The liquidity and trading activity effects of acquisition payment methods: Evidence from the announcements of private firms' acquisitions |
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| Institution: | 1. Department of Management, University of Bologna, Via Capo di Lucca, 34, 40126 Bologna, Italy;2. University of Edinburgh, Business School, 29 Buccleuch Place, Edinburgh, EH8 9JS, United Kingdom;3. University of Chieti-Pescara, Via Luigi Polacchi, 11, Chieti 66100, Italy;1. Excelia Group, Excelia Business School, CERIIM, 102 Rue de Coureilles, 17024 La Rochelle, France;2. University Paris-Saclay, UMI SOURCE, UVSQ, IRD, France and Paris School of Business, PSB, 59 Rue Nationale, 75013 Paris, France;3. Rabat Business School, International University of Rabat, Rabat 11103, Morocco;4. Audencia Business School (AACSB, EQUIS, AMBA), France;1. School of Management and Engineering, Nanjing University, Nanjing, Jiangsu 210093, China;2. School of Economics and Management, Tsinghua University, Beijing 100084, China;3. School of Management, Shanghai University of Engineering Science, Shanghai 201620, China;4. Faculty of Business, Athabasca University, Athabasca, Alberta T9S 3A3, Canada;5. Odette School of Business, University of Windsor, Windsor, Ontario N9B 3P4, Canada |
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| Abstract: | We investigate how the liquidity and trading activity effects of the announcement of the acquisition of private targets vary by payment method. We find significant increases in trading activity around acquisition announcement dates irrespective of the payment method used; however, fluctuations are lower for acquisitions financed by earnouts and cash. Similarly, the stocks of acquirers using cash and earnouts are also less affected by a general loss of liquidity that accompanies announcements. We show that these effects are explained by the interpretation of cash acquisition by the market as an option used when acquirers perceive no risk of being adversely selected, and the potential of earnout as an adverse selection risk reduction tool. |
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