Method Of Payment In Acquisitions Research Articles

Overlapping insiders and the method of payment in acquisitions: New tests and evidence on adverse selection

Exploiting a unique setting of overlapping insiders between acquirers and targets in India, we examine how information asymmetry between the transacting parties influences the returns to acquiring firms' shareholders, as well as the method of payment. Using a novel dataset, we find that cash-financed deals generate greater (no significantly different) value for acquiring firms’ shareholders than stock-financed ones when insiders are non-overlapping (overlapping) between acquiring and target firms. Further, stock-financed deals with overlapping insiders outperform those without them. These results indicate that the adverse selection effect of stock issues in stock-financed acquisitions with asymmetric information between the transacting parties is the key reason behind the underperformance of stock-financed deals. We also find that acquisitions with overlapping insiders on both sides of the deal have a significantly higher incidence of financing with stock than those with non-overlapping insiders. However, the positive effect of overlapping insiders on the propensity of acquisition financing with stock becomes weaker when acquiring and target firms are in the same industry. These results suggest that the effect of a particular channel of information asymmetry reduction on the payment method is greatest in the absence of other channels. Our results are robust to several checks.

Overlapping Insiders and the Method of Payment in Acquisitions: New Tests and Evidence on Adverse Selection

Overlapping Insiders and the Method of Payment in Acquisitions: New Tests and Evidence on Adverse Selection

Country uncertainty, power distance, and payment methods in acquisitions

ABSTRACT This study examines the impact of country-specific uncertainty on the choice of payment method in international acquisitions. Our results show a negative association between the level of target country-specific uncertainty and cash transactions. Specifically, when the host country experiences a high level of country uncertainty, acquirers are more likely to choose non-cash transactions in which acquiring firms can issue their own equity to the target firm as part or all of the purchase consideration of the deal. The result is robust to alternative tests and analysis of subsamples. We also find that differences in uncertainty between host and home countries are informative of bidders’ payment choices. Further, we find that the negative relation between target country-specific uncertainty and cash payment weakens when there are larger differences in power distance between host and home countries. Our findings provide recommendations for policy-making bodies, and have implications for firm managers making corporate restructuring decisions.

Does Venture Capital Syndication Affect Mergers and Acquisitions?

We find that targets backed by venture capital (VC) syndication receive higher acquisition premiums and spend more time negotiating transaction terms. The acquirers of syndicate-backed targets experience lower cumulative abnormal returns surrounding the acquisition announcements; however, they outperform those of individual-backed targets over the long-term. We show that VC syndication creates value for entrepreneurial firms by appointing larger and more independent boards of directors prior to acquisitions. It aligns the incentive of acquirers’ CEO to their shareholders by increasing CEO equity and variable pay. Syndicate-backed targets prefer stock as the method of payment in acquisitions. Taken altogether, we show that VC syndication creates value for not only entrepreneurial firms but also their acquirers in the long-term.

Selling to Buy: Asset Sales and Method of Payment in M&As

This study establishes that asset sale proceeds constitute an economically important omitted variable that determines the method of payment in acquisitions. We find that firms with asset sales are more likely to subsequently conduct cash acquisitions. In economic terms, this translates into 42.76% higher likelihood to use cash as method of payment. We attribute this finding to the increased cash liquidity offered by asset sales. Our results are robust after controlling for potential endogeneity bias, and highlight, in a setting of two pure asset restructuring events, the importance of asset sales to the crucial choice of payment method in acquisitions.

Do Firms Set Free Cash Free? Misallocation vs. Opportunism in Acquisitions

We examine the impact of excess cash on the decision and method of payment in acquisitions. Consistent with prior literature, we find that firms that have excess cash do make more acquisitions. However, those acquisitions frequently use stock as the method of payment. We investigate this finding further and show that cash-rich firms use overvalued equity to make acquisitions. Moreover, there is no evidence that firms waste excess cash on acquisitions; cash-rich firms that pay with cash actually acquire undervalued firms. Our results suggest that with respect to acquisitions, managers are opportunistic with the firm’s financial resources; both its equity and its cash.

Operating Performance and the Method of Payment in Takeovers

This study investigates the relation between the method of payment in acquisitions, earnings management, and operating performance for a large sample of firms that conducted acquisitions between 1985 and 1997. Prior to their acquisitions, acquirers exhibit levels of operating performance that exceed that of their respective industry peers. We find no evidence that acquirers manage their earnings prior to acquisitions, despite the possible incentives of managers who plan stock-based acquisitions to temporarily inflate their stock's purchasing power. Subsequent to acquisitions, acquirers continue to exhibit superior performance relative to their industry and experience significantly higher levels of operating performance than control firms with similar pre-event operating performance. Although the extant literature documents significant relations between the form of acquisition payment, announcement returns, and the post-acquisition excess return of acquirers, we find no evidence that the method of payment conveys information about the acquirer's future operating performance.

INFORMATION ASYMMETRY, MANAGEMENT CONTROL, AND METHOD OF PAYMENT IN ACQUISITIONS

AbstractWe examine the information asymmetry hypothesis and the management control hypothesis by examining the relation between insider trading and insider holdings to the choice of payment method in acquisitions. Our results indicate that both insider ownership and insider trading are significantly related to payment method. These results provide additional evidence for both the management control theory and the asymmetric information theory in the choice of payment method in acquisitions. Furthermore, we find a significant relation between insider trading activity and the market reaction to the announcement of acquisitions. We conclude that information asymmetry exists in the takeover market and that it influences the payment method decision.