Method of Payment and Risk Mitigation in Cross-Border Mergers and Acquisitions

63 Pages Posted: 26 Feb 2014 Last revised: 19 Nov 2015

See all articles by Peng Huang

Peng Huang

University of New South Wales - Australian School of Business

Micah S. Officer

Loyola Marymount University - Department of Finance and Computer Information Systems

Ronan Powell

University College Dublin (UCD) - Michael Smurfit Graduate School of Business

Date Written: November 9, 2015

Abstract

We argue that the method of payment in cross-border mergers and acquisitions (M&As) can mitigate country-level governance risk for the acquirer. We find a greater use of stock as the method of payment in cross-border deals involving targets from countries with high governance risk relative to that in the acquirer’s country. This increased use of stock in riskier cross-border deals is consistent with the optimal reaction of the acquirer in response to information asymmetry (to avoid overpayment), even though we also show that the use of stock (instead of cash) as the method of payment in cross-border deals is associated with a lower likelihood of deal completion. Furthermore, for more recent periods (i.e., after 2000) we show that the use of stock (cash) has increased (decreased) significantly in cross-border deals, resulting in convergence with the method of payment used in domestic deals.

Keywords: Cross-border M&As, information asymmetry, relative country-risk, overpayment

JEL Classification: G34, G38, D82, K33

Suggested Citation

Huang, Peng and Officer, Micah S. and Powell, Ronan G., Method of Payment and Risk Mitigation in Cross-Border Mergers and Acquisitions (November 9, 2015). Asian Finance Association (AsianFA) 2014 Conference Paper; 27th Australasian Finance and Banking Conference 2014 Paper. Available at SSRN: https://ssrn.com/abstract=2401059 or http://dx.doi.org/10.2139/ssrn.2401059

Peng Huang

University of New South Wales - Australian School of Business ( email )

UNSW Business School
High St
Sydney, NSW 2052
Australia

Micah S. Officer

Loyola Marymount University - Department of Finance and Computer Information Systems ( email )

Los Angeles, CA 90045
United States

Ronan G. Powell (Contact Author)

University College Dublin (UCD) - Michael Smurfit Graduate School of Business ( email )

Blackrock, Co. Dublin
Ireland

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