Determinants of the medium of payment used to acquire privately-held targets

Since private firms have a unique ownership structure, the method of payment decision when acquiring private firms is influenced by a different set of factors than the method of payment decision when acquiring public firms. We find that bidders are more likely to pay for private targets with stock when the capital gain tax rate is relatively high. This relationship is attributed to greater tax benefits to private owners who receive stock in periods when the capital gains tax is high. Bidders are more likely to use stock in takeovers when the targets are high-tech firms, which we attribute to protection against overpayment by using a contingent pricing method. Bidders are more likely to use cash in takeovers since the Sarbanes-Oxley Act, which we attribute to the higher level of due diligence by bidder managers and board members, and therefore a reduced need for contingent pricing methods like stock. Overall, the results suggest the likelihood of using stock to acquire private targets is positively related to the information asymmetry between the parties, while the likelihood of using cash is greater when conditions (such as SOX) reduce the information asymmetry.