Expected Market Reaction and the Choice of Method of Payment for Acquistions - Statistical Data Included

Financial Management (Financial Management Association), Winter, 1999 by Gary W. Emery, Jeannette A. Switzer

For each bidder and target in our sample, we used The Wall Street Journal Index to determine the announcement date, method of payment, type of acquisition, completion date, and the existence of confounding events. We deleted 111 transactions in which the method of payment was not 100% stock or 100% cash. We also deleted 119 transactions with ambiguous event dates or insufficient information to compute the independent variables. This gave us a final sample of 347 transactions; 147 acquisitions for stock and 200 for cash. Two hundred six of the transactions were mergers and 141 were tender offers.

Table 2 provides the means and z-scores of the CARs and the means and standard deviations of the independent variables that represent the benefits and costs of acquisitions for stock and cash. We note first that the abnormal returns are similar to those reported in other studies. Bidders that used stock as the method of payment had an average CAR significantly less than zero while bidders that used cash had an average CAR not significantly different from zero.

There is a significant difference in the means of five independent variables for the bidders that used stock and those that used cash. These variables are PER-TAX, MK-BK(B), SLACK, INDUSTRY, and INEXP. The significant difference between the values of PER-TAX in the subsamples indicates that bidders that used stock as the method of payment acquired targets whose owners had larger exposures to short-term capital gains. Hayn (1989) found a similar effect. Bidders that chose cash as the method of payment had lower market-to-book ratios than those that chose stock. This difference is inconsistent with the signaling explanation for the choice of method of payment. Bidders that chose cash as the payment method had more financial slack than stock bidders, however, which is consistent with the signaling explanation. Bidders that used stock as the method of payment were more likely to acquire companies outside their own industry, which suggests they used stock for its contingent pricing benefits. At the same time, bidders that chose stock were more likely to have recent experience in acquisitions, which indicates they may have been less concerned about the effect of competition. Taken together, these differences in the means of the independent variables suggest that taxes, asymmetric information, and competition may affect a bidder's choice of the method of payment for an acquisition.

B. Calculation and Analysis of Expected Abnormal Returns

We randomly divided our entire sample for the tests described in the remainder of this section. We used 173 observations to estimate the coefficients of our expectations models and used the remaining 174 observations for our tests. Of the 174 bidders in our test sample, 99 used cash as the method of payment and 75 used stock.

Table 3 presents the results of estimating the coefficients of the independent variables in our cross-sectional regression models. The dependent variable is the CAR for successful bidders in acquisitions for stock and cash over the period t = -l through t = 0. The independent variables are proxies for the benefits and costs of using stock and cash as the method of payment plus the instrumental variable, GAMMA, that corrects for the effect of censored data. The coefficients of six of the ten independent variables are significantly different from zero at the 0.05 level. All but one of them, INEXP in the acquisitions for stock model, have the sign that we predicted.