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

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  • Monaco, Eleonora
  • Ibikunle, Gbenga
  • Palumbo, Riccardo
  • Zhang, Zeyu

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.

Suggested Citation

  • Monaco, Eleonora & Ibikunle, Gbenga & Palumbo, Riccardo & 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, Elsevier, vol. 82(C).
    • Handle: RePEc:eee:finana:v:82:y:2022:i:c:s105752192200148x
    DOI: 10.1016/j.irfa.2022.102187
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    More about this item

    Keywords

    Earnout financing; Information asymmetry; Acquisition announcements; Liquidity; Payment methods;
    All these keywords.

    JEL classification:

    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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