Method of Payment and Shareholders Stock Returns: Evidence from Mergers

Abstract

Manuscript type: Research paper
Research aims: Extant literature has largely focused on how the all-cash
and all-stock acquisition payment methods impact shareholders’ returns.
It also suggests that the mixed payment method (i.e. various cash-to-stock
ratios) is a unique (rather than a hybrid) payment category. Nonetheless,
the justification for its uniqueness and the impact of announcing the
different ratios remain unclear. This paper aims to fill the gap by
examining the effect of the mixed payment method (together with the
various constituent cash-to-stock ratios) on acquirer firm shareholders’
returns.
Design/Methodology/Approach: This study uses a market model event
study on a sample of 305 mergers in the U.S. from 2004 until 2018.
Research findings: The key findings are: (1) shareholders reacted
negatively to the mixed method of payment announcement by the
acquirer firm, and (2) higher cash-to-stock ratios in this method presented
higher abnormal stock price returns.
Theoretical contribution/Originality: This paper presents a more focused
study on how the mixed payment method category (and the different
cash-to-stock ratios) impact shareholder returns. Moreover, the twentypercentage-
point change criterion used provides granularity in studying
the impact.
Practitioner/Policy implications: It provides a basis for guiding managers
in considering the appropriate cash-to-stock ratio for mixed payment
acquisition offers. This would also guide policymakers in state-owned
firms on the mixed method of payment offers and to safeguard the
shareholders’ interests.
Research limitation: The sample is limited to domestic mergers that
occurred in the U.S. Future studies may consider including cross-border
mergers and expanding the study to other regions.