border stock financed deals significantly underperform in the long-run compared to the cross-border cash financed deals. Further, we examine the role of stock payment in mitigating information asymmetry in cross-border deals and alleviating the risk arising from making acquisitions in a foreign market with lower corporate governance rating. Our results show that stock payment is viewed as a possible remedy for reducing information asymmetry and lowering corporate governance related risk in cross-border acquisitions.