Means of Payment in Mergers & Acquisitions: the Effect on Analyst Recommendations

Yiling Zhang and Jinsuk Yang

In merger and acquisition (M&A), we find strong evidence that within a 90 day window of a deal announcement date, analysts are more likely to upgrade their recommendations over the acquirer stocks in deals with cash only payment compared to deals with pure stock payment in a probit analysis. To disentangle the means of payment impact on the short term abnormal return of acquirer stocks from other impacts, we perform an event study using a three day window around the deal announcement date. We found a 1.06% (-1.05%) cumulative abnormal return for the acquirer stocks for cash only versus pure stock deals during this time frame. Moreover, we conduct a two stage least square test (2SLS) and found a positive relationship between the probability of analysts’ recommendation upgrades and the cumulative abnormal returns within a three day event window around the merger announcement date. Our findings extend the merger means of payment hypothesis, suggesting cash only deals in the short term will receive more positive upgrades by analysts for the acquirer stocks compared to pure stock deals. The market reacts to this and results in a difference of cumulative abnormal return for acquirer stocks.

DOI : https://doi.org/10.21102/jbpr.2016.12.112.03