eThesis - Kauppakorkeakoulun sähköiset gradut

ABSTRACT

PURPORSE OF THE STUDY This thesis examines M&A transactions in United States and the method of payment. The theoretical framework for the study has been set based on research on the double-sided information asymmetry and the choice for method of payment. It therefore builds on the likelihood of convertible payment compared to the all-cash or all-stock payments when the double-sided information asymmetry is severe. The use of convertible securities as the method of payment is suggested to tackle the information asymmetry on the bidder and the target side simultaneously. The bidder mitigates its risk overpayment cost and the target shareholders at the same time are able to tackle the valuation problem of bidder’s equity. Additionally, I test the announcement effects of convertible deals compared to the all-cash or all-stock deals. DATA I gather sample from the publicly quoted firms in United States. I use SDC to gather the M&A transactions and then WRDS’ database to retrieve data on the financial analyst estimates, financial statements and stock prices of each firm occurring 1986-2011. I primarily use multinomial logistic regression model to test the likelihood of convertible payment compared to all-cash or all-stock payment. To account for the outliers and sampling bias I winsorise the sample. OLS regression is used in the event study method to test the announcement effects. RESULTS The results support my hypotheses. When the double-sided information asymmetry is severe, the deal is more probably paid by the convertible securities rather than all-cash or all-stock. The announcement effects for the convertible deals are positive for both the bidder and the target as expected. Furthermore, the returns for the convertible deals are in between the documented returns for the all-cash and all-stock deals as one would rationalize. Based on the results, shareholder wealth is increased in the convertible deals on both the bidder and the target side, on average. KEYWORDS M&A, merger, acquisition, method of payment, double-sided information asymmetry, convertible securities, convertible payment, all-cash payment, all-stock payment