DP11974 Are stock-financed takeovers opportunistic?

Author(s): B Espen Eckbo, Tanakorn Makaew, Karin S Thorburn
Publication Date: April 2017
Keyword(s): cash payment, governance, information asymmetry, mispricing, mutual fund flow, opportunism, payment method, stock payment, Takeover bidding
JEL(s): G3, G34
Programme Areas: Financial Economics
Link to this Page: www.cepr.org/active/publications/discussion_papers/dp.php?dpno=11974

The more the target knows about the bidder, the more difficult it is to pay with overpriced shares. Thus, under bidder opportunism, the fraction of stock in the deal payment is lower with better-informed targets. We test this simple prediction using information proxies reflecting industry relatedness and geographic location specific to the merging firms. We find instead that public bidders systematically use more stock in the payment when the target knows more about the bidder. While inconsistent with opportunism, this is as predicted when bidders are primarily concerned with adverse selection on the target side of the deal. Moreover, tests based on exogenous variation in bidder market-to-book ratios, identified using aggregate mutual fund outflows, also fail to support bidder opportunism. Finally, "cash-only" targets and potential competition from private bidders appear to place significant external pressure on public bidders to pay in cash.