Corporate Takeover Bids, Methods of Payment, and Bidding Firms' Stock Returns

TLDR: In this paper, the authors explored the role of the method of payment in explaining common stock returns of bidding firms at the announcement of takeover bids and revealed significant differences in the abnormal returns between common stock exchanges and cash offers.

Abstract: This study explores the role of the method of payment in explaining common stock returns of bidding firms at the announcement of takeover bids. The results reveal significant differences in the abnormal returns between common stock exchanges and cash offers. The results are independent of the type of takeover bid, i.e., merger or tender offer, and of bid outcomes. These findings, supported by analysis of nonconvertible bonds, are attributed mainly to signalling effects and imply that the inconclusive evidence of earlier studies on takeovers may be due to their failure to control for the method of payment. RECENT STUDIES ON CORPORATE takeovers provide inconclusive results on the valuation effects of acquisitions on the common stock of bidding firms.1 Substantial differences are reported between the studies that analyze acquisitions initiated as tender offers and those that confine their samples to merger proposals. The existence of mixed empirical findings for the bidding firms makes it difficult to interpret existing evidence and to draw conclusions about the managers' acquisition motivations. Nevertheless, the reason for the substantial difference between empirical findings on mergers and tender offers still remains an unresolved issue. It is observed, however, that mergers are usually common stock exchange offers whereas tender offers are usually cash offers. Given that different methods of financing a project have different signalling implications (Myers and Majluf [39]), the differential stock returns of bidders in mergers and tender offers may be due to the method of acquisition financing.