Determinants of the Method of Payment in M&A Deals
Origins of method of payment choice theories. Information asymmetry theory. Evidence concerning mixed payment method. Evidence concerning public and private companies. Investment Opportunities Theory. Possible determinant factors described in literature.
| Рубрика | Финансы, деньги и налоги |
| Вид | курсовая работа |
| Язык | английский |
| Дата добавления | 09.08.2018 |
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1.6.4 Evidence regarding cross-border deals
From target's point of view, selling stock to foreign company might bear additional difficulties. These problems arise due to greater trading costs of a foreign stock, lower liquidity, currency exchange risk, greater information asymmetry, longer time and other transaction costs (Faccio and Masulis, 2005). Therefore, cross-border deals would rather be undertaken with the use of cash rather than equity.
Nevertheless, Huang et al. (2016) focused their research on cross-border mergers and found evidence not fully consistent with findings of Faccio and Masulis (2005). The study claimed that cross-border deals involving targets from riskier countries tend to be paid in stock, however cash payment is usually preferred in cross-border deals. The acquirer pays in stock to avoid overpayment, however stock offer decreases a chance of deal completion. Huang et al. (2016) state that governance risk (defined as institutional quality of a target's country) is an important element of cross-border mergers and acquisitions. To handle governance risk, the acquirer might use stock payment to share all consequent gains and losses as well as avoid overpayment, which is consistent with Risk Sharing hypothesis of Martin (1996).
Overall, the acquirer would be more likely to offer equity to a foreign target if they value loss from overpayment more than the risk of deal failure. Moreover, the bidder will offer cash if they value certainty in deal completion and are willing to deliver a signal of confidence to the target (Huang et al., 2016). Cho and Ahn (2016) support previous findings and advance the theory with introducing cultural distance variable. The paper states that larger cultural difference increases probability of stock payment, which can also be explained by Risk Sharing hypothesis.
1.7 Summary of the literature review
Table 1. Overview of main hypotheses and determinants
|
Hypothesis |
Determinants |
Choice of payment method |
Evidence |
|
|
Cash Availability |
financial leverage, free cash flow, credit rating |
Higher cash and debt capacity leads to higher probability of cash payment method. |
Myers (1984); Martin (1996); Faccio and Masulis (2005); Karampatsas, Petmezas and Travlos (2014) |
|
|
Risk Sharing |
size of the deal, relative size of the bidder and the target |
If the acquiring company is unsure about future prospects of the deal and seeks to share risks with the target, it would choose equity payment method. |
Martin (1996); Blackburn, Dark and Hanson (1997); Faccio and Masulis (2005); Martynova and Renneboog (2009) |
|
|
Asymmetric Information |
industry relatedness, stock value, cross-border deals |
If the acquiring company is unsure about firm's value and seeks to avoid overpayment, it would choose equity payment method. |
Hansen (1987); Travols (1987); Amihud, Lev and Travols (1990); Blackburn, Dark and Hanson (1997); Martynova and Renneboog (2009) |
|
|
Taxation |
capital gain tax level, premium offered to the target |
Higher capital gain tax is associated with higher probability of stock payment to avoid immediate taxation. |
Amihud, Lev and Travols (1990); Blackburn, Dark and Hanson (1997); Madura and Ngo (2010) |
|
|
Hypothesis |
Determinants |
Choice of payment method |
Evidence |
|
|
Investment Opportunities |
Tobin's Q, market-to-book ratio, growth rate, returns correlation |
Acquiring company with high investment opportunities would prefer equity financing method as it gives the managers more flexibility of investing behaviour. |
Jung, Kim and Stulz (1995); Martin (1996); Ismail and Krause (2010); Feijoo, Maduram and Ngo (2012) |
|
|
Managerial Ownership |
fraction of shares owned by managers |
Acquirers with high managerial ownership level would choose cash method of payment to avoid dilution of control. |
Amihud, Lev and Travols (1990); Martin (1996); Ghosh and Ruland (1998); Akhtar, Javid, and Abbasi (2014) |
|
|
Outside Monitoring |
fraction of shares owned by active investors |
Firms with large institutional holding prefer cash payment method, as equity payment leads to negative abnormal returns. |
Jensen (1991); Martin (1996); Faccio and Masulis (2005) |
Table 2. Advantages and disadvantages of payment methods
|
Payment Method |
Advantages |
Disadvantages |
Evidence |
|
|
Cash |
Requires less time and transaction costs, leads to higher abnormal returns |
Immediate capital gain tax is required; large cash and debt capacity is needed |
Martin (1996); Amihud, Lev and Travols (1990) |
|
|
Stock |
Risk sharing with the target; allows for more flexibility in the usage of funds; decreases the risk of overpayment; no immediate taxation |
Provides negative signal to investors causing negative abnormal returns; is more costly |
Blackburn, Dark and Hanson (1997); Faccio and Masulis (2005) |
Chapter 2. Methodology: Data and Model Development
2.1 Methodology
Previous empirical literature employed binary choice models to estimate the determinants of payment method: logit, probit and tobit regressions. Justification of this models' usage lies in the fact that the decision might be modeled as a binominal dependent variable. In this study, the dependent variable is CASH-Dummy, which is defined as follows:
(2.1)
Further estimation is made through including dependent and independent variables defined above into a logit regression, which according to (Greene, 2012) can be theoretically described in a following way:
(2.2)
STATA Software would be used for fitting the model by maximum likelihood method. It will model the probability of a positive outcome given regressors introduced in previous section. Correlation matrix and VIF (variance inflation factors) would be calculated in order to account for multicollinearity. Heteroskedasticity presence would be checked as well, however it is a common problem in binary models and there is no established approach of eliminating it.
The sample would be divided into 2 subsamples randomly: main estimation sample of 132 observations (80%) and testing sample of 32 observations (20%), which would be used for examination of the prediction quality. Predictions and actual values would be compared and conclusions about the overall predictive power would be made.
Theoretical representation of the combined model which includes all financial variables which will be defined in the next section, including controlling for the year and industry is shown below:
(2.3)
2.2 Variables Definition
This study will use several variables to test the hypotheses introduced in Chapter 1. In this section, justification of employed variables would be outlined. The dependent variable is CASH-Dummy, which takes the value of 1 if the transaction was paid in cash (including financing through liabilities and earn-outs) and 0 if the transaction was paid in stock (including mixed offers as well).
· H1: Eastern-European acquires would be more likely to use stock as the method of payment when risk of transaction is higher.
In order to test Risk Sharing hypothesis, the risk level estimation is required. Relative size and size of the deal might be used as proxies for risk. Such choice is explained by the fact 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). Moreover, lower relative size of the companies is expected to create intentions for equity payment for the same reason. Absolute company's size, measured as Total Assets figure, might be negatively related to the probability of stock offer. Large companies are usually more diversified compared to smaller ones and thus will prefer cash offer (Faccio and Masulis, 2005). Finally, cross-border deals are assumed to be riskier for the bidder (Feijoo et al., 2012). Thus, companies are expected to pay in stock in cross-border deals to share risks and avoid overpayment for the target. The evidence concerning this point is somewhat mixed in the literature review. Stock payment method might bring additional difficulties in cross-border deals due to greater trading costs of a foreign stock, lower liquidity, longer time and other transaction costs (Faccio and Masulis, 2005), making cash more preferable. The study will test this hypothesis to understand the pattern of cross-border deals undertaken by Eastern-European bidders. Therefore, the following variables are used to test Risk Sharing hypothesis:
RELSIZE - relative size of the bidder and the target. The variable is calculated as the ratio of bidder's market capitalization of the bidder prior the acquisition to deal value. Deal value is assumed to be very close to the target value, as actual target's figure is unavailable due to the fact that most of the targets are unlisted companies. The variable is expected to be positively related to the probability of cash offer.
LNDEALVALUE - natural logarithm of an actual deal value in millions of US Dollars. The variable is expected to be negatively related to the probability of cash offer.
LNTOTASSETS - natural logarithm of an absolute size in mln US Dollars of the acquiring company a year before the acquisition. The variable is expected to be positively related to the probability of cash offer.
CROSS-BORDER Dummy - variable which takes value of 0 is the deal is international and 1 if the deal is domestic.
· H2: Eastern-European acquires with higher investment opportunities would be more likely to use stock as the method of payment.
Testing Investment Opportunities hypothesis requires proxies for modeling such opportunities. Following prior studies described in literature review, specifically Martin (1996), sales' growth, market-to-book ratio and ROA would be used as proxies for investment opportunities. A firm with good investing opportunities would prefer stock financing as it gives the managers more flexibility of investing behaviour, allowing them to exploit good investment prospects (Martin, 1996). Therefore, the following variables are used to test Investment Opportunities hypothesis:
SALESGROWTH - variable estimates the bidder's average sales growth during the year before the estimation. The variable is expected to be negatively related to the probability of cash offer.
ROA - return on assets, which measures firm's profitability and effectiveness of its management, which can be considered a proxy for investment opportunities. The variable is expected to be negatively related to the probability of cash offer.
MKT-T-BOOK - ratio of bidder's market capitalization to book value. The variable is expected to be negatively related to the probability of cash offer.
· H3: Eastern-European acquires with higher cash availability would be more likely to use cash as the method of payment.
For testing Cash Availability hypothesis, relative free cash flow and financial leverage figures are used. As cash payment are usually financed with the use of liabilities (Faccio and Masulis, 2009), both cash availability and debt capacity in considered. High financial leverage signals about poor debt capacity. Overall, the following variables would be used:
CASHFL - ratio of FCF of the acquirer at pre-acquisition year divided by the deal value (the amount paid for the target), which is then comparable between different deals. The variable is expected to be positively related to the probability of cash offer.
LEVG - leverage ratio of the firm, which is calculated as total liabilities divided by total equity. The variable is expected to be negatively related to the probability of cash offer.
· H4: Eastern-European acquires with higher institutional ownership would be more likely to use cash as the method of payment.
Finally, testing Outside Monitoring hypothesis is undertaken through estimation of firm's percentage of institutional ownership. Stock payment method is usually associated with negative abnormal returns, therefore institutional investors would prefer cash payment method (Martin, 1996). Using ownership data accessed through Zephyr Bureau Van Dijk, the following categories of shareholders are considered institutional: mutual and pension fund, nominee, trust, trustee, insurance company, bank, financial institution, private equity fund. Therefore, the following variable is used:
INSTOWNERSHIP - variable which shows the percentage of institutional shareholders in the acquiring company. The variable is expected to be positively related to the probability of cash offer.
Moreover, the combined logit regression would include several control variables, which take into account time and industry factors:
YEARDUMMY - variable which controls for the year in which the deal was completed. The variable is expected to capture any time effect which influence the choice of payment method.
HIGHTECHDUMMY - variable which takes 1 if the acquirer belongs to the high-tech industry and 0 otherwise. Such control for is justified by the fact that high tech firm's prospects depend on research and development projects, which usually are uncertain (Madura and Ngo, 2010). Therefore, high-tech industry requires to be controlled, and it is expected that the variable would be negatively related to the probability of cash offer.
2.2 Sample
The study exploits a dataset gathered consequently from Zephyr Bureau Van Dijk and Bloomberg Terminal databases. Firstly, the list of M&A deals satisfying following specific criteria was accessed from Zephyr Bureau Van Dijk: listed acquirer, significant change in stake percentage (maximum 50% of initial stake and minimum 50% of final stake), the deal was actually completed, and both companies belong to the industry other than financial services. Only significant deals were included in the sample with the value exceeding 1 million US Dollars. Moreover, following the focus of the study, only deals involving Eastern European bidders were chosen for the sample. Nevertheless, this point requires clarification: there are companies in the sample which were founded and currently operate in Eastern Europe, however officially registered outside of this region. The examples are as follows: Russian companies MAIL.ru Group (Virgin Islands), Yandex (Netherlands), Lenta Ltd (Virgin Islands) and others. These companies are included in the sample with accordance to the actual country of their operation. Sample's time period is from 2009 to 2018, which was chosen in order to capture modern trends in factors which determine the payment method in M&A deals. In total, 180 deals were collected from Zephyr Bureau Van Dijk database. Secondly, financial figures and market data over 2008-2018 time period for 180 bidders was accessed with the use of Bloomberg Terminal. However, the information was not available for some bidders, and therefore sample size was decreased to 167 deals.
Table 4. M&A deals acquirer's country
|
Acquirer country |
Number of deals |
Deal value per country, mln USD |
% of total deal value, mln USD |
|
|
Bulgaria |
1 |
17,09 |
0,02% |
|
|
Croatia |
2 |
79,82 |
0,09% |
|
|
Czech Republic |
4 |
877,15 |
0,97% |
|
|
Estonia |
2 |
20,28 |
0,02% |
|
|
Hungary |
4 |
805,72 |
0,89% |
|
|
Lithuania |
2 |
13,86 |
0,02% |
|
|
Poland |
87 |
4831,81 |
5,36% |
|
|
Romania |
1 |
5,58 |
0,01% |
|
|
Russia |
61 |
83519,9 |
92,58% |
|
|
Serbia |
1 |
1,77 |
0,00% |
|
|
Slovakia |
1 |
42,1 |
0,05% |
|
|
Slovenia |
1 |
1,79 |
0,00% |
|
|
Total |
167 |
90216,87 |
100,00% |
Source: Author's calculations
As it can be seen from the Table 4, among Eastern European countries the highest M&A activity could be observed in Poland and Russia. Despite the fact that in Poland there were more transactions than in Russia, most of total deal value in mln US Dollars relates to Russian M&A deals (92,58%).
Table 5. M&A deals target's country
|
Target country |
Number of deals |
Deal value per country, mln USD |
% of total deal value, mln USD |
|
|
Austria |
1 |
1,79 |
0,00% |
|
|
Belgium |
2 |
430,09 |
0,48% |
|
|
Cayman Islands |
1 |
611,74 |
0,68% |
|
|
Croatia |
1 |
15,91 |
0,02% |
|
|
Czech Republic |
1 |
12,5 |
0,01% |
|
|
Estonia |
2 |
20,28 |
0,02% |
|
|
Finland |
1 |
5,73 |
0,01% |
|
|
Germany |
4 |
364,63 |
0,40% |
|
|
Great Britain |
3 |
66,38 |
0,07% |
|
|
Hungary |
2 |
11,24 |
0,01% |
|
|
India |
1 |
2,52 |
0,00% |
|
|
Ireland |
1 |
49,83 |
0,06% |
|
|
Lithuania |
2 |
264,79 |
0,29% |
|
|
Netherlands |
1 |
63,91 |
0,07% |
|
|
Poland |
71 |
4296,66 |
4,76% |
|
|
Romania |
4 |
85,94 |
0,10% |
|
|
Russia |
59 |
82340,16 |
91,27% |
|
|
Serbia |
1 |
1,77 |
0,00% |
|
|
Slovakia |
2 |
112,74 |
0,12% |
|
|
Spain |
1 |
292,57 |
0,32% |
|
|
Sweden |
2 |
120,73 |
0,13% |
|
|
Switzerland |
1 |
462,64 |
0,51% |
|
|
Turkey |
1 |
11 |
0,01% |
|
|
United States |
2 |
571,32 |
0,63% |
|
|
Total |
167 |
90216,87 |
100,00% |
Source: Author's calculations
Due to the presence of cross-border deals in the sample, geography of target countries expands to Continental Europe, Northern America and Asia. However, the majority of deals in respect to the number and deal value are observed in Russia. Therefore, the conclusion can be made that most of M&A activity in Eastern Europe could be attributed to Russia and Poland, while Russian deals comprise more than 90% of the total deal value of the Eastern European region.
Graph 1. Distribution of payment methods over years
Source: Author's calculations
It can be seen from the Graph 1 that cash payment method prevails through almost every year examined. Moreover, the peak of M&A activity is observed in 2009-2011 years, which is followed by a sharp decrease in the number of deals. Contrary to the predictions of Boone et al. (2014), the use of mixed payment method has not significantly increased during last 5 years, at least in Eastern Europe.
Overall, the final sample size is equal to 164 as several deals were excluded due to absence of information regarding all financial variables. This sample would be randomly divided into estimation and test subsamples, which will constitute 80% and 20% of the whole sample respectively. In the next chapter, the statistics analysis would be undertaken and the model would be estimated, and its predictive power would be tested on the testing subsample.
Chapter 3. Discussion of results
This chapter presents estimation results of the model specified previously. First section outlines descriptive statistics of independent variables, while second section of this chapter provides empirical results of the study as well as the discussion of it.
3.1 Descriptive statistics
Descriptive statistics of gathered data is reported in Table 6, which might provide additional understanding of the patterns in Eastern European M&A deals prior to actual estimation of the regression model.
Table 6. Independent variables descriptive statistics
Source: Author's calculations
As it can be seen from the table, most of transactions were undertaken with the use of cash, including liabilities and earn-outs. On average the bidding firm is almost ten times larger than the target. In general, since 2009 most of the deals settled in Eastern Europe were domestic deals in Russia and Poland. Also, average market-to-book ratio is higher than 1, which means that the average bidder is earning the return which is higher than the replacement costs of its assets. Average percentage of institutional investors ownership (mutual funds, banks, financial institutions, private equity funds) is around 30% among Eastern European bidders.
3.2 Empirical results
In this section, statistical outputs of estimated model would be provided and interpreted. Based on empirical results, hypotheses stated in the previous chapters would be considered as accepted or rejected. Output for the combined logit model (2.3) is presented below in the Table 7.
Table 7. Results of logit model estimation for the choice of payment method
Source: Author's calculations
As it can be seen from the table, relative size of the bidder and the target RELSIZE has a positive sign which aligns with the expectations. Larger relative size of the acquirer increases the probability of cash offer. Natural logarithm of the deal value DEALVALUE also presents the expected sign - negative. The larger is the deal value, the riskier it might be for the bidder, thus the bidder might prefer to use stock for payment. LNTOTASSETS, which stands for the logarithm of the absolute size of the acquiring company a year before the acquisition, also shows a positive sign which was expected: larger firms might be better diversified and thus prefer cash offers. CROSSBORDER dummy has a negative sign, which means that domestic deals are more likely to be paid in stock while international deals would rather be paid in cash. This sign might be explained by the presence of higher transaction costs associated with the stock payment in international deals. SALESGROWTH which serves as a proxy for bidding firm's investing opportunities also showed an expected sign which is negative. It aligns with the theory described in previous chapters that managers of more perspective firms would prefer stock financing. However, MKT-T-BOOK and ROA which are also proxies for investment opportunities have unexpected positive sign. When it comes to cash capacity variables, the result differs from expected as well: CASHFL presents negative sign which is the opposite to proposed hypothesis. This might be explained by the fact that relative value of free cash flow is used, the one divided by the deal value in particular. Therefore, negative sign might be explained by the influence of this variable as well. Variable LEVG has expected negative sign, which aligns with the hypothesis that higher debt capacity increases the probability of cash payment. Finally, INSTOWNERSHIP differs from the one expected and is negative, yielding that increase in the share of institutional ownership leads to higher probability of stock offer.
Pseudo is equal to 27.55%, which is considered satisfactory for financial data. Overall, not all variables turned out to be significant in the model specification (2.3), which is shown in Table 8 presented below.
Table 8. Coefficients of combined logit regression
legend: * p<.1; ** p<.05; *** p<.01
Source: Author's calculations
Coefficients of variables LNDEALVAL, LNTOTALASSETS and SALESGROWTH are significant at 5% significance level, while CROSSBORDER is significant at 10% and. Therefore, according to this results, hypothesis H2 concerning negative relation between higher investment opportunities and probability of cash payment is not rejected. Investment opportunities hypothesis is additionally supported by new variable included - ROA, which is appeared to be significant at 5% significance level. The higher is the return on firm's assets, the better investment opportunities it might have and thus is more willing to pay for the deal in stock. Moreover, hypothesis H1 which states that Eastern-European acquires would be more likely to use stock as the method of payment when risk of transaction is higher is also not rejected. It means that acquirers prefer to share risk when the deal value is large, and choose to pay cash if the bidding firm is already large and well diversified. However, other hypotheses regarding cash availability and outside monitoring were not supported by these estimation results.
Furthermore, the logit model was tested for heteroskedasticity and multicollinearity. The hypothesis of constant variance was not rejected, which means that the problem of heteroskedasticity is not the case while estimating the model. Calculation of VIF (variance inflating factors) showed absence of multicollinearity as the factors did not exceed 3, while mean VIF is 1.81, which means that no variables should be dropped and that overall predictive value of the model should be satisfactory.
The model specified above would be applied on the rest of the sample (20% or 32 observations) which were not used for estimation, therefore the predictive power of the combined logit regression would be tested.
Table 9. Prediction output
Source: Author's calculations
As it could be seen from the table, mean of predicted probabilities probhat is very close to actual values of CASH_DUMMY. This might be a sign of a good predictive power, however further investigation with considering individual deals is required.
Graph 2. Actual vs. predicted
Source: Author's calculations
As it can be seen from the graph, the model performs well when used for prediction on a separate sample of 32 M&A deals (20% of the total sample), however errors still present. Assuming that predicted value over 0,5 is considered a cash offer and below 0,5 a non-cash offer (stock or mixed payment), the prediction produces 24 successes and 8 failures, which means that 75% of predictions are correct. Overall, basing on these calculations, the combined logit model might be considered reliable for predicting Easter-European bidders' choice of payment method.
Overall, the empirical results yield in the following conclusions regarding hypotheses proposed for testing in the previous chapter: hypothesis H1 which states that Eastern-European acquires would be more likely to use stock payment when risk of transaction is higher is not rejected at 5% significance level. It means that Eastern-European bidders, and Russian bidders in particular (as all the largest deals were undertaken in Russia, such as acquisition of TNK-bp by Rosneft) seek to share risks with the targets and might also exploit the overvaluation of their stocks. Investment opportunities hypothesis H2 which states that Eastern-European acquires with higher investment opportunities would be more likely to use stock is also not rejected at 5% significance level. This can be explained by the fact that most of Russian firms (PAO Gazprom, PAO Rostelecom, PAO Mechel, MAIL.ru GROUP Ltd), which are involved in M&A activity and pay for targets in stock are from industries associated with higher growth opportunities, such as energy or IT. However, cash availability and outside monitoring were not supported by the present sample. It can be explain by the fact that large Polish and Russian companies do not base their decision solely on cash as their cash capacity is less limited compared to small companies. Therefore, the negative sign of cash coefficient might indicate that cash availability does not determine choice of payment method in Eastern Europe. Moreover, the share of institutional investors is also irrelevant when it comes to decision of payment method. Therefore, Eastern European acquires base their considerations mostly on investment opportunities and risk level, while giving limited attention to cash capacity or outside monitoring.
Conclusion
This study investigates the choice of the payment method, in particular between cash and stock/mixed methods, in M&A deals undertaken by Eastern European bidders. The main motivation of the study was to fill a research gap as the majority of previous studies focused mostly on countries with leading and developed economies such as the US and the UK. Even though limited attention was paid to developing countries, there was no separate research of M&A deals completed in Eastern Europe and Russia specifically. Thus, the main goal of the study was to examine whether theories established in the previous literature could be considered true for Eastern European bidders, which to one's best knowledge have not been tested before.
The paper showed that the highest M&A activity could be observed in Poland and Russia, while 92% of the total deal amounts correspond to domestic Russian deals. Utilizing multiple sources and databases, a sample of 167 M&A deals which took place in 2009-2018 time period was gathered. The empirical model was built basing on 80% observations from the sample and further tested on remaining 20%. The combined logit regression produced 75% correct predictions which might be considered relatively high for financial data. The paper found that the main factors which determine method of payment in M&A deals completed in countries of Eastern Europe are those connected to growth opportunities and risk sharing. Contrary to previous literature which examined developed economies, cash availability theory was not supported in Eastern European sample, as well as outside monitoring hypothesis. Therefore, cash capacity and institutional ownership turned out to be the irrelevant factors in payment method decision for Eastern European acquirers.
The main limitation of the study might be relatively small sample size due to absence of specific information as well as lack of attention to target's characteristics. However, industry of the target was took into account through industry control variable as both agents belong to the same industry in the sample. Moreover, target's countries might have been controlled and divided into developing and developed economies, however there is limited number of cross-border deals in the sample.
Further research is needed in order to take into account target's financial variables as well as macroeconomic conditions which might be specific for Eastern European region. Moreover, larger sample would be able to provide more precise results and yield into deeper understanding of Eastern European bidders' choice of payment method.
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Annex 1
Table 1. Summary of the literature review
|
Article |
Sample |
Time period of deals |
Major findings |
|
|
Amihud, Lev and Travols (1990) |
Fortune 500 |
1981-1983 |
Evidence in favor of Managerial Ownership hypothesis: cash financing is preferred to avoid dilution, while relative size is not a significant determinant. |
|
|
Martin (1996) |
US |
1978-1988 |
Evidence in favor of Managerial Ownership, Risk Sharing, Cash Availability, Outside Monitoring hypotheses for the US deals. |
|
|
Blackburn, Dark and Hanson (1997) |
US |
1981-1990 |
Evidence in favor Information Assymetry theory - the overvalued company would prefer to use stock. Stock payment bears negative market signal. Mixed payment discloses more information about the deal compared to pure cash and stock payments. |
|
|
Ghosh and Ruland (1998) |
US |
1981-1988 |
Evidence for nonlinear relationship of target's managerial ownership, no evidence for relative size significance was found. |
|
|
Faccio and Masulis (2005) |
Europe 13 countries |
1997-2000 |
Evidence in favor Managerial Ownership, Investment Opportunities and Cash Availability hypotheses. Cross-border deals are riskier and are paid in cash, deals from related industries are correlated with equity payment. |
|
|
Martynova and Renneboog (2009) |
Europe 26 countries |
1993-2001 |
Evidence for managerial ownership, cash availability, investment opportunities, risk sharing. Sources of transaction are more important than payment methods, equity financing in any payment method leads to negative returns. |
|
|
Madura and Ngo (2010) |
US |
1985-2005 |
Evidence for risk sharing hypothesis: the acquirer would prefer to pay in stock for private firms and companies from high-tech industry to share potential losses or gains. Higher capital gain tax is associated with higher probability of stock payment for privately held firms. |
|
|
Ismail and Krause (2010) |
US |
1985-2004 |
The article found new significant non-tested before variables to model firm's investment opportunities, which are directly connected with the probability of stock payment: growth rate, return volatility, correlation between returns. |
|
|
Feijoo, Maduram and Ngo (2012) |
US |
1985-2007 |
The study reported that relationship between cash availability and choice of payment method might be opposite in different industries. Cash Availability hypothesis is accepted only for Chemicals and Consumer Durable industry. Across all industries, bidders with high cash capacity tend to use equity rather than cash when industry sales are high, which is consistent with Investment Opportunities hypothesis. |
|
|
Article |
Sample |
Time period of deals |
Major findings |
|
|
Grigorieva and Fomenko (2012) |
BRICS |
1999-2009 |
Evidence in favor Cash Availability, Information Assymetry, Investment Opportunities, Managerial Ownership hypothesis for developing markets of BRICS. |
|
|
Boateng and Bi (2014) |
China |
1998-2008 |
The study focused on the features of Chinese market and found evidence for Cash Availability, Information Assymetry, Investment Opportunities, Managerial Ownership hypothesis. |
|
|
Karampatsas, Petmezas and Travlos (2014) |
US |
1998-2009 |
The paper supported Debt Capacity theory by finding the relationship between credit ratings and probability of cash payment, as cost of debt decreases when credit rating is higher. The availability of credit rating decreases Information Asymmetry and thus makes cash payment more likely. |
|
|
Boone, Lie, and Liu (2014) |
US |
1985-2013 |
Found no evidence for significance of taxation in determining the choice of payment method. Examined long-term time trends and reported that the amount of deals with mixed payment is expected to increase. |
|
|
Koutmos, Song, and Zhoub (2014) |
US |
1998-2010 |
The article provided evidence for different cost of debt for bidders from various geographic locations. As debt capacity of rural bidders is lower, they would prefer stock payment. Urban acquirers would prefer cash payments as they have lower cost of debt in the US. |
|
|
Akhtar, Javid, and Abbasi (2014) |
Pakistan |
2005-2012 |
The study found evidence for Risk Sharing, Managerial Ownership, Outside Monitoring, Investment Opportunities hypotheses for deals completed in Pakistan. |
|
|
Huang, Officer, and Powell (2016) |
46 countries |
1990-2010 |
The paper reported that cross-border deals involving targets from countries with high governance risk tend to be paid in stock; however cash payment is generally preferred in cross-border deals. |
|
|
Cho and Ahn (2016) |
42 countries |
1997-2012 |
The article advanced the research concerning cross-boarder deals and found evidence that larger cultural difference leads to higher probbaility of stock payment due to Risk Sharing hypothesis. |
|
|
Cao, Nguyen and Dao (2016) |
ASEAN countries |
1995-2013 |
The paper concluded that bidders from South Asia (ASEAN countries) prefer stock payment when they come from high-tech industries, as well as when the target is public or comes from countries with stronger corporate governance practices. |
Annex 2
Table 2. Correlation matrix of variables used in regression
Source: Author's calculations
Annex 3
Table 3. Heteroskedasticity test
Source: Author's calculations
Annex 4
Table 3. Heteroskedasticity test
Source: Author's calculations
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