Mergers and Acquisitions Valuation: Cash vs Stock Payment

Abstract

The aim of this paper is to study the influence of the Merger and Acquisition (M&A) payment method decision on the acquiring shareholders’ M&A valuation, considering the relevance of the acquiring ownership structure and the legal and institutional environment, and the possibility that the payment method decision may be endogenous.

The results show that the ownership structure and the legal and institutional environment influence both the choice of payment method and the acquiring shareholders’ valuation. 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. Acquiring shareholders value cash paid M&As more in firms with high levels of ownership concentration because of higher managerial control. Also, it is higher in countries with a strong legal and institutional environment, where lower agency costs are expected, and cash payment is not associated with avoiding ownership dilution.

Keywords: Mergers and Acquisitions (M&As), payment method, ownership, legal and institutional environment, shareholder protection, abnormal return

JEL Classification: G30, G32, G34, F30