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

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.

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