The Medium of Exchange in Acquisitions: Does the Private Information of Both Acquirer and Target Matter?

43 Pages Posted: 12 Jan 2004 Last revised: 16 Dec 2017

See all articles by Thomas J. Chemmanur

Thomas J. Chemmanur

Boston College - Carroll School of Management

Imants Paeglis

Concordia University - John Molson School of Business

Karen Simonyan

Suffolk University - Department of Finance

Date Written: September 1, 2009

Abstract

We present a direct test of the choice of the medium of exchange in acquisitions when both acquirers and targets possess private information about their own intrinsic values. We test three hypotheses: first, whether acquirers are more likely to choose a stock offer as their equity is more overvalued; second, whether acquirers facing a greater extent of information asymmetry in evaluating targets are more (or less) likely to use a stock versus a cash offer; and third, whether a cash offer deters competing bids. Our findings are as follows. First, acquirers choosing a stock offer are overvalued and those choosing a cash offer are correctly valued. Second, the greater the extent of acquirer overvaluation, the greater the likelihood of it using a stock offer; further, the greater the extent of information asymmetry faced by an acquirer in evaluating its target, the greater its likelihood of using a cash offer. Third, the extent of an acquirer’s under- or overvaluation significantly affects the abnormal returns to its equity upon the acquisition announcement. Finally, the use of cash by an acquirer deters competing bids. We conclude that private information held by both acquirers and targets together determine the medium of exchange.

Keywords: Mergers and acquisitions, Medium of exchange, Asymmetric information

JEL Classification: G34

Suggested Citation

Chemmanur, Thomas J. and Paeglis, Imants and Simonyan, Karen, The Medium of Exchange in Acquisitions: Does the Private Information of Both Acquirer and Target Matter? (September 1, 2009). Journal of Corporate Finance 15, no. 5 (2009): 523-542, Available at SSRN: https://ssrn.com/abstract=485822 or http://dx.doi.org/10.2139/ssrn.485822

Thomas J. Chemmanur

Boston College - Carroll School of Management ( email )

Finance Department, 436 Fulton Hall
Carroll School of Management, Boston College
Chestnut Hill, MA 02467-3808
United States
617-552-3980 (Phone)
617-552-0431 (Fax)

HOME PAGE: http://https://www2.bc.edu/thomas-chemmanur/

Imants Paeglis (Contact Author)

Concordia University - John Molson School of Business ( email )

Montreal, Quebec H3G 1M8
Canada

Karen Simonyan

Suffolk University - Department of Finance ( email )

8 Ashburton Place-Beacon Hill
Boston, MA 02108-2770
United States
(617) 973-5385 (Phone)

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