Taking stock or cashing in? Shareholder style preferences, premiums and the method of payment

• Published in: Journal of empirical finance 2012-09, Vol.19 (4), p.558-582
• Main Authors: Burch, Timothy R., Nanda, Vikram, Silveri, Sabatino
• Format: Article
• Language: English
• Subjects: Capital gains; Institutional ownership; Mergers and acquisitions; Method of payment; Ownership; Payments; Stock exchange; Stockholders; Taxes
• ISSN: 0927-5398; 1879-1727
• DOI: 10.1016/j.jempfin.2012.03.005

We develop and test hypotheses on the impact of target shareholders' investment style preferences on the method of payment and premiums in acquisitions. Stock offers (unlike cash offers) allow target shareholders to defer capital gains taxes. This deferral value, however, depends on target shareholders' willingness to retain acquirer stock. The empirical findings support our hypotheses. Bid premiums in stock offers are negatively and jointly related to target shareholder tax liabilities and to variables proxying for target shareholder willingness to hold acquirer stock. Moreover, the difference between predicted cash and stock premiums due to these factors significantly explains the method of payment choice. ► We test hypotheses about impact of target shareholders' preferences on method of payment and premiums in acquisitions. ► Stock offers (unlike cash offers) allow target shareholders to defer capital gains taxes. ► The deferral value, however, depends on target shareholders' willingness to retain acquirer stock. ► We show bid premiums are negatively related to target shareholder tax liabilities and preference for acquirer stock. ► Difference between predicted cash and stock premiums significantly explains method of payment choice.