4.7 Article

The liquidity and trading activity effects of acquisition payment methods: Evidence from the announcements of private firms' acquisitions

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ELSEVIER SCIENCE INC
DOI: 10.1016/j.irfa.2022.102187

关键词

Earnout financing; Information asymmetry; Acquisition announcements; Liquidity; Payment methods

资金

  1. European Capital Markets Cooperative Research Center (ECMCRC)

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We examine the impact of payment methods on the liquidity and trading activity effects of acquisition announcements for private targets. Regardless of the payment method used, there are significant increases in trading activity around the acquisition announcement dates, but the fluctuations are lower for acquisitions financed by earnouts and cash. Likewise, the stocks of acquirers using cash and earnouts are less affected by the general loss of liquidity that accompanies these announcements.
We investigate how the liquidity and trading activity effects of the announcement of the acquisition of private targets vary by payment method. We find significant increases in trading activity around acquisition announcement dates irrespective of the payment method used; however, fluctuations are lower for acquisitions financed by earnouts and cash. Similarly, the stocks of acquirers using cash and earnouts are also less affected by a general loss of liquidity that accompanies announcements. We show that these effects are explained by the interpretation of cash acquisition by the market as an option used when acquirers perceive no risk of being adversely selected, and the potential of earnout as an adverse selection risk reduction tool.

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