Market sentiment and the choice of payment method in mergers and acquisitions

Abstract

AbstractThe study contributes to the literature that pre‐merger market sentiment plays a significant role in the choice of payment method in M&As and further impacts the market reactions to such related deals around the deal announcement date. Stock is more likely to be overvalued and chosen as the medium of exchange when the market is in the bullish periods. The higher investor sentiment prior to the deals setting under the cash payment, the better abnormal stock returns of such deals around the deal announcement date. The two commonly used sentiment indexes, BWI and CSI, are both representative for the market sentiment in relation to the choice of M&A payment methods, but the investor sentiment index, BWI, is more powerful on explaining the relationship with market reactions.