Determinants of the Method of Payment in Asset Sell‐Off Transactions

Abstract

Using a sample of asset sell-off transactions from January 1990 to April 2010, we find that the method of payment used in asset sell-off transactions is associated with several characteristics cited in the acquisitions research that reflect cash constraints of the bidder. Specifically, bidders facing more stringent cash constraints are more likely to use equity when purchasing assets, while sellers subjected to cash constraints prefer cash when selling assets. Second, we find that the variation in method of payment among asset sell-off transactions also is partially explained by variables representing asymmetric information. Third, we apply our model to an expanded sample that includes non-U.S. sellers of assets and find that an equity payment is more likely when sellers are based in countries that have relatively high country risk (more government restrictions), weak shareholder rights, and a weak legal system. Thus, it appears that bidders prefer that sellers share in the risk of the transaction under these conditions.

Deal structure decision in the global market for divested assets

“…Their empirical findings are consistent with their model's prediction. Cao and Madura (2011) find that bidders facing more stringent cash constraints or that have higher growth prospects are more likely to use equity when purchasing assets. Furthermore, they find that an equity payment is more likely when sellers are based in countries that have relatively high country risk (more government restrictions), weak shareholder rights, and a weak legal system.…”

Three Essays on Mergers and Acquisitions: Negative Premium, Failed Mergers, and Deal Quality Implications of Medium of Exchange

“…and Lie (2002)) or with the risk-sharing function of the medium of exchange (e.g., Cao and Madura (2011)). It seems that research subsequent to has inferred postacquisition implications from his model, but is clear that his model reflects only assets in place and no ex post profitability or (un)certainty regarding ex post acquisition gains.…”

“…No Cao and Madura (2011) An investigation of the role of medium of exchange in asset sell-off transactions.…”

“…and use an event-time portfolio approach to evaluate post-acquisition, long-run wealth effects and find that stock acquirers earn negative long-term abnormal returns, and obtain the same finding with a calendar-time portfolio approach. Another empirical study that provides some evidence in favor of the deal quality hypothesis is Cao and Madura (2011) who examine the determinants of the medium of exchange in asset sell-off transactions, and the study finds that a stock financed acquisition is more likely when targets are based in countries that have relatively high country risk, weak shareholder rights, and a weak legal system. Cao and Madura (2011) conclude that bidders prefer that targets share in the risk of the transaction under conditions characterized by higher risk.…”

“…Another empirical study that provides some evidence in favor of the deal quality hypothesis is Cao and Madura (2011) who examine the determinants of the medium of exchange in asset sell-off transactions, and the study finds that a stock financed acquisition is more likely when targets are based in countries that have relatively high country risk, weak shareholder rights, and a weak legal system. Cao and Madura (2011) conclude that bidders prefer that targets share in the risk of the transaction under conditions characterized by higher risk. Focusing on operating performance of 315 target and bidder pairs, reports that cash flows increase significantly following acquisitions that are made with cash, but decline for stock financed acquisitions.…”