Stock Market Reactions to Financing and Payment Decisions for European Mergers and Acquisitions

Abstract

Aim: We analyze stock market reactions to merger and acquisition announcements for firms in Europe and contribute to the literature by providing empirical evidence how the decisions with respect to alternative financing sources (equity or debt) and the methods of payment (cash or stock) affect the magnitude of the valuation effects.
 
 Research design: An event study methodology is applied to 717 M&A transactions. We analyze the size of the cumulative abnormal returns using the financing sources and payment methods and other variables as the relevant determinants.
 
 Findings: The cumulative abnormal results suggest that target shareholders and bidder shareholders in private deals benefit from mergers and acquisitions. The effect found is centered around the announcement date, making our findings consistent with market efficiency. Debt financed deals outperform equity financed deals and cash paid M&A outperform stock paid M&As, due to information asymmetry, signaling and agency effects.
 
 Originality: This study adds to our understanding of the relevance of the financing sources and the payment methods for mergers and acquisitions in Europe.
 
 Implications: This study may help practitioners to better assess the valuation effects of alternative financing sources and payment methods when acquiring other firms.
 
 
 JEL: G32, G34

The effect of the acquirers’ market capitalization and payment method on the short-term return of M&As in Greater China and South Korea

“…When the CAR [-3; +1] is positive, paying in cash leads to an increase in CAR of 0.427pp ceteris paribus and when the CAR [-3; +1] is negative, paying in cash results in an increase of 2.613pp ceteris paribus. This is inline with the findings of amongst others Bessler et al (2020). The effect of the payment method is however insignificant at the 10% level, given the CAR is negative as well as positive.…”

“…In the following section an overview is provided of the selection methods for the data. The procedures used mostly follow those such as outlined by Bessler et al (2020). Moreover, in this section information and descriptive statistics are provided for the dependent, independent and control variables.…”

“…In this research three company specific control variables are used, namely; Debt, Employee and Age. These control variables are similar to the firm specific control variables used in other studies, for example Vagenas-Nanos (2020); Caneghem and Luypaert (2017);and Bessler et al (2020). The variable Debt refers to the debt ratio of the acquiring firm, which has been obtained by taking the ratio of total assets to total liabilities during the year of the announcement.…”

“…As a final step, the variables Employee and Age have been transformed by taking the natural logarithm, with as goal of making the distribution of these control variables normal. This approach is common in this field of research, as can be observed from amongst others Bessler et al (2020) research, in which they take the natural logarithm of overall asset value as a measure of firm size.…”