Title: Capturing the elusive convexity of the relationship between acquirer's announcement returns and the cash portion of M&A payments

Authors: Tarcisio Da Graça

Addresses: Département Des Sciences Administratives, Université du Québec en Outaouais, B-2082 Pavillon Lucien-Brault, 101 Rue Saint-Jean-Bosco, Gatineau, Québec J8Y 3G5, Canada

Abstract: We find empirical evidence that the acquirer's announcement return is a U-shaped function of the cash portion of the payment in mergers and acquisitions (M&As). This convexity has long been theoretically predicted in an asymmetric information model, but it remained empirically elusive until now. Our sample consists of US M&As from 1990 to 2008. We apply a structural M&A event study methodology that accounts for the interaction of two M&A effects: synergy (change in total value) and dominance (distribution of synergies between the parties). This interaction simultaneously determines the parties' announcement returns. In addition, we consider that the cash portion is an endogenous variable, as well. Empirically modelling these interdependencies is the likely source of the extra statistical power that allows us to capture the convexity effect. We estimate the acquirer's announcement return is the lowest when the payment consists of approximately 50% of cash.

Keywords: event study; mergers and acquisitions; M&As; convexity.

DOI: 10.1504/IJCG.2019.101523

International Journal of Corporate Governance, 2019 Vol.10 No.2, pp.165 - 184

Received: 22 Oct 2018
Accepted: 09 May 2019

Published online: 02 Aug 2019 *

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