Medium of Payment in Corporate Acquisitions: Evidence from Interstate Bank Mergers

Abstract

It has been known for some time that the medium of payment used in acquisitions is an important factor to consider (see Carleton et al. 1983). It has also been noted that different methods of financing a project have different infor-lllational implications (Myers and Majluf 1984; Krasker 1986). Furthermore, a substantial volume of empirical literature on stock issues reports negative stock price reactions to new offerings of seasoned common stock (for example, Asquith and Mullins 1986; Kalay and Shimrat 1987). This paper examines the role of medium of payment in corporate acquisitions with the help of evidence from a large sample of interstate bank mergers which took place over the five-year period from 1982 through 1986 under state statutes passed in compliance with the Douglas Amendment to the Bank Holding Company Act (1956). Initiated in 1982, merger activity of this type has grown rapidly in volume ever since and has already dramatically changed the stiucture of the commercial banking industry in this country. The results of this study indicate that when the full sample of banks involved in interstate bank mergers is divided into subsamples by medium of payment the abnormal announcement period returns for the subsamples are equal to each other, as well as to the results for the full sample. The finding that bidder returns are not affected by the bidder's choice of medium of payment is in contrast with findings of the existing empirical studies that have explored this issue in the context of nonbank mergers (see Asquith, BIuner, and Mullins 1987; Travlos 1987; Eckbo and Langohr 1989; Franks, Hams, and Mayer 1988). They all report significantly higher bidder returns from cash-financed acquisitions than from stock-financed acquisitions.