The Informational Role of Acquirer Dividend Policy in Corporate Takeovers

Abstract

Various studies have analyzed the main determinants of payment method in M&As since the 1980s. We examine how relative the existing dividend policy of the acquirer affects the choice of the payment method. Based on the contingent-pricing effect of stock offer, we hypothesize that the likelihood of stock payment increase with the pre-merger dividend policy of the bidder since the information content of dividends can alleviate adverse selection effects. In a second step, we show that bidder announcement returns are, on average, less negative in all-stock offers for public targets when the acquirer is a dividend payer. Our analysis suggests that the positive wealth effect is related to the informative effect of acquirer dividend against adverse selection risk when using stock as a means of payment.

Keywords: M&A, Method of payment, Dividend policy, Information asymmetry, Announcement returns

JEL Classification: G34, G35