Emerging Market Bidder Returns and the Choice of Payment Method in M&A: Evidence from India

Abstract

Indian mergers and acquisition deals present an interesting venue to study the effects of two conflicting forces, namely, high promoter holdings and lack of debt funding, on the method of payment choice and its impact on shareholder returns. We study the short run effects on shareholders’ wealth of the acquiring companies in mergers and acquisitions in India. Analysis of abnormal returns indicates that the M&A announcements in India display positive effects on shareholder wealth, oftentimes irrespective of the method of payment. Cash deals display positive abnormal returns, and in some event windows we observe positive abnormal returns for stock deal bidders, as well. This phenomenon is contrary to the wealth effect predictions of the information asymmetry models. We offer financing constraint hypothesis and ownership hypothesis, along with an alternative hypothesis, i.e., the pseudo cash deals hypothesis to explain this anomaly. The availability of internal funds, insider ownership and size of a deal are important factors that determine the choice of payment method in Indian mergers and acquisitions.