The Effects of Cash and Stock Consideration on Market Response to Acquisitions of Private and Public Firms

This paper investigates the combined effects of the method of payment, cash or stock, and the type of target firm, public or private, on merger announcement returns for US public acquirers between 1994 to 2015. We break down the sample into deciles and quartiles based on the fraction of cash in the offer amount in order to assess which financing mix is most welcomed by the market, resulting in significant positive immediate abnormal returns (BHAR). For both private and public acquisitions, we find that the higher the cash proportion, the higher the BHAR, for both private and public targets, but more so for public targets. This relation between the cash proportion and returns is monotonic. The returns for fully stock-financed acquisitions of public targets are significantly negative, in contrast to studies based on earlier sample periods. In regressions of BHARs for cash quartiles samples, we find that quartiles with relatively more cash have significantly greater returns for both private and public targets.