Early theoretical papers, such as Travols (1987), Hansen (1987), Fishman (1989) and others, mostly focus on the problem of asymmetric information that exists between the acquirer and the target. Stock and cash payments might bear different signals as well as provide insights in the case of information asymmetry. Therefore, the choice of payment method might be determined by the uncertainty level and motives of the agents involved in M&A deal. In fact, both acquirer and the target might be unsure about the fair value of each other.

The acquirer can exploit insider's information about its company value and pay for the acquisition in stock if it believes that the company is overvalued (Myers and Majluf, 1984). He does so because it let the acquirer to save on a deal value: it pays less for the target compared to situation with absence of market misvaluation of the acquirer's stock. Nevertheless, investors are aware of such behavior and might react to the stock offer accordingly - acquirer's shares would experience price decrease. Following this logic, all else equal, cash financing would be preferred for the acquiring company to save the value of its stock.

The opposite situation is also possible, when the target stockholders are better informed about its value before the acquisition and they believe their stock is undervalued. In such a case, they would prefer to be paid in stock (Hansen, 1987). Their motives are conspicuous: their stock is currently valued lower and they are reluctant to sell it for cash, as they would rather exchange it for the stock in a merged company. Due to expected synergy effects, merged company's stock price is expected to rise thus providing capital gains to the target shareholders. However, empirical tests of this theory might be complicated as it requires various proxies for unobservable variables to model the presence of insider's information. Researches usually employ event studies of abnormal returns on the bidder's stock to capture private information. The evidence by Travols (1987) and other empirical studies suggests that abnormal returns in cash offers are higher compared to equity offers, which aligns with the findings described above. Amihud et al. (1990) supported previous conclusions and reported findings on negative stock price reaction to equity financed acquisitions, however it holds true only for firms with low managerial ownership.

Cash and stock offers are able to translate various signals to investors. Stock offer initiated by firms controlled by management convey a negative signal regarding firms's value unlike firms controlled by owners (Blackburn et al., 1997). Cash offer bears a positive signal to the market, usually that the deal is expected to be profitable and that the acquirer is not seeking for risk sharing. Moreover, it can be explained by the fact that cash deals are usually financed by raising debt, and debt generates a tax shield (Martynova and Renneboog, 2009). Further empirical tests of Linn and Switzer (2001) supported previous findings that the acquirer experiences lower abnormal returns in case of stock offers as well as poorer operating performance up to several years after the acquisition.

There arises a question - why do companies still choose to finance M&A deals with stock even though it leads to unappealing implications described in literature? What motivates the acquirer to choose stock offer? This research question was examined in a study of Martin (1996) in which the author proposed Risk Sharing hypothesis.

1.1.1 Risk Sharing Hypothesis

Risk Sharing Hypothesis was proposed in a study of Martin (1996) as an advancement of information asymmetry model in M&A deals. The author investigated the relationship between payment method and uncertainty in the value of the acquirer and the target. If the acquirer is uncertain about target's value, it would rather pay for the deal in stock. Therefore, the target will become a stockholder of a merger firm, thus sharing any post-acquisition effects. Martin (1996) examined such characteristics as size and investment opportunity as proxies for the level of uncertainty presented in a deal.

The choice of such proxies for uncertainty level is justified by the prediction of Hansen (1987). He stated that the level of informational asymmetry increases along with target's size. Thus, the larger is the target, the more asymmetry of information there is in the deal. Following this logic, one can notice that if size of the acquirer increases, then equity financing becomes less likely, while if target's size increases, then equity financing becomes more likely. However, Amihud et al. (1990) findings presented no significance of size variables in choosing between cash or stock. Moreover, results of Martin (1996) also showed insignificance of size, thus it might be not the best proxy for measuring risk and uncertainty. Another proxy used to capture asymmetric information is investment opportunities, modelled by Tobin's Q. According to Martin (1996), the use of equity is likely to occur when the acquirer is less sure about the target's investment opportunities or when both agents' investment opportunities are high.

Risk Sharing hypothesis might be tested with the use of absolute and relative deal value as proxies for risk. Such choice is justified by stating that misevaluation of the target firm is especially harmful if the deal value is very large, therefore the probability of stock offer increases along with deal value (Martynova and Renneboog, 2009). The study proved the hypothesis by obtaining significant coefficient of absolute and relative deal size variables.

Information asymmetry is expected to be larger when M&A deal is cross-industry, which is often the case during conglomerate mergers. Risk sharing theory, offered by Martin (1996), might be employed here because cash or stock offers usually disclose the willing of agents to share risk, which is more pronounced in cross-industry mergers and acquisitions. Therefore, Faccio and Masulis (2005) stated a hypothesis that the target would be more willing to accept equity payment if the deal is intra-industry as they are well aware about industry risks and opportunities. Contrary, according to the same logic cross-industry deals are more likely to involve cash payment because the target would prefer not to share risks without expertise in the unknown industry.

Overall, the following hypotheses would be used to test Risk Sharing hypothesis: as described before, relative size and deal value might be used as proxies for risk. Therefore, it might be expected that the bidder would like to share risk by offering stock payment.

H1: Eastern-European acquires would be more likely to use stock as the method of payment when risk of transaction is higher.

Choice of payment method is often dictated by company's financing preferences. In 1988, an argument of managerial incentives that influences those preferences was formulated in the study by Stulz. The paper states that managers might tend to choose such financing option that would provide an opportunity for keeping control over the entity. With respect to capital structure, management of the firm that values control would choose to finance investments with debt rather than equity as it might lead to increase in the fraction of stock owned by insiders. The less stock is owned by individual, or passive, investors, the more control the management of the firm obtains. Moreover, according to Stulz (1988), the strategy of keeping leverage ratio high not only allows for increased insider's control, but also protects the firm from hostile takeovers. However, Harris and Raviv (1988) stated that the adverse effect is possible, as holding more debt leads to higher costs of financial distress (in particular, bankruptcy risk) and thus making control maintenance more difficult. Following the theories described previously, Amihud et al. (1990) conducted an empirical examination of the relation between leverage and control on the case of corporate acquisitions. In fact, M&A deals are unique investment projects that disclose the information about its financing method, contributing to the research on the topic of financial preferences.

Numerous empirical studies approached to examining the influence of the payment method on abnormal returns. Empirical study of Amihud et al. (1990) examined both Information Asymmetry, outlined previously, and Managerial Ownership theories and reported the following findings: equity financed acquisitions led to negative share price reaction, however it was true only for firms with low (below 5%) managerial ownership. There arises a question: why are firms with higher managerial ownership perceived differently by the market? Amihud et al. (1990) provides the following explanation: if firm's managerial ownership is high, then it would seek to maximize shareholder's value and thus it gives investors a signal that acquisition is a trustworthy deal, which would increase or at least not decrease stock's value. Thus this finding outlines another possible issue - an agency conflict between managers and shareholders (situation when incentives of two parties do not match). If managerial ownership is high, then agency conflict problem is believed to be lower. However, if managerial ownership is low, then agency problem is more pronounced as managers' actions could be aimed at maximizing their own utility, not shareholder's wealth. For example, being influenced by hubris, managers might involve in M&A deals in order to increase company's size (empire building) rather than maximizing shareholders' utility. In addition, Blackburn et al. (1997) pointed out that hubris might give the managers false judgement about their ability to run the target firm. Martynova and Renneboog (2009) found no evidence that financing decision is influenced by agency conflicts between managers and shareholders. However, the study provided evidence for negative reaction of the market driven by pure cash payments. Pure cash payments mean payments which included internally generated funds. Investors interpreted such action as deals motivated by managers' empire building motives. Overall, Amihud et al. (1990) provides evidence for managerial ownership to be considered as a determinant of method of payment choice.

However, further researches approached to another question - is relationship between managerial ownership and probability of stock payment indeed linear? Martin (1996) supported previous findings, however in addition the author found evidence for nonlinear relationship between the probability of stock financing and managerial ownership. Firms with high managerial ownership would be reluctant to offer stock as this action would dilute their control and would make any unwanted intervention possible (Martin, 1996). However, the author also notices that in case of very high ownership level, managers would be indifferent to stock offers, as additional issue of shares would not be able to dilute their ownership significantly. Following the same logic, if initial ownership is already very low, managers would be unconcerned about possible dilution by equity offer. However, if managerial ownership level is in between the two extreme states, and the balance of control is fragile, then managers would strongly prefer cash offers to secure their control positions in the company. Further research undertaken by Faccio and Masulis (2005) contribute to the previous conclusions by finding evidence for linear relationship between managerial ownership and payment method in continental Europe, and non-linear (cubic) in the UK and Ireland.

Target's firms preferences regarding payment method might also be influenced by its ownership structure. Ghosh and Ruland (1998) provided evidence for a strong and positive relationship between target's managerial ownership and the probability of stock offer. It could be explained by the fact that managers of the target firm would like to gain additional influence in the merged firm by becoming its large shareholders. The main motivation to get this control is an incentive to keep they jobs in the combined firm. Moreover, the authors also presented a finding that managers indeed have greater possibility of retaining their positions if they were paid in shares. Ghosh and Ruland (1998) also claim that target's ownership structure turns out to be more important than acquirer's ownership structure in terms of determining the choice of payment method. Moreover, the study uses relative size of the companies as an additional proxy for modeling the level of influence. For example, if the target is relatively smaller than the acquirer, even in case of stock payment the influence of targets' managers in a merged firm is expected to be low. Moreover, acquiring firm would be less willing to offer stock to the large target as thus dilution would be more likely. Thus, Ghosh and Ruland (1998) suggested that control for relative size should be taken into account to get more reliable results. However, the results showed that relative size of the target does not differ significantly between payment method options. Nevertheless, the variable which combined effect of both managerial ownership and size was found to be significant.

However, managerial ownership might have a significant effect on the choice of payment method only in specific cases. For instance, the study of Madura and Ngo (2010) observed no significant effect of the acquirer's ownership structure on the choice of payment method. The researches explain this inconsistency as follows: in their sample they used only privately held targets unlike previous studies which used public targets. Thus, there is evidence that private targets are less willing to accept overvalued stock of the bidding company.

1.3 Investment Opportunities Theory

The study of Myers and Majluf (1984) introduced the pecking order theory which states that managers are not indifferent about the way to finance projects. Firstly, they would prefer to spend internal resources (namely, cash), then they would prefer to borrow (debt financing) and only then they would prefer to raise cash with the use of equity. Moreover, Jensen (1986) claims that if a company has large free cash flow figure, it would use cash to finance projects. The same holds true for the firm with a good debt capacity, that is way financial leverage is also taken into account when examining this hypothesis. Martin (1996) found evidence supporting Cash Availability theory, concluding that higher amount of free cash flow leads to higher probability of cash financing.

However, the following question might arise - what is the source of cash in cash payment method? Faccio and Masulis (2005) pointed out the fact that most of acquirers have limited cash capacity, therefore cash offers are usually undertaken with the use of debt. Therefore, Faccio and Masulis (2005) claim that the real choice of financing method is undertaken between debt and stock alternatives, rather than cash and stock. Following this logic, firm's debt capacity and financial leverage might be highly related to the choice of payment method. The authors define cash payments as a category which includes cash payments itself along with noncontingent liabilities and newly issued notes. Due to the fact that cash is usually obtained by new debt issue, the leverage level should be examined to estimate the probability of cash offer. If leverage of the acquirer is higher, then the company is constrained in its ability to borrow, and thus the firm will not be able to afford cash offer. Madura and Ngo (2010) support this conclusion, claiming that acquirers with higher level of debt and less cash prefer to use stock as method of payment. It can be explained by the fact that they do not have required liquidity level and cannot borrow additional funds as their debt burden is already high.

Nevertheless, payment method is in fact more complicated than pure cash or stock. Martynova and Renneboog (2009) advanced an idea of Faccio and Masulis (2005) regarding means of financing cash payment method. The authors stated that sources of transaction should also be taken into account, not just payment method. For instance, debt and equity are external sources of transaction, while pure cash is an internal source. Due to constraints of pure cash capacity for most companies, external sources of financing (equity and debt) are usually used in acquisitions with cash payment method. The study provides evidence that M&A deals financed with funds generated internally significantly underperform those financed with debt.

However, the theory might hold only within specific industry-level. Feijoo et al. (2012) provided evidence which is not totally consistent with previous research. The study found that Cash Availability theory works only for specific industries. For instance, Chemicals and Consumer Durable industries are highly cyclical and thus acquirers from these industries usually have large volumes of free cash flow and therefore prefer to offer cash payments. However, it does not hold true for other industries, contrary to previous studies. Across all industries, bidders with high cash capacity when industry sales are high tend to use equity rather than cash. It can be explained by Investment Opportunity theory if high industry sales are the indicator of growth opportunities. Moreover, Feijoo et al. (2012) reported that relationship between debt capacity and choice of payment method might be opposite in different industries. For instance, bidders with high financial leverage (and thus low debt capacity) from Business Equipment and health industry tend to use equity as well as acquires with low financial leverage (and thus high debt capacity) from Chemicals, Manufacturing, Durable and Non-durables industries.

Credit rating could also be connected to a choice of payment method. The study of Karampatsas et al. (2014) provided evidence that acquirers with high rating level prefer to use cash as the payment method. This fact can be explained by Cash Availability theory as well: high credit rating leads to lower cost of borrowing and thus increases firm's debt capacity. Therefore, the firm experiences lower financial constraints by having better access to debt markets. Moreover, the availability of credit ratings decreases information asymmetry about the firm's value. However, sole existence of credit rating does not bear positive implications described above, as company with good growth opportunities without credit rating has more debt capacity compared to a company with low credit opportunity and poor growth opportunities.

Debt capacity might be influenced by geographic location as well. Koutmos et al. (2014) studied various M&A deals undertaken by rural and non-rural bidders in the US. The paper provided evidence that rural acquirers are more likely to offer pure stock, while non-rural bidders have higher propensity for using cash. This situation is explained by the fact that rural costs face higher cost of debt and are have limited access to information that might help to determine target's value precisely.

Overall, the following hypothesis is stated to test whether Cash Availability theory hold for Eastern European M&A transactions, where cash availability means high free cash flow or good debt capacity:

H3: Eastern-European acquires with higher cash availability would be more likely to use cash as the method of payment.

Active investors bring additional benefits in the form of costly monitoring (Martin, 1996). However, there arises a question - who can be claimed an active investor having incentives and opportunities to monitor? The author states that active investors usually are blockholders and institutional holders. Black (1992) claims that this type of investors might influence management and force them to align their incentives along with those of shareholders. Moreover, compared to passive investors, active ones are much more in position to be actually involved in decision making: they can take action in antitakeover strategies, promote compensation structure for management, as well as represent themselves on a board of directors. Moreover, they are able to communicate with senior managers directly and thus influence terms of a future M&A deal. According to evidence described previously, stock payment usually deteriorates the value of the company, which is not appealing for active investors. Therefore, firms with large blockholding and institutional holding would be less likely to use stock as payment method. However, evidence from the study of Martin (1996) did not support this suggestion. Overall, this study will test this hypothesis for Eastern-European sample:

H4: Eastern-European acquires with higher institutional ownership would be more likely to use cash as the method of payment.

Further research focused on concentrated ownership of the target. In the case of stock financed acquisition, the bidder would sell his shares and create a new blockholder, making corporate governance of the combined company more vulnerable. Therefore, targets with higher institutional ownership are more likely to be acquired for cash (Faccio and Masulis, 2005). Madura and Ngo (2010) advanced the idea proposed by Faccio and Masulis (2005) and suggested that firms with concentrated ownership are usually private firms. However, the researchers found evidence for the fact that private firms are more likely to be acquired for stock, but only when capital gain tax is relatively high. Moreover, Faccio and Masulis (2005) connected the probability of cash offer and company's size. The paper states that large companies usually are more diversified and have better access to debt compared to smaller companies. To test this hypothesis, the authors estimate size of the bidder by measuring its total assets before the merger. The results support the hypothesis at 1% significance level, which is not consistent with findings of Martin (1996).

1.6 Other possible determinant factors described in literature