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.

Keywords:

• event studies
• agency theory
• inside ownership
• shareholder value
• legal origin
• mergers and acquisitions (M&As); payment method

JEL classification:

• G30
• G32
• G34
• F30

Acknowledgements

Isabel Feito-Ruiz acknowledges Professor Luc Renneboog for his useful comments during her visiting research at Tilburg University. We also acknowledge the participants of FMA 2011 Annual Conference (Porto, Portugal), III International Risk Management Conference (IRMC) (Florence, Italy), XVII Multinational Finance Society Conference 2010 (Barcelona, Spain), XX Asociación Científica de Economía y Dirección de Empresa (ACEDE), (Granada, Spain).

Notes

1. We only consider the acquiring ownership. This variable is not available for all target firms, given that there are listed and unlisted worldwide firms.

Additional information

Funding

This work was supported by the Spanish Economy and Competitiveness Ministry [ECO2012-31772].