Reference points and method of payment in mergers

Abstract

Purpose

The purpose of this paper is to examine the impact of the target and bidder reference points on the method of payment in mergers. When considering initial and final results for target and bidder, the target appears to have more negotiating power than the bidder in achieving the financial mix preference that was initially articulated.

Design/methodology/approach

The authors examine the impact of target and bidder reference points on the consideration sought by the target and the consideration offered by the bidder. The authors test whether the target reference points has an impact on the final method of payment agreed upon by the target and the bidder.

Findings

The authors find that targets with a longer distance to their respective target reference points prefer to receive cash financing in the consideration sought, while bidders with a longer distance to their respective reference points prefer stock financing in consideration offered. The authors also find evidence that target’s longer distance to its reference point is associated with the use of cash over stock, while the bidder reference point has no impact on the final method of payment used in the merger.

Practical implications

These insights may be used by the management to formulate the optimal mix of financing in M&A transactions.

Originality/value

This is an original paper exploring the effect of behavioral finance on corporate decision making.

Citation

Chira, I. and Madura, J. (2018), "Reference points and method of payment in mergers", Managerial Finance, Vol. 44 No. 2, pp. 278-290. https://doi.org/10.1108/MF-04-2017-0109