The Role of Medium of Exchange in Acquisitions

Asrat Tessema (Eastern Michigan University)

American Journal of Business

ISSN: 1935-5181

Publication date: 22 April 1989

Abstract

This paper investigates the role of method of payment in explaining the differences in returns to a bidding firm during the announcement period. The results indicate that the bidding firms’ returns are negative for equity payment bids and positive and significantly larger for cash bids. This is consistent with the view that cash‐offer announcements constitute a revelation by management of favorable new information about a firm’s future cash flows and vice versa for equity offerings. The results from this study provide an explanation of why business executives have been reluctant to issue equity even when they are raising the money to finance profitable projects like acquisitions. Executives relied on internal funds that allowed them to avoid the flotation costs of issuing new shares and the scrutiny by the financial market while limiting growth to that sustainable with internally generated funds.

Keywords

Citation

Tessema, A. (1989), "The Role of Medium of Exchange in Acquisitions", American Journal of Business, Vol. 4 No. 1, pp. 39-44. https://doi.org/10.1108/19355181198900007

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Publisher

:

MCB UP Ltd

Copyright © 1989, MCB UP Limited

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