Credit Ratings and the Choice of Payment Method in Mergers and Acquisitions

Abstract

This paper establishes that credit ratings affect the choice of payment method in mergers and acquisitions. We find that bidders holding a credit rating and/or having a higher rating level are more likely to use cash financing in a takeover. We attribute this finding to the lower financial constraints and enhanced capability of these firms to access public debt markets as implied by their higher debt capacity and/or credit quality. Our results are robust to several firm-and deal-characteristics and are not sensitive to the method used to measure the probability of payment choice or after controlling for endogeneity bias.JEL Classification: G14; G24; G32; G34

Customer Concentration of Targets in Mergers and Acquisitions

“…The distributions of the customer concentration measures in this sample are similar to those in the bid sample. On average, 27 percent of deal value is offered in stock of the bidding firm, while 60 percent is offered in cash, which is comparable to prior studies (e.g., Martynova and Renneboog 2009;Karampatsas, Petmezas, and Travlos 2014). 13 Relative to the total sample of firm-years in Panel A, firm-years with bids in Panel B tend to exhibit lower abnormal returns, MTB and PE Ratios.…”

The performance of acquisitions by high default risk bidders

“…26 Andrade et al (2001) report that the use of cash as a method of payment in corporate takeovers is time dependent, as it was prevalent during the 1980s, and over the first decade of the new century, but declined significantly during the 1990s. Karampatsas, et al (2014) show that firms with high credit ratings are more likely to make cash acquisitions because of their low cash constraints and their ability to access debt market. undertake value-destroying stock acquisitions when they want to maintain market mispricing (Jensen, 2004) and when they pay a higher acquisition premium (Fu et al, 2013).…”

Interorganizational imitation and payment mode decisions in cross‐border acquisitions

“…This includes availability of free cash flow (Jensen, 1986;Martin, 1996); use of stock by firms showing superior stock performance (Zhang, 2001), capital structure, and organizational slack (Chaney, Lovata, & Philipich, 1991); credit ratings of the acquirer firm (Karampatsas, Petmezas, & Travlos, 2012); ownership structure (Faccio & Masulis, 2005;Swieringa & Schauten, 2008) and listing status of target firm (Draper & Paudyal, 2006). Under the condition of information asymmetry, that is, when target firm knows its value better than acquirer, acquirer offers stock due to its contingent pricing characteristics (Hansen, 1987).…”