Stock acquisitions, investor recognition, and announcement returns

Abstract

Purpose -The purpose of this paper is to test the hypothesis that relative to a cash acquisition, a stock acquisition would increase the bidder's investor base and lower Merton's (1987) shadow cost, which in turn contributes positively to the bidder announcement return. Design/methodology/approach -Using the number of registered shareholders and measures of institutional ownership as the proxies for investor base and investor recognition, this paper compares their changes and the changes in shadow cost between bidders using different methods of payment. The authors examine the relation between the shadow cost reduction and bidder announcement return in a multivariate framework.Findings -This paper finds that given the target type, bidders using stocks experience significantly larger increases in their investor bases and investor recognition than bidders using cash. Additionally, only bidders using stocks experience significant decreases in their shadow costs. In a multivariate framework, the change in the shadow cost has a negative and significant effect on the bidder announcement return in the sample of stock acquisitions and the subsample of bidders using stocks to acquire private targets. These findings support the authors' hypothesis and suggest that the less established bidders acquiring private targets in particular benefit from the shadow cost reduction. Originality/value -This paper provides the direct evidence that investor recognition matters in mergers and acquisitions. The findings also provide a complementary explanation for the documented positive bidder returns when bidders use stocks to acquire private targets.

Why Do Acquirers Prefer M&A? Evidence from Banks in India

“…Basu and Chevrieu (2011) review the adverse impact of distance and information asymmetry on acquirer returns and operating performance. Lei and Li (2016) show how the use of stock as a method of payment iproves Acquirer returns especially positive returns when bidders use stock to acquire private targets from improved investor base and reduction in shadow costs. Harris et al(2016) examine the impact of agency conflict in takeover negotiations and better monitoring by specific blockholders means higher acquirer returns.…”