Method of Payment and Risk Mitigation in Cross-Border Mergers and Acquisitions
63 Pages Posted: 26 Feb 2014 Last revised: 19 Nov 2015
Date Written: November 9, 2015
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: Suggested Citation