The liquidity and trading activity effects of acquisition payment methods: Evidence from the announcements of private firms' acquisitions
The liquidity and trading activity effects of acquisition payment methods: Evidence from the announcements of private firms' acquisitions
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.
Earnout financings, Information asymmetry, Acquisition announcement, Liquidity, Payment methods
Monaco, Eleonora
0c00a196-c567-4f98-a111-b56df9924e91
Ibikunle, Gbenga
64508586-a87a-41ff-a9e8-4282931b8b45
Palumbo, Riccardo
f264fe6a-c082-4c03-adc4-9ebe5325217d
Zhang, Zeyu
53318314-2017-47cf-b56c-0d4226481260
2 May 2022
Monaco, Eleonora
0c00a196-c567-4f98-a111-b56df9924e91
Ibikunle, Gbenga
64508586-a87a-41ff-a9e8-4282931b8b45
Palumbo, Riccardo
f264fe6a-c082-4c03-adc4-9ebe5325217d
Zhang, Zeyu
53318314-2017-47cf-b56c-0d4226481260
Monaco, Eleonora, Ibikunle, Gbenga, Palumbo, Riccardo and Zhang, Zeyu
(2022)
The liquidity and trading activity effects of acquisition payment methods: Evidence from the announcements of private firms' acquisitions.
International Review of Financial Analysis, 82 (102187).
(doi:10.1016/j.irfa.2022.102187).
Abstract
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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Accepted/In Press date: 19 April 2022
e-pub ahead of print date: 22 April 2022
Published date: 2 May 2022
Keywords:
Earnout financings, Information asymmetry, Acquisition announcement, Liquidity, Payment methods
Identifiers
Local EPrints ID: 476665
URI: http://eprints.soton.ac.uk/id/eprint/476665
ISSN: 1057-5219
PURE UUID: a957225a-d9b6-42ae-bf1d-7baf49bfd750
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Date deposited: 10 May 2023 17:21
Last modified: 17 Mar 2024 01:42
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Contributors
Author:
Eleonora Monaco
Author:
Gbenga Ibikunle
Author:
Riccardo Palumbo
Author:
Zeyu Zhang
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