Methods of Payments and Cross-Border Acquiring firm Valuation.pdf

Methods of Payments and Cross-Border Acquiring firm Valuation.pdf

This preview shows page 1 out of 9 pages.

Journal of International Management Studies * February 2008 89 Methods of Payments and Cross-Border Acquiring firm Valuation Dr. Eric Tsai, State University of New York, Oswego, USA ABSTRACT Consistent with the existing literature in U.S. domestic M&As, the methods of payment also seem to convey information about acquiring firm valuation in cross-border acquisitions. Cash-financing is associated with positive wealth gain upon foreign M&A announcements while equity-financing results in insignificant shareholder wealth increase. The fact that equity-financing does not lead to value loss as found in most domestic M&A studies seems to suggest additional wealth effect components associated with international diversification. After controlling for payment methods, the wealth effect determinants of U.S. acquirers in international M&As remain to be internationalization, location, and corporate governance factors. A missing piece in the existing literature of cross-border acquiring firm value gain and a critical complement to the documented determinants in explaining acquiring firm wealth effect appears to be the medium of exchange. INTRODUCTION Shareholder wealth for firms involved in mergers and acquisitions is one of the most scrutinized areas in finance. U.S. evidence in domestic mergers and acquisitions (M&A) typically reports sizable wealth gains for target firms. Nevertheless, acquirers typically experience negative or negligible, if statically significant, firm value increase surrounding their announcements due to, for instance, agency costs and operational inefficiency (see literature survey by Martin and Sayrak (2003)). Bidders in far less studied international M&As seem to fare slightly better, but empirical results on their wealth gain are still mixed at best. This is somewhat puzzling because International Business theories suggest international diversification benefits stemming from internalization, flexibility, and risk reduction and hence provide justifications for expecting more favorable wealth effects for cross-border acquiring firms. It is unclear why there is such a discrepancy between the theoretical justification and the empirical evidence. One plausible explanation is that a large percentage of bidders use equity to finance their acquisitions. Due to information asymmetry, presumably more severe in international M&As, investors interpret this as a signal that their stocks are overvalued and such a perception subsequently depresses the values of those equities. A handful of papers examine payment methods and acquiring firm values in U.S. domestic M&As and find some correlation between the two. Whether such a signaling hypothesis holds true in international M&As has not been examined in the literature. This paper will investigate this issue as it might add additional explanatory power to or affect the conclusions of some existing foreign M&A studies. For instance, it is argued that the increasing wealth effect
Image of page 1
You've reached the end of this preview.

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern