The Method of Payment in Corporate Acquisitions, Investment Opportunities, and Management Ownership
Posted: 22 Aug 1994
Date Written: August 4, 1994
This paper provides evidence on the motives underlying the method of payment in corporate acquisitions. The findings support the notion that the higher a firm's growth opportunities, the more likely it is to use stock to finance an acquisition. In addition, the likelihood of stock financing increases with higher pre-acquisition market and acquiring firm stock returns and decreases with cash availability, institutional blockholdings, and in tender offers. Contrary to established theory, however, acquiring firms with higher growth opportunities experience announcement period abnormal stock returns that are significantly negative when stock financing is used regardless of management ownership stakes. Additionally, cash-financed acquisitions are met with significantly negative abnormal returns for acquiring firms with low ownership stakes regardless of the firm's growth opportunities.
JEL Classification: G34
Suggested Citation: Suggested Citation