Innovative Mode of Financing and Abnormal Returns to Shareholders of Indian Acquiring Firms

Abstract

This chapter seeks to explore the influence of innovative mode of financing such as the combination of cash and stock or the earn-out offers used in the acquisitions. This chapter also looks into whether the short-run performance of domestic and cross-border acquisitions is impacted differently when an innovative mode of payment is used. This chapter examines the abnormal returns to the shareholders of 14 acquiring companies in India during the period 2003–2008. The results indicate that the acquisitions generate statistically significant positive abnormal returns of 5.29 % during the 5-day event window (− 2, + 2) when an innovative method of payment is used as a mode of acquisition. The major finding of disaggregated analysis is that the acquirer experiences higher cumulative average abnormal return (CAAR) in the case of acquisition of a domestic target firm. The acquirer earns more than 10 % CAAR during the 5-day event window (− 2, + 2) when the target firm is domestic. The acquirer earns more than 3 % during the 5-day event window (− 2, + 2) when the target firm is cross-border. The acquisitions financed with a combination of cash and stock or earn-out offers experience positive abnormal returns, could be a signal in support of the investment opportunity and the risk-sharing hypotheses.