Payment Method and Public Acquiror Returns: Evidence from the U.S. Market for Corporate Control

Sammanfattning: This thesis examines the relationship between method of payment, financial stress, and acquiror abnormal returns using a sample of 676 acquisitions by NYSE, NYSE American, and Nasdaq listed non-financial, non-utility firms. In normal market conditions the results are generally consistent with previous findings, with stock acquisitions of private targets generating the highest abnormal returns. However, acquiring firm shareholders no longer experience significant losses in stock acquisitions of public targets. In addition, when the Kansas City Financial Stress Index (KCFSI)-a proxy for capital markets uncertainty-exceeds two standard deviations above its average, acquisition announcements consistently generate negative or insignificant negative abnormal returns regardless of the method of payment used. I show that the negative effect of financial stress on acquiror abnormal returns is most pronounced for acquisitions of public targets. In such acquisitions, a one standard deviation increase in KCFSI is associated with 1.08% lower abnormal returns on the day of the announcement. For acquisitions of private targets, higher liquidity discounts in periods of financial stress may partly offset the costs of issuing more expensive sources of financing. I also find no evidence that the effect of financial stress on acquiror abnormal returns differs by payment method. The results are consistent with predictions derived from pecking order theory and an agency model developed by Jung, Kim & Stulz (1996).