Product market advertising effects on the method of payment in M&A

Purpose - Prior literature suggests that managers have an incentive to increase stock prices prior to stock-based acquisitions. This article aims to examine if there is any relationship between product market advertising and method of payments in mergers.Design methodology approach - To examine the...

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Bibliographic Details
Published in:Managerial finance 2013-03, Vol.39 (4), p.362-383
Main Authors: Devos, Erik, Elliott, William B, Karim, Mohammad A
Format: Article
Language:English
Subjects:
Acquisitions & mergers
Advertising
Advertising expenditures
Audiences
Consolidation
Economic models
Equity
Investments
Stock prices
Studies
Variables
Citations: Items that this one cites
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Summary:Purpose - Prior literature suggests that managers have an incentive to increase stock prices prior to stock-based acquisitions. This article aims to examine if there is any relationship between product market advertising and method of payments in mergers.Design methodology approach - To examine the hypotheses the paper uses ordinary least squares (OLS) regressions and regressions based on a propensity score matching approach, which controls for the possibility that differences in firm characteristics are driving the results.Findings - The paper finds that managers of firms that use stock to finance bids increase advertising intensity in the pre-merger period and find that advertising is high prior to stock-based mergers, relative to that of cash-based acquirers. It also finds that managerial ownership in stock based acquiring firms is positively related to pre-merger advertising intensity.Research limitations implications - Although this paper examines whether stock-based acquirers increase their advertising intensity in the pre-merger period to gain economic benefit it does not discuss in detail through which mechanism advertising affects stock price.Practical implications - The paper provides a new perspective on the relationship between product market advertising of the acquirer and the method of payment in mergers. The results shown in this paper may motivate investors of the target firms to re-evaluate the acquirers offer if the medium of payment is acquirers own stock.Originality value - To the authors' knowledge this paper is the first to document the link between advertising prior to a merger and the method of payment used in that merger.
ISSN:0307-4358
1758-7743
DOI:10.1108/03074351311306184