Acquisition Finance and Market Timing

55 Pages Posted: 4 Oct 2013

See all articles by Theo Vermaelen

Theo Vermaelen

INSEAD - Finance

Moqi Groen-Xu

London School of Economics & Political Science (LSE)

Date Written: October 3, 2013


Bidders have an incentive to pay with stock when their shares are overvalued, but target firms should be reluctant to accept such overvalued payment. In a sample of 2,978 acquisitions, we find that stock payment is readily accepted only when the bidder can justify the financing decision in terms of such economic fundamentals as optimal capital structure. Yet even when the fundamentals justify stock payment, paying with cash is more common. In that way, firms can preclude paying with undervalued stock and are more likely to experience positive longterm excess returns.

Keywords: Mergers and acquisitions, Capital structure, Market timing, Mispricing

JEL Classification: G14, G34

Suggested Citation

Vermaelen, Theo and Groen-Xu, Moqi, Acquisition Finance and Market Timing (October 3, 2013). INSEAD Working Paper No. 2013/107/FIN. Available at SSRN: or

Theo Vermaelen

INSEAD - Finance ( email )

Boulevard de Constance
F-77305 Fontainebleau Cedex
33 1 60 72 42 63 (Phone)
33 1 60 72 40 45 (Fax)

Moqi Groen-Xu (Contact Author)

London School of Economics & Political Science (LSE) ( email )

Houghton Street
London, WC2A 2AE
United Kingdom

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