Does The Financing Decision Help To Understand Market Reaction Around Mergers And Acquisitions?

Abstract

Few studies distinguish between the method of payment and the means of financing in mergers and acquisitions. This paper aims to test if the financing means has incremental information beyond that contained in the payment means. To answer this question, we consider a sample of 265 deals undertaken by French listed acquires between January 1997 and December 2008. We decompose our sample according to the method of payment (cash, stock or mixed payment). The difference of means test shows that the impact of the three methods of payment is not statistically significant. In order to take the analysis further, we then broke our sample down according to both the method of payment and the means of financing (debt, equity or internal funds). The difference of means test, the event study methodology and OLS regressions reveal that takeovers financed by debt outperform those financed by other means of financing. These findings confirm the monitoring role of debt and support the pecking order preferences. Finally, our OLS regressions highlight that market reaction depends also on legal environment (common law vs. non common law) on acquisition characteristics such as deal size and on acquirer specific factors such as size and growth opportunities.