Stock or Cash? Explaining the Payment Method Choice of M&As and the Effect on Performance on the European Developed Markets

Abstract: We investigate what factors determine the choice of the payment method when choosing between payment of stocks or cash during an acquisition or merger. Furthermore, we examine how that choice of payment method affects the bidder’s performance in the short term by examining the changes in the cumulative abnormal return. The sample consists of 2,647 transactions in the European Developed Markets covering the years 1998 - 2021. Our results show that factors related to Capital Structure, Deal Characteristics, Profitability of the Bidder and Non-Financial Characteristics drive the choice of the payment method, similar to earlier findings. The results are further explained by the theories of Opportunistic Behaviour and Rational Payment Design. Additionally, stock payments create a significant negative cumulative abnormal return and a significantly lower return than cash payments, based on an event window of three days.