Abstract

In this paper, we take a relatively unexplored approach to examining the abnormal returns around cash acquisition announcements by considering the impact of the source of financing in addition to the method of payment. We find the general result that cash acquisitions earn higher abnormal returns than those for stock, but, more importantly, that the source of financing for this cash does indeed matter. We find significant results: acquisitions where the method of payment is cash experience significant positive abnormal returns at announcement, while returns to stock acquisitions are found to be insignificant in the announcement window. Acquisitions paid in cash financed via borrowing and corporate funds each experience significantly positive abnormal returns at announcement, while those financed by stock-issue proceeds earn insignificant abnormal returns. However, these equity-financed transactions show large and highly significant losses over a wider event window. Using a novel dummy variable approach to estimating abnormal returns that incorporates prior-year financing activity results in finding negative and significant abnormal returns upon the announcement of a stock-proceeds-financed acquisition, and insignificant returns at announcements of acquisitions financed by either debt or a mix of debt and equity.