Crossing takeover premiums and mix of payment: An empirical test of contractual setting in M&A transactions

Abstract

The analyses of the tender offer premiums and of the means of payment should not be performed separately. In the empirical literature, these two variables are often considered independently, although they may have an endogenous relationship in a contractual setting. Using a sample of European M&As over the 2000-2010 decade, we show that these two variables are jointly set in a contractual empirical approach. The relationship between the percentage of cash and the offer premium is positive: higher premiums yield payments with more cash.We highlight that the payment choice is not a continuum between full cash and full share payments. Two different regimes of payment in M&A transactions are empirically characterized. We analyze the major determinants of M&A terms when the offer premium and the means of payment are jointly set. The underlying rationale of an asymmetry of information and a risk-sharing calculus is found to be significant in the setting of the agreement.

The Review of Factors Affecting Merger Premium

“…Further research also finds that different mode of payment also have an impact on the premium. Relatively speaking, the premium level paid by the main cash-paying companies is relatively low [34]. Relatively speaking, actively-merging enterprises that pay most in cash pay relatively low premiums [34].…”

Litigation risk: Measurement and impact on M&A transaction terms

“…This result is well documented in the literature. A payment variable, such as a dummy for share payments, is excluded from the control variables because of a well‐known endogeneity problem (de La Bruslerie, ).…”

“…The previous conclusions are drawn from a unidimensional analysis on the determinants of the cash payment. It is well known that the premium and means of payment are jointly set and are endogenous (Eckbo et al., ; de La Bruslerie, ). We should consider the transaction terms as a whole that is jointly set.…”

Applications of simultaneous equations in finance research: methods and empirical results

“…The endogeneity problem in empirical studies is extensively noted and the appropriate estimation methods should be adopted. Second, we employ 2SLS, 3SLS, 2 For example, capital structure and firm performance (Harvey et al 2004;Ruland and Zhou 2005;Berger and Bonaccorsi di Patti 2006;, financial policies and ownership (Jensen et al 1992;Velury et al 2003;Setia-Atmaja et al 2009), agency problem and firm performance (Agrawal and Knoeber 1996;Coles et al 2006), corporate governance and liquidity (Chen et al 2007), repurchase and firm performance (Gong et al 2008;Babenko 2009), mergers and acquisitions (Betton and Eckbo 2000;Officer 2003;Billett and Xue 2007;Edmans et al 2012;Fidrmuc et al 2012;De La Bruslerie 2013;Deng et al 2013), stock option (Core and Guay 2001;Grundy et al 2012), governance/risk in banking industry (Shrieves and Dahl 1992;Jacques and Nigro 1997;Aggarwal and Jacques 2001;Chen et al 2006), risk management (Graham and Rogers 2002;MacKay and Moeller 2007;Aunon-Nerin and Ehling 2008;Lee et al 2010) and capital asset pricing models (Simkowitz and Logue 1973;Lee 1976) are the issues of research applying simultaneous equations model in the papers. 3 Smirlock and Marshall (1983) and Fama and French (2002) also only consider the firms paying dividend.…”