Mergers and acquisitions valuation: the choice of cash as payment method

Abstract

This paper studies the relevance of the acquiring ownership structure and its legal and institutional environment on the decision to pay for a merger and acquisition (M&A) with cash and how this decision influences the acquiring shareholders’ M&A valuation. At the same time, we deal with the potential endogeneity problem. The results show that the acquiring ownership structure and the legal and institutional environment influence both the choice of cash as the payment method and the acquiring shareholders’ valuation, being the payment method an endogenous decision. High levels of ownership concentration in the acquiring firm or in countries with strong legal and institutional environments reduce the probability of cash paid M&As and provoke higher acquiring shareholders valuation around the announcement of an M&A paid in cash.