dividend policy and the method of payment
TRANSCRIPT
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Dividend Policy and the Method of Paymentin Mergers and Acquisitions
Jin Q Jeon*Dongguk Business School
Dongguk University
3-26 Pil-dong, Chung-gu
Seoul 100-715, KOREA
+822-2260-8884
James A. LigonDepartment of Economics, Finance & Legal Studies
The University of Alabama
P.O. Box 870224
Tuscaloosa, AL 35487-0224
205-348-6313
Charn SoranakomCollege of Management
Mahidol University
69 Vipawadee Rangsit Rd.
Phayathai, Bangkok, 10400 THAILAND
+662-206-2000 Ext. 2105
Last modified: July 2010
* Corresponding Author.
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Dividend Policy and the Method of Payment in Mergers and Acquisitions
ABSTRACT
This study examines how relative differences in dividend policies affect the choice of
payment method in mergers and acquisitions. Using the dividend clientele hypothesis, we
hypothesize that, at the margin, the method of payment is more likely to be stock if the
dividend policies of the two firms involved in a merger or acquisition are quite similar, but
more likely to be cash if the dividend policies are much different. The empirical data support
the relevance of the dividend clientele hypothesis for the method of payment in mergers and
acquisitions. We also find some evidence that in stock-based deals a difference in dividend
policies is negatively correlated with announcement returns.
JEL classification: G32, G34, G35
Keywords: Mergers and Acquisitions; Method of Payment; Dividend Clientele; Dividend
Policies; Announcement Returns
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price movement as the change in dividend policy is more apparent to those investors who
find it less favorable (present stockholders) than to those who find it more favorable."
Baker, Coval, and Stein (2007) show that if the demand curve for the acquirers stock
is downward sloping, then the cost of a stock for stock merger is decreasing in the fraction of
target shareholders who passively accept and retain acquirer shares. Each share retained by a
passive target shareholder is one less share that must be absorbed by market investors with a
lower evaluation of the acquirer. Demand curves for stocks may slope down for a number of
reasons. Miller (1977) suggested the combined effects of differences of opinion and short-
sale constraints. The empirical literature provides clear support for downward-sloping
demand curves (e.g. Harris and Gurel, 1986; Shleifer, 1986; Bagwell, 1992; Hodrick, 1999;
Kaul, Mehrotra, and Morck, 2000; Wurgler and Zhuravskaya, 2002; and Greenwood, 2005).
In the context of mergers, Mitchell, Pulvino, and Stafford (2004) focus on price pressure
around mergers and Baker, et al. (2007) find evidence in support of inertial behavior by
target shareholders and that acquirer returns are lower when inertia is lower.
We argue that if the target firm's dividend policy is very different from the acquiring
firm's, this may serve as a disincentive to a stock based acquisition. If the dividend clientele
hypothesis holds and the dividend policies of the acquirer and the target are materially
different and stock is used in the acquisition, this may cause a change in the shareholder
composition of the targets shareholder base. That is, target shareholders may decide to
rebalance their portfolios. They may decide to sell their position in the target, before the
merger is consummated, or in the survivor firm, after the merger is consummated, if they do
not like the dividend policy of the acquiring firm. In the language of Baker, et al. (2007), a
similarity in dividend policies between the target and the acquirer increases inertia, while a
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management faces the qualitative decision to pay in the form of either stock, cash, or some
mix of the two. The results of our multinomial regressions show that the degree of difference
in dividend policies is significantly higher for pure cash deals than pure stock deals. We
alternatively examine the determinants of the proportion of cash payment used in takeovers
using a two-limit Tobit approach. The results are similar to our discrete analysis showing that
a difference in dividend policies significantly increases the percentage of cash payment. In
addition, consistent with previous studies, we find that several deal, target, and acquirer
characteristics serve as important determinants of the payment choice.
We also examine the relationship between the degree of similarity in dividend
policies and takeover abnormal announcement returns. According to the dividend clientele
hypothesis, target shareholders who do not prefer the dividend policy of the acquiring firm
may sell at any point from the announcement date until after the merger consummation.
However, clienteles preferring the dividend policy of the acquirer would not buy until the
likelihood of merger consummation was high enough and the price drop large enough to
compensate them for the risk of merger failure and the transaction costs of rebalancing.
Target announcement returns will be lower if some dividend related selling occurs at the
announcement date and the effect is not fully transferred by merger arbitragers immediately
to the acquirer. Acquirer announcement returns will be lower if merger arbitragers
immediately transfer, at least partially, the effects of any selling by target shareholders to the
acquirer. Therefore, our second hypothesis states that in stock based acquisitions abnormal
announcement returns of targets, acquirers, or both are lower if the level of difference in
dividend policies is larger.
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To test this hypothesis, we conduct both OLS and a 2-step procedure that controls for
the potential endogeneity of the choice of the payment methods. Our results show that target
cumulative abnormal returns (CARs) at the takeover announcement date for stock deals are
significantly lower when one firm pays a dividend but the other does not and decreases in the
difference in dividend policies between target and acquiring firms when dividend yield is
used to measure the differential in dividend policies. We also find some evidence that
acquirer CARs decrease in the difference in dividend policies. In addition, our results are
largely consistent with adverse selection explanations that announcement returns are lower
for stock based acquisitions because acquirers may use their stock to pay for acquisitions
only when their stock is overvalued (Myers and Majluf, 1984; Travlos, 1987; Amihud, Lev
and Travlos, 1990).
In sum, this study provides a new perspective regarding the takeover method of
payment choice by showing that, in addition to other factors related to traditional
explanations of method of payment, the dividend policies of target and acquiring firms are a
key determinant of the payment choice. The remainder of this paper is organized as follows.
In Section 2, we present the research hypotheses and describe the dependent and test
variables and the testing techniques. Section 3 details the sample selection process and
provides the descriptions of the control variables and the rationales for including them,
including references to relevant literature, and presents the descriptive statistics. Section 4
analyzes the determinants of the payment method. Section 5 analyzes announcement returns,
and Section 6 concludes.
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2. Hypotheses Development, Dependent and Test Variables, and Testing Techniques
2.1. Hypotheses
We construct and test two hypotheses in this study. The first hypothesis states that, if
the dividend policies of the two firms involved in an acquisition are quite similar, it is more
likely that a method of payment for the acquisition is going to be stock, other things equal. A
method of payment is more likely to be cash if the dividend policies are much different, other
things equal. Ceteris paribus, the management should consider using a stock based
acquisition when the dividend policies are similar and use cash when the dividend policies
are fundamentally different.
Our second hypothesis states that for stock based mergers, abnormal stock returns on
the announcement day for the target, the acquirer, or both are lower if the level of difference
in dividend policies is greater. In this case, selling activities by target shareholders who do
not like the change in dividend policy that a successful merger would entail may put
downward pressure on the target stock price. Potential buyers who prefer the new dividend
policy may delay their purchase until the merger has a reasonably high probability of
consummation and they can cover the transaction costs of rebalancing through a temporarily
depressed stock price. These factors may result in a lower announcement return, ceteris
paribus, for targets when the dividend policies of the target and the acquirer differ
substantially. A negative effect of dividend differences on announcement returns for stock
based mergers for acquiring firms is also possible if dividend related effects are anticipated
and arbitraged by the market. Both may experience negative return if any effect is only
partially arbitraged.
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2.2. The Dependent and Test Variables
2.2.1. Dependent Variables : Method of Payment and Announcement Returns
We take both dummy variable and continuous variable approaches to measure the
payment method. First, we categorize deals into three groups in terms of their payment
methods; Cash Only, Mixed Paymentand Stock Only. Cash Only includes deals where at
least 90% of consideration is paid with cash. Stock Only includes deals where at least 90% of
consideration is paid with acquirer stock.2Mixed Paymentincludes deals financed with both
stock and cash. Alternatively, we use a continuous variable, %Cash PMTor%Stock PMT,
which takes on any value between zero and one.
Announcement returns, CARs, are the cumulative abnormal returns over the three-
day window [-1, +1] or five-day window [-2, +2] around the bid announcement using the
firm return minus the CRSP value-weighted market return. We calculate the announcement
returns for both target and acquiring firms.
2.2.2. Measures of a Difference in Dividend Policies
We obtain cash dividends for each acquiring firm and target firm from the
COMPUSTAT database. We collect quarterly dividend data as of the end of the quarter
immediately preceding the quarter when a merger is announced. We then average actual
dividend payments over the last 4 quarters in order to account for seasonality in dividend
payments. For example, if a merger is announced in the second quarter of 2006, we average
quarterly dividends from the second quarter of 2005 to the first quarter of 2006.3
We use three measures of a difference in dividend policies between an acquirer and
2 We use alternative definitions for cash- or stock-based acquisitions and the results are similar to those
presented here.3 In unreported results, we also use the quarterly dividend prior to the announcement date. The results are
similar to those presented here.
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target. First, One is Payeris a dummy variable equal to 1 if one of the two firms involved in
the merger pays any dividend during the last 4 quarters prior to the deal announcement, while
the other does not, and equals 0 otherwise. Dividend policies are significantly different in the
case that only one of the two firms pays a dividend. There is less difference in dividend
policies if both or neither firm pay dividends. We also calculate the absolute value of
differences in the dividend yield between targets and acquirers,Diff.DivYield, and, in order to
ensure that our results are not affected by stock price variation (Grinstein and Michaely,
2005; Li and Zhao, 2008), we also use the absolute value of differences in the dividend to
book value ratio between targets and acquirers,Diff.Div/Book. DivYield is defined as the
ratio of dividends per share to the market price per share and Div/Book is the ratio of the
amount of dividends to the book value of assets.
For example, for a merger between a firm with a dividend yield of 2.0% and a firm
with a dividend yield of 5.0%, the dividend yield difference between the two companies
would be |2.0% - 5.0%| = 3.0%. The closer this number is to zero, the more similar the
dividend policies between the two firms are. For the coefficient on Diff.DivYield to be
meaningful, we add a control variableAcquirer DivYieldto control for the levels of dividend
yields of the acquiring firms. Likewise, we add a control variable Acquirer Div/Bookwhen
Diff.Div/Bookis included as a variable of interest. We do so because a 3% value reported in
Diff.DivYieldmay result, for example, from a 3%-dividend-yield acquirer takes over a non-
dividend-paying firm, or it may result from a non-dividend-paying acquirer buys a 3%-
dividend-yield firm. The impact on the method of payment from these two cases may be
different. Hence, we use the variableAcquirer DivYieldto control for the differences in the
acquirers dividend yields.
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2.3. Testing Techniques
To test the first hypothesis, we adopt the multinomial logit model as well as the two-
limit Tobit model. First, we consider the case where acquirer management faces the
qualitative financing decision. Faccio and Masulis (2005) argue that in many mixed deals,
target shareholders have a choice to receive cash or stock, implying that acquiring firms do
not determine the fraction of cash financing.4
Accordingly, we categorized the sample into
three groups in terms of their payment methods. An indicator variable, MOP, takes a value of
0 for pure cash deals, 1 for mixed deals (whether the mix is acquirer or target determined),
and 2 for pure stock deals. Using MOPas a dependent variable, we estimate the following
multinomial logit regression :
(1)
where P(MOPi=K) is the probability that a deal i will have the Kth
payment method. The
variables of interest are the measures of the degree of similarity in dividend policies, One is
Payer,Diff.DivYield, orDiff.Div/Book. Following previous literature, we include a number of
other control variables including; deal characteristic variables such asDeal Premium, ln(Deal
Value), Related Deal, Hostile, and Tender Offer, acquirer characteristic variables such as
Insider Ownership, Insider Ownership Squared, Leverage, Change in Leverage, PPE/Book,
Market/Book, Cash/Deal Value, andPrereturns, and target characteristic variables including
Relative Size, Insider Ownership, Insider Ownership Squared, Institutional Ownership,
4 The fact that target shareholders have a choice to receive cash or stock should not affect our investigation of
the relationship between method of payment and dividend differences since, in equilibrium, the more similar the
dividend policies of the two firms the more likely stock is the method of payment, ceteris paribus, irrespectiveof whether the choice is made by the acquirer or target shareholders. In our examination of announcement
returns, our key test variable is an interaction term related to stock only acquisitions.
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Leverage, and Market/Book. All the control variables and the rationales for including them
are discussed fully in Section 3.2.
We also examine the effect of a difference in dividend policies on the fraction of cash
financing by adopting the two-limit Tobit model. In this model, the dependent
variable, %Cash PMT, can be thought of as a latent variable that is truncated at both lower
and upper limits, namely at zero and one. %Cash PMTvalues that we actually observe are
bounded between zero and one. Specifically, we estimate the following model :
(2)
wherex is the set of explanatory variables and,
iCashPMT% = 1 if iCashPMT%*1, all cash
iCashPMT% = iCashPMT%*
if 0< iCashPMT%*
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CARs=+1(Stock OnlyMeasures of Dividend Differences) + 2 Measures of
Dividend Differences +3 Stock Only+ 4X+e (3)
Announcement returns, CARs, are measured as the cumulative abnormal returns of
targets and acquirers, respectively, relative to the CRSP value-weighted market index,
computed for the event windows of [-1, +1] and [-2, +2] days around a bid announcement
date. Measures of Dividend Differences refers to the three measures of dividend differences
previously discussed. As discussed in our second hypothesis, we expect the interaction term
of a dividend difference and a stock based acquisition dummy, Stock Only Measures of
Dividend Differences, is negatively correlated with target and/or acquirer announcement
returns. We include several control variables (designated by the vector X) in the
announcement returns regressions; including the acquirers ln (Market Value), Market/Book,
Leverage, and PPE/Bookand the targets Relative Size, Institutional Ownership, Leverage,
Stock Return Volatility, and Market/Book. The control variable descriptions and the
rationales for including them are again provided inSection 3.2.
A potential concern in equation (3), however, is that the payment method, Stock Only,
is an endogenous variable because it is not randomly determined (Faccio and Masulis, 2005).
If the payment method is indeed endogenous, then the interaction term of the payment
method and a difference in dividend policies also becomes an endogenous variable. As a
result, controlling for this endogeneity is integral to estimating the model. In order to control
for the potential endogenous problem in our regressions, we additionally estimate the
following 2-stage least squares (2SLS) equations:
1st
reduced form: %Stock PMT = 1 z1+ 2 z2+ 3X+u
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2nd
reduced form: %Stock PMTMeasures of Dividend Differences= 1z1+ 2 z2+ 3 X+w
Main equation:
CARs=+1P[%Stock PMTMeasures of Dividend Differences] + 2 Measures of
Dividend Differences +3 P[%Stock PMT]+ 4X+e (4)
where P[] refers to the predicted value from the first stage regressions.6
In this model, we have two sets of instrumental variables; one for %Stock PMTand
the other for %Stock PMTMeasures of Dividend Differences. The set of instrumental
variables for%Stock PMTisz1. Since %Stock PMTMeasures of Dividend Differences is an
interaction term, the instrumental variables, z2, arez1Measures of Dividend Differences.
Note that in order to satisfy the over-identification condition, all instrumental variable sets (z1
andz2) and the exogenous variable set,X, must be included in both first and second reduced
forms.7
Instrumental variable sets,z1and z2, are described in Section 3.2.
3. Sample Selection, Control Variable Descriptions, and Summary Statistics
3.1. Sample
Our sample consists of all mergers and acquisitions that were announced from
January 1, 2001 to December 31, 2007, obtained from the Securities Data Corporation (SDC)
Platinum Mergers and Acquisitions database. All mergers and acquisitions must satisfy the
following screening criteria : 1) deal value is greater than one million dollars and is publicly
disclosed, 2) the percentage of shares of the target firm held by an acquirer at announcement
is less than 50%, 3) stock prices are available in the Center for Research in Securities Prices
6 Instead of the discrete variable, Stock Only, we use a continuous variable for stock payment, %Stock PMT,
defined as the percent of stock financing.
7 See Section 6.2 of Wooldridge (2002) for detailed discussion of this model.
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(CRSP) database, 4) Financial data are available in COMPUSTAT for both targets and
acquirers, and 5) insider ownership data are available in the Thomson Financial Network
(TFN) Insider Filing database for both targets and acquirers. The sample restrictions result in
a final sample of 1,022 deal observations.
3.2. Control Variable Descriptions
The literature has suggested that various factors may have some impact on the
outcome of a method of payment in acquisitions. The variables mentioned below will be used
as our control variables for these factors in our payment choice regression models.
3.2.1. Ownership Structure
Managers of an acquiring firm who value control may prefer to use cash as a means
of payment in an acquisition because stock dilutes their ownership in the combined firm
(Amihud, Lev, and Travlos, 1990; Harris and Raviv, 1988; Martin, 1996; Mayer and Walker,
1996; Stulz, 1988; Yook, Gangopadhyay, and McCabe, 1999). Conversely, managers of a
target firm may be interested in retaining control in the combined firm after the merger or
acquisition (Ghosh and Ruland, 1998). Ghosh and Ruland find that the target firms
managerial ownership is an even more important factor than the acquiring firms managerial
ownership in explaining the method of payment in acquisitions. Faccio and Masulis (2005)
indicate the role of managerial ownership may be non-linear and we control for this as well.
Thus, we include the acquiring firm's percentage of insider ownership, Acquirer Insider
Ownership, and the target firm's percentage of insider ownership, Target Insider Ownership,
and their squares in our empirical models. The data on ownership is obtained from the TFN
Insider Filing database. The more stake the management of the acquiring firm has in the
firm, the more likely the acquiring firm will use cash as a means of payment for the
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acquisition. So, we expect the coefficient ofAcquirer Insider Ownership to have a positive
sign. On the contrary, the higher the percentage of target firm's insider ownership, the more
likely the means of payment will be stock. Thus, we expect the coefficient ofTarget Insider
Ownership to have a negative sign.8
Baker, et al. (2007) show that if the proportion of passive shareholders who accept
acquirer stock in a stock for stock deal decreases, acquirer returns to the acquisition decrease.
They find that institutional shareholders are less likely to be passive than individual
shareholders. Accordingly we control for the percentage of institutional target shareholders
using Target Institutional Ownership. The larger this percentage, the less attractive a stock
merger is for the acquirer and hence acquirers would be less likely to use stock and if they do
so the merger is likely to have lower announcement returns.
3.2.2. Relative Cost of Funds
According to Myers (1984) pecking order theory, firms should fund their investment
opportunities from internally generated cash flow whenever feasible. If cash flow is
inadequate, debt should be the next financing option the firms should consider. Equity
financing, being the most expensive, should be considered last, only when the firms have no
other financing option. This implies that if the acquiring firm has a lot of free cash flow, the
firm is more likely to use cash as a means of payment for the acquisition. Martin (1996), and
Mayer and Walker (1996) find acquirers, who have an ample amount of cash on the balance
sheet or who can generate a large amount of free cash flow and have a low level of leverage,
tend to use cash and/or debt to finance their acquisitions. Our variable, Cash/Deal Value,
8 Faccio and Masulis (2005) provide the tradeoff hypothesis between corporate control concerns and
debt constraints. They argue that an acquirers payment decision is influenced by debt capacity and existingleverage and, simultaneously, by insiders desire to maintain their control of firms. We consider leverage below.
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measures the amount of acquirer cash plus marketable securities normalized by the value of
the merger or acquisition.
In the case where the acquirer does not have enough cash, but it is not already highly
leveraged, the acquirer can issue new debt to fund the acquisition. The acquirer can also use
the unused lending capacity from the target firm if the target firm is under-leveraged.
Chaney, Lovata, and Philipich (1991) find that acquiring firms that use cash acquisitions tend
to be highly levered small firms with high return on assets, while acquiring firms that use
stock acquisitions tend to have large asset bases, low leverage, low return on assets, and high
price-earnings ratios. Acquirer Leverage and Target Leverage measure the debt to assets
ratio of acquirers and target firms, respectively. Faccio and Masulis (2005) control for the
borrowing power of the acquirer using a variable related to the collateral capacity of the firm,
which they measure using property, plant, and equipment (PPE) over the book value of total
assets. We also includePPE/Bookto control for the collateral value of the acquiring firms
assets.
Yook (2003) suggests that the leverage effect plays an important role in payment
decisions. An increase in leverage caused by cash payment reduces the free cash flow
problem that self-interested managers invest money on less profitable (or negative NPV)
projects. The benefits of this leverage effect should be stronger when a firm has lower growth
opportunities and large free cash on hand. To address this, we include Change in Leverage,
defined as the change in the acquirers leverage (total liabilities/total assets) from t-2 to t-1
(where t is the deal announcement year).
When the stock price runs up considerably, it makes equity financing relatively less
expensive. Acquirers could take advantage of such an occurrence by using stock as a means
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of payment when their stock prices have gone up prior to the merger or acquisition
announcement. Conventional wisdom suggests that targets would recognize such overvalued
stock offers and refuse them. However, research by Rhodes-Kropf and Viswanathan (2004)
suggests that stock price appreciation of bidders and targets may be positively correlated.
Mutual overvaluation can lead bidders to make, and targets to accept, stock offers
introducing a possible positive correlation between stock price appreciation, merger
frequency, and use of stock as a method of payment. Shleifer and Vishny (2003) construct a
model where mutual overvaluation can also lead to a positive correlation between stock price
performance and the use of stock as a method of payment in acquisitions. We use a 90-
trading-day market-adjusted cumulative return at the 30th
trading day prior to the
announcement date,Prereturns, to measure how much the stock price of each acquiring firm
has run-up. We predict a negative sign on this coefficient. The higher the stock returns prior
to mergers or acquisitions announcements, the higher the likelihood that acquirers will use
stock.
The growth opportunities of acquiring firms also affect the payment choice. An
acquirer with a high growth rate may be able to use their high multiple stock to pay for
acquisitions.Acquirer Market/Bookis defined as the sum of total assets and market value of
equity minus book value of equity divided by total assets. We also include Target
Market/Book. According to Carleton, Guilkey, Harris and Stewart (1983), a high target
market to book ratio represents potentially high capital gains for target shareholders and non-
deductible goodwill for acquirers, hence low market to book ratios of targets are associated
with the use of cash.
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3.2.3. Asymmetric Information
Payment for acquisitions in the form of stock can help alleviate an asymmetric
information problem. Asymmetric information exists in acquisitions because acquirers may
know more about the value of their own firms than do target firms, but may not be able to
derive a correct estimate of the true value of target firms, and vice versa. Hansen (1987)
regards a stock offer as a contingent pricing mechanism. He finds that when target firms
know their values better than acquirers, the acquirers will prefer to use stock, which has
desirable contingent-pricing characteristics, rather than cash. When asymmetric information
exists on both acquirers and target firms sides, a signaling equilibrium develops whereby
targets regard both the method of payment used and the size of the stock offer as signals of
the value of the acquiring firms. However, he finds only minimal supportive evidence.
Fishman (1988) and Eckbo, Giammarino, and Heinkel (1990) also provide adverse selection
based models of the acquirers choice of payment.
When stock is used as a payment in acquisitions, the risks of a miscalculated firm
valuation are shared between acquirers and targets. This type of risk is likely to be small
when an acquirer is a much larger firm than is a target firm. As the target firms size
increases, the risks are larger. Following Martin (1996),Relative Size is our proxy variable
for information asymmetry which measures the relative size of target firm to acquiring firm.
Relative Size is a ratio of targets market value of equity to the sum of targets market value
and acquirers market value as of the year-end prior to the deal announcement.9
The larger
the size of the target firm relative to the acquirer, the higher the risks of valuation
9 In unreported regressions we substitute an alternative relative size measure, which is the ratio of target firms
total assets to the sum of targets total assets and acquirers total assets. The results are essentially unchanged.
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miscalculation and, thus, the higher the probability of a use of stock as a payment
consideration.10
Target Return Volatility, an alternative proxy for information asymmetry that may be
particularly relevant to announcement returns, is the standard deviation of daily stock returns
during the one year prior to the bid announcement date. Officer, Poulsen, and Stegemoller
(2009) find that acquirer announcement returns are greater in stock based acquisitions when
target stock return volatility is greater, which implies that targets market value is difficult to
estimate.
3.2.4. Deal Characteristics and Acquirer Size
We examine several variables that capture deal characteristics. Deal Premium is
defined as an acquirers offer value for the target over the pre-offer market value of the target
minus one. We follow the approach of Officer (2003) to calculate deal premium. Ln(Deal
Value) is the natural logarithm of deal value.Related Dealis a dummy variable equal to 1 if
an acquirer and target share the same primary 2-digit SIC code and 0, otherwise. Hostile is a
dummy variable equal to 1 if deal attitude is hostile and 0 if friendly or unsolicited as
classified by the SDC. Tender Offeris a dummy variable equal to 1 if an acquirer involves a
tender offer as reported in SDC and 0, otherwise.
In the announcement return regressions we include a number of the variables
previously discussed. We also include the natural log of the acquirers market value,
ln(Market Value) in the announcement return regressions. Our control variables in the
10 Mayer and Walker (1996) use both the interaction between earnings predictability and the market to book
ratio of acquirers, and the ratio of market value of equity for target firms to that of acquirers to proxy for theinformation asymmetry. However, they find that these variables have only minimal impact on the method of
payment.
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announcement returns regressions follow previous literature such as Moeller, Schlingemann,
and Stulz (2004) and Officer, Poulsen, and Stegemoller (2009).
3.2.5. Instrumental Variables for Equation (4)
The set of instrumental variables for the percentage stock financing, %Stock PMT, in
the first stage estimation associated with Equation (4) includes two variables. Average
Acquirer Industry %Stock PMTis the acquirer industry-average (based on the 1-digit
acquirer SIC code) proportion of stock financing during the quarter prior to the bid
announcement. Average Target Industry %Stock PMTis the target industry-average %Stock
PMT, computed in the same manner. We construct instrumental variables for an interaction
variable of the proportion of stock financing and our three measures of differences in
dividend policies, %Stock PMTMeasures of Dividend Differences, by interacting the
instrumental variables for%Stock PMTand the measures of differences in dividend policies.
3.3. Descriptive Statistics
[Table 1 about here]
Table 1 presents the summary statistics when deals are classified by the payment
method and dividend policy. There are 379 deals (37.1% of total sample) financed only with
cash, while 271 deals (26.5%) are financed only with stock. The frequency of stock-based
deals is the highest in the year 2001 (87 out of 208 deals), and is then generally decreasing
over the sample years. The average of the cash portion of consideration is about 50%, while
that of the stock portion is about 43%. During the sample period, 355 target and 535
acquiring firms pay dividends. The average quarterly dividend yield of target and acquiring
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firms are 0.802% and 0.956%, respectively.11
The average dividend to book value ratio is
1.233% for targets and 1.555% for acquiring firms. In 303 mergers, only one firm (either a
target or an acquirer) pays a positive dividend during last 4 quarters prior to the deal
agreement. In 312 merger deals, both firms pay dividends, while no firm pays a dividend in
407 deals. The mean and median of the absolute differences in dividend yields,Diff.DivYield,
are 0.404% and 0.077%, respectively, while those ofDiff.Div/Bookare 1.157% and 0.00%,
respectively.
4. Effects of Differences in Dividend Policies on the Payment Method
[Table 2 about here]
Table 2 presents the mean and median differences in dividend policies for the three
sub-groups in terms of the payment method. Tests for statistically significant differences
between the Stock Only group and other groups are from t-tests and Wilcoxon rank-sum tests
for each of the three measures of dividend differences: One is Payer, Diff.DivYield, and
Diff.Div/Book. The overall results in Table 2 support the hypothesis that acquirers are more
likely to pay with stock when dividend policies are similar. All 1,022 deals are examined in
Panel A. Thirty-nine percent of the merger deals in the Cash Only group have a single
dividend payer (i.e. are part of the One is Payerclassification). In the Mixed Paymentgroup,
24% of the deals have only one dividend payer. The percentages ofOne is Payer in both
Cash Only and Mixed Paymentgroups are significantly higher than that in the Stock Only
group, 19%. The mean and median Diff.DivYieldof the Cash Only group are 0.495% and
11 Note that this is average quarterly dividend yield. One may calculate annual dividend yield by multiplying by
4.
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0.122%, respectively, which are (weakly) significantly greater than those of the Stock Only
group, 0.391% and 0%. The mean and median ofDiff.Div/Bookare also significantly higher
for the Cash Only group (1.467% and 0.155%, respectively) than for the Stock Only group
(0.472% and 0%). The Mixed Payment group also has greater dividend policy differences
than the Stock Only group, while lower than the Cash Only group (these test results are not
reported). In Panel B, we drop the deals where both targets and acquires do not pay any
dividend in the previous quarters. As a result, the values of the percentage ofOne is Payer,
Diff.DivYieldand Diff.Div/Bookare greater than those in Panel A. However, the results of
univariate tests remain consistent withPanel A.
[Table 3 about here]
Table 3 reports estimates of multinomial logit models on the acquirers financing
decisions as a function of the measures for dividend differences and the control variables.
The table makes pair-wise comparisons between three categories of payment methods: Cash
Only, Mixed Paymentand Stock Only. Note that in a multinomial logit analysis, a regression
coefficient indicates the effects on the log-odds between each of the groups and the reference
group. In the first regression, where the reference choice is the Stock Only group, the
coefficients ofOne is Payer,Diff.DivYieldandDiff.Div/Bookare all positive and statistically
significant in the Cash Only group. Thus, if dividend differences between the target and
acquirer are greater, the acquisition is more likely to be financed by cash than stock, which is
consistent with our first hypothesis.
In the second and third regressions, whenDiff.DivYield(Diff.Div/Book) is used as the
independent variable, we control for the DivYield (Div/Book) of acquiring firms. The
negative coefficients onAcquirer DivYieldandAcquirer Div/Booksuggest that the higher the
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acquirers dividend level, the more likely the acquisition is to be stock based. While we had
no prior expectation regarding the sign of this variable, the empirical results are consistent
with the proposition that dividend paying stock is more likely to be used as an acquisition
vehicle.
In each of our regressions, where the dependent variable is Mixed Paymentand the
reference group is Stock Only, the coefficients of our dividend difference measures are
positive but not statistically significant. Also, in the third regression, where the dependent
variable is Cash Only and reference group is Mixed Payment, the coefficients of the dividend
difference measures are positive, but again insignificant. Therefore, the results suggest that
even if the degree of dividend differences leads an acquirer to choose a cash deal rather than
stock deal, it does not significantly affect a choice between mixed payment and stock only or
a cash deal versus a mixed deal.
Note that most of the coefficients of the control variables are signed in accordance
with our expectations and prior literature. We find that tender offers are usually financed
with cash (Jensen and Ruback, 1983). The positive coefficient ofCash/Deal Value implies
that an acquirer maintaining more cash has a greater ability of cash financing and, therefore,
is more likely to use cash as a mean of payment. Consistent with Faccio and Masulis (2005),
the negative coefficient ofPrereturns suggests that when acquirers stock price is overvalued
at the announcement date the acquirer is more likely to use stock financing. Acquirer
Leverage displays a positive sign, which suggests that acquirers may borrow early in
anticipation of future cash acquisitions. The coefficient ofTarget Insider Ownership displays
a significant quadratic relationship, first falling and then rising, implying higher managerial
ownership in target firms at first decreases, but ultimately increases, the likelihood of the
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method of payment being cash. Ghosh and Ruland (1998) have previously documented a
negative relationship (i.e. a positive relationship between target inside ownership and stock
payments).Relative Size is negatively correlated with the probability of cash payment and is
weakly significant, implying a larger target size, which increases the risk of valuation
miscalculation, results in the lower chance of cash financing rather than stock financing. The
results support the asymmetric information hypothesis (Hansen, 1987; Martin, 1996). Target
Institutional Ownership is positively related to the probability of a cash payment, consistent
with the arguments of Baker, et al. (2007). TargetLeverage is negatively related to the
probability of a cash payment.
[Table 4 about here]
In Table 4, we alternatively employ a two-limit Tobit approach to examine the effect
of dividend differences on the fraction of cash financing, %Cash PMT. The Q-MLE is used
to maximize a log-likelihood function, in cases where that function is possibly misspecified
due to the specification of the wrong density. The proxies for a difference in dividend
policies (One is Payer, Diff.DivYield and Diff.Div/Book) have positive and significant
coefficients, implying that the proportion of cash financing is increasing in these variables.
The result is consistent with the first hypothesis that with a greater difference in the dividend
policies between an acquirer and target, acquirer management is more likely to choose cash
as the payment form. The effect of the level of the dividend yield or dividend to book ratio of
an acquirer in the second and third regressions is negative and significant, consistent with the
findings in the first regression in Table 3. As expected, other important determinants of the
percentage of cash payment include Deal Premium, Tender Offer, Cash/Deal Value,
Prereturns, Target Insider Ownership, Target Institutional Ownership, and Target Leverage.
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24.60%, respectively. In contrast, takeovers are possibly wealth destroying for acquiring
firms where average CARs are -1.45% and -1.41% in the three-day and five-day windows,
respectively. The table also shows that the average CARs of the Cash Only group are
significantly higher than the Stock Only group. The average CARs of acquiring firms are
0.41% in the three-day window and 0.57% in the five-day window for a cash deal, while they
have negative values for a stock deal. Also, cash based takeovers are associated with greater
target CARs. As widely documented in the literature, the lower announcement returns
associated with stock deals are consistent with the adverse selection argument initially
suggested by Myers and Majluf (1984). The mergers and acquisitions literature applies the
adverse selection argument to suggest that acquiring firms pay with stock only when their
shares are overvalued (Travlos, 1987; Amihud, Lev and Travlos, 1990).
[Table 6 about here]
Table 6 presents the results of OLS regressions that analyze the determinants of
takeover announcement returns for both target and acquiring firms. The variable of interest in
the regressions is the interaction variable of a dummy for a stock deal and the difference in
dividend policies. As discussed above, our second hypothesis states that abnormal
announcement returns are lower for a stock based deal with a greater difference in dividend
policies. Whether this negative announcement effect is greater for target firms or acquiring
firms depends upon whether merger arbitragers anticipate the extent of dividend related
selling and the speed with which they shift its effects to acquirers. In Panel A, consistent with
our hypothesis, the coefficients of the interaction variables between a stock deal dummy and
the degree of the dividend differences are negatively correlated with target returns for all
three measures and are statistically significant when One is PayerandDiff.DivYieldare used
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to measure the dividend differential. In stock based mergers target CARs decrease by, on
average, 2.6% during the three-day window around the deal announcement and 5.9% during
the five-day window if only one firm pays a dividend.12
Also, target CARs drop by 2.9% or
4.5% during the three-day or five-day windows, respectively, when the difference in
dividend yield increases by one unit. In the acquirer CARs regressions in Panel B, the
interaction terms again have negative coefficients for the three measures of dividend
differences but are significant only when One is Payerand Diff.Div/Book(and the latter at
the 10% level) are used as the dividend difference measure. In stock based takeovers, CARs
of acquiring firms decrease by 0.6% (that is, -0.015 + 0.009) or 0.3% during the three-day or
five-day windows, respectively, when only one firm pays a dividend. The evidence suggests
that the market does not fully immediately shift the dividend effect in the acquirer stock price,
but that some arbitrage activity does occur. In both panels, the coefficients of a dummy for a
pure stock deal, Stock Only, are negative and significant at the 1% level in 11 of the 12
specifications (and at the 5% level in the other), supporting the adverse selection hypothesis.
We include several control variables in both the target and acquirer CARs regressions
as suggested by previous literature. Target and acquirer announcement returns are
significantly higher if the ln(Market Value) of an acquirer is larger, while they are lower if
the targetsRelative Size is bigger. The positive coefficient on target Stock Return Volatility
suggests that target firms with greater stock return volatility are more likely to benefit from
takeovers. HigherTarget Institutional Ownership depresses announcement returns for both
targets and acquirers consistent with Baker, et al.s (2007) passive shareholder arguments.
12 Note that the coefficient ofOne is Payeris not statistically different from 0 in both the three-day and five-
day CARs regressions. Therefore, the marginal effect of One is Payer in stock based deals is -0.0261+0=-
0.026.
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Finally, we find that Target Leverage is negatively associated with target announcement
returns.
[Table 7 about here]
A potential concern in Table 6 is that a decision on a pure stock payment would not
be randomly assigned, resulting in endogeneity bias. As discussed in Section I.C, we employ
the two-stage least squares (2SLS) approach to control for the endogeneity of payment
decisions in takeovers. Table 7 reports the results of both first and second stage 2SLS
regressions. In Panel A , One is Payeris used for the measure of dividend difference, while
Diff.DivYieldandDiff.Div/Bookare used in Panel B and Panel C, respectively. In the reduced
form regressions in each panel, we estimate the determinants of the endogenous
variables, %Stock PMTand %Stock PMTMeasure of Dividend Differences. In each panel,
the instrumental variables, described in Section 3.2.5, are significantly and positively
correlated with each of the endogenous variables they are intended to instrument, confirming
that there is no weak instrument problem.
The results of 2SLS in Table 7 are generally consistent with our findings from the
OLS regressions in Table 6. In Panel A, the predicted value of the interaction variable
between %Stock and One is Payer is negatively and significantly correlated with target
CARs, confirming that our results in Table 6 are robust after controlling for endogeneity. For
acquiring firms, it is negative and weakly significant when three-day CARs are used, but not
significant when five-day CARs are used. In Panel B Diff.DivYield, is used for the measure
of the dividend differential. Consistent with our previous findings, target CARs are
negatively correlated with the predicted value of the interaction variable, %Stock
Diff.DivYield. The coefficient of the interaction variable, however, is negative but not
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significant for acquirer CARs. In Panel C Diff.Div/Book, is used for the measure of dividend
differential. The effect of the predicted value of %StockDiff.Div/Book is negative but not
significant on both target and acquirer abnormal announcement returns. The results are thus
similar to the OLS results for target CARs but somewhat weaker, in terms of statistical
significance, for acquirer CARs. In addition, the predicted values of the percentage of stock
payment in each panel are negatively correlated with both target and acquirer announcement
returns, consistent with adverse selection explanations.
Overall, the results of the announcement returns analysis support our second
hypothesis. In stock based takeovers, the difference in dividend policies has a negative effect
on target returns, reflecting the possibility of selling activities by target shareholders who will
experience a change in dividend policy from that of the target firm to that of the acquirer.
The effect, however, is less significant in the acquirer CARs regressions, suggesting that the
market does not immediately fully arbitrage the dividend related effect.
6. Conclusions
The dividend clientele hypothesis suggests that shareholders are different in their
preferences for payouts from the firms they invest in. Some shareholders prefer to receive a
regular stream of income in the form of cash dividends, while others may prefer to forgo cash
dividends in order to get a possibly better payout from a firm in the form of capital gains.
Hence, different dividend policies attract different types of shareholders.
Changes in dividend policies resulting from mergers of firms with dissimilar policies
may result in portfolio rebalancing from target shareholders. Shareholders may reduce or
totally liquidate their positions from the firms whose dividend policies have changed in a
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way that is unfavorable to them. In anticipation of such a consequence, acquirers may at the
margin select a method of payment based on how different the dividend policies are between
the acquirers and the target firms.
We offer two hypotheses. First, similar dividend policies between acquirers and
targets increase the likelihood of the use of stock as a method of payment in acquisitions.
Second, in stock based acquisitions abnormal announcement returns are lower if the level of
difference in dividend policies is larger.
Our empirical results generally support the hypothesis that the likelihood of acquirers
using stock as the payment method in takeovers increases with the degree of similarity in
dividend policies. To arrive at this conclusion, first we consider the case where acquirer
management faces the qualitative decision to pay in the form of stock, cash, or a mix of the
two. The results of our multinomial analysis show that the degree of difference in dividend
policies is significantly higher for pure cash deals than pure stock deals. We, then, examine
the determinants of the proportion of cash payment using a two-limit Tobit approach. The
results show that a larger difference in dividend policies significantly increases the
percentage of cash payment. We also find that the higher the dividend on the acquirer stock,
the more likely it is to be used as an acquisition currency.
To test our second hypothesis related to announcement returns, we conduct OLS and
a 2-step procedure in order to control for endogeneity of payment decisions. Our results show
that, for stock deals, target cumulative abnormal returns (CARs) around the takeover
announcement date significantly decrease if only one firm pays a dividend and the other does
not or if the difference in dividend yields between target and acquiring firms becomes larger.
The negative effect for acquirer CARs, however, is only weakly significant and only when
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one firm pays a dividend and the other does not. These results suggest that the market does
not fully immediately incorporate the dividend effect in the acquirer stock price. In addition,
our results are largely consistent with adverse selection explanations of the method of
payment, which suggest that stock based acquisitions produce lower announcement returns
because acquirers may use their stock to pay for acquisitions only when their stocks are
overvalued.
In sum, this study provides a new perspective regarding the takeover method of
payment choice. We show that, in addition to factors related to traditional explanations of
the method of payment, the dividend policies of target and acquiring firms are a key
determinant of the payment choice.
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Table 1. Descriptive Statistics
This table provides summary statistics regarding the method of payment and dividend policies of target andacquiring firms. The sample includes 1,022 merger agreements during the period January, 2001 to December,
2007. Cash Only includes deals where at least 90% of consideration is paid with cash. Stock Only includes deals
where at least 90% of consideration is paid with acquirer stocks. Mixed Paymentincludes deals financed with
both stock and cash. One is Payer,Diff.DivYield and Diff.Div/Book, based on quarterly dividends, are ourmeasures of the degree of difference in dividend policies and are discussed in Section 2.2.
Year 2001 2002 2003 2004 2005 2006 2007 Total
Mean Mean Mean Mean Mean Mean Mean Mean Median
N 208 110 150 149 148 143 114 1,022 [100%]
Payment Method
Cash Only (N) 48 41 50 52 53 76 59 379 [37.1%]
Stock Only (N) 87 33 40 39 29 25 18 271 [26.5%]
Mixed Payment (N) 73 36 60 58 66 42 37 372 [36.4%]
% Cash Financing 34.708 46.248 47.950 48.824 52.799 63.543 64.574 49.937 46.135
% Stock Financing 55.101 45.040 45.578 45.564 40.402 30.090 31.282 42.945 43.725
Target Dividends
Dividend Payer (N) 57 34 54 52 53 56 49 355
DivYield (%) 0.881 0.838 0.812 0.694 0.814 0.849 0.716 0.802 0.570
Div/Book (%) 0.895 0.790 0.269 0.601 1.692 2.623 1.579 1.233 0.270
Acquirer Dividends
Dividend Payer (N) 79 53 75 93 82 90 63 535
DivYield (%) 0.779 0.858 1.576 0.827 0.983 0.878 0.798 0.956 0.652
Div/Book (%) 1.191 1.313 1.163 1.003 2.752 1.735 1.740 1.555 0.569
Dividend Differential
One is Payer (N) 59 27 31 51 49 50 36 303
Both are Payers (N) 57 30 49 47 43 48 38 312
Neither is Payer (N) 92 53 70 51 56 45 40 407
Diff.DivYield (%) 0.195 0.246 0.736 0.264 0.510 0.564 0.348 0.404 0.077
Diff.Div/Book (%) 0.754 0.517 0.563 0.667 1.845 1.796 2.240 1.157 0.000
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Table 2. Univariate Tests
The sample is divided into three groups based on their payment methods. Cash Only includes deals where atleast 90% of the consideration is paid with cash. Stock Only includes deals where at least 90% of the
consideration is paid with acquirer stock. Mixed Payment includes deals financed with both stock and cash.
Tests for statistically significant differences between the Stock Only group and other groups are from t-tests (for
means) and Wilcoxon rank-sum (i.e. Mann-Whitney-Wilcoxon) tests for each of the three measures ofdifferences in dividend policies, One is Payer,Diff.DivYieldandDiff.Div/Book, which are discussed in Section
2.2. The Wilcoxon tests are technically for the equality of the distributions rather than medians per se. The
symbols ***, **, and * represent statistical significance at the 1%, 5%, and 10% level, respectively.
Panel A. Full Sample
Cash Only Mixed Payment Stock Only
N = 1022 379 372 271
Mean Median Mean Median Mean Median
One is Payer (%) 38.522 *** 0 *** 23.656 ** 0 *** 19.188 0
Diff.DivYield (%) 0.495 * 0.122 *** 0.423 0.106 *** 0.391 0
Diff.Div/Book (%) 1.467 *** 0.155 *** 1.341 ** 0.006 *** 0.472 0
Panel B. Subsample (When both targets and acquirers are dividend payers)
Cash Only Mixed Payment Stock Only
N = 588 225 231 132
Mean Median Mean Median Mean Median
One is Payer (%) 64.889 *** 1 *** 40.125 * 0 * 38.393 0
Diff.DivYield (%) 0.966 ** 0.345 ** 0.682 0.326 * 0.602 0.295
Diff.Div/Book (%) 2.242 *** 1.062 *** 1.474 * 0.324 *** 0.662 0.165
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Table 3. Determinants of the Payment Choice
Cash Only includes deals where at least 90% of consideration is paid with cash. Stock Only includes dealswhere at least 90% of consideration is paid with acquirer stock. Mixed Payment includes deals financed with
both stock and cash. Multinomial logit regressions are estimated for the payment method categories. The
measures of differences in dividend policies include One is Payer,Diff.DivYield, andDiff.Div/Book, which are
discussed in Section 2.2. All tests use the QML robust standard errors and z statistics which are reported in brackets. The symbols ***, **, and * represent statistical significance at the 1%, 5%, and 10% level,
respectively. Coefficients onRelative Size have been multiplied by 10,000 for presentation purposes. All of
the control variables are discussed in Section 3.2.
Cash Only Mixed Payment Cash Only
Reference group : Stock Only Stock Only Mixed Payment
Dividend Differential
One is Payer 0.614**
0.227 0.387
[2.23] [0.96] [1.44]
Diff.DivYield 33.308**
17.753 15.555
[2.15] [1.05] [1.01]
Acquirer DivYield -30.697**
-15.562 -15.135
[-2.05] [-0.95] [-0.96]
Diff.Div/Book 11.042**
10.363 0.679
[2.32] [0.87] [0.23]
Acquirer Div/Book -6.152* 7.635 -1.483
[-1.91] [0.72] [-0.46]
Deal Characteristics
Deal Premium 0.592** 0.538 0.546 0.066 0.042 0.075 0.526** 0.495 0.470
[2.16] [1.25] [1.34] [0.25] [0.16] [0.29] [2.07] [1.35] [1.56]
Ln (Deal Value) -0.296*** 0.249* 0.277* 0.198** 0.216** 0.200** -0.494*** -0.465 -0.477
[-2.89] [1.76] [1.71] [2.13] [2.34] [2.15] [-5.00] [-1.48] [-1.49]
Related Deal -0.112 -0.075 -0.105 0.471** 0.495*** 0.464** -0.583*** -0.570*** -0.569*
[-0.54] [-0.36] [-0.51] [2.58] [2.69] [2.50] [-3.09] [-3.03] [-3.03]
Hostile -0.158 -0.076 -0.131 0.131 0.153 0.105 -0.289 -0.228 -0.236
[-0.18] [-0.09] [-0.15] [0.15] [0.18] [0.12] [-0.45] [-0.35] [-0.36]
Tender Offer 1.752*** 1.706*** 1.712*** 0.346 0.337 0.333 1.406*** 1.369*** 1.378*
[4.96] [4.95] [4.96] [0.96] [0.93] [0.91] [4.13] [4.11] [4.13]
Acquirer Characteristics
Insider Ownership -0.374 -0.478 -0.304 0.173 0.141 0.311 -0.546 -0.620 -0.615
[-0.42] [-0.53] [-0.34] [0.21] [0.18] [0.37] [-0.62] [-0.70] [-0.70]
Insider Ownership
2
-0.010 0.009 -0.060 -0.441 -0.440 -0.510 0.431 0.449 0.449[-0.03] [0.03] [-0.18] [-1.05] [-1.04] [-1.18] [1.13] [1.16] [1.15]
Leverage 1.355*** 1.605*** 1.444*** 0.253 0.391 0.249 1.102** 1.214** 1.194*
[2.71] [3.22] [2.84] [0.52] [0.81] [0.49] [2.13] [2.41] [2.35]
Leverage -1.082 -1.258 -1.290 -1.456 -1.626 -1.708 0.374 0.368 0.418
[-1.08] [-1.23] [-1.26] [-1.43] [-1.58] [-1.58] [0.41] [0.41] [0.46]
PPE/Book 0.544 0.362 0.213 0.693** 0.613** 0.449 -0.149 -0.251 -0.236
[1.59] [1.07] [0.62] [2.26] [2.03] [1.49] [-0.53] [-0.90] [-0.84]
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Market/Book -0.029 -0.032 -0.056 0.069 0.068 0.046 -0.098 -0.100 -0.102
[-0.31] [-0.34] [-0.58] [0.74] [0.72] [0.47] [-1.20] [-1.24] [-1.22]
Cash/Deal value 0.022** 0.022** 0.020** 0.002 0.002 0.000 0.020 0.020 0.020
[2.14] [2.19] [2.14] [0.11] [0.09] [0.00] [1.15] [1.17] [1.15]
Prereturns -1.502***
-1.587***
-1.535***
-0.582 -0.629 -0.580 -0.920**
-0.958**
-0.955*
[-2.59] [-2.73] [-2.70] [-1.04] [-1.12] [-1.03] [-2.04] [-2.11] [-2.09]
Target Characteristics
Relative Size -0.923*
-0.895*
-0.858*
-0.615***
-0.611***
-0.606***
-0.308 -0.284 -0.252
[-1.69] [-1.69] [-1.66] [-2.70] [-2.72] [-2.71] [-0.55] [-0.52] [-0.48]
Insider Ownership -4.121**
-0.004**
-0.005***
1.939 1.938 2.026 2.182 2.089 2.081
[-2.58] [-2.55] [-2.60] [1.22] [1.21] [1.26] [1.48] [1.43] [1.43]
Insider Ownership2
4.769***
0.047***
0.049***
-2.182 -2.227 -2.384 -2.587 -2.508 -2.507
[2.69] [2.72] [-2.81] [-1.27] [-1.29] [-1.37] [-1.55] [-1.53] [-1.53]
Institutional Ownership 2.835***
2.631***
2.658***
0.314 0.241 0.232 2.522***
2.390***
2.426*
[5.49] [5.14] [5.17] [0.66] [0.51] [0.48] [5.34] [5.17] [5.23]
Leverage -1.886
***
-1.630
***
-1.610
***
0.501 0.585 0.611 -2.388
***
-2.215
***
-2.221
*
[-3.97] [-3.55] [-3.50] [1.20] [1.38] [1.37] [-5.17] [-5.01] [-5.07]
Market/Book 0.059 0.038 0.037 -0.173 -0.180 -0.188 0.232*
0.219*
0.225*
[0.63] [0.44] [0.44] [-1.54] [-1.62] [-1.60] [1.84] [1.81] [1.83]
Intercept 4.033** -3.205* -3.769** -4.553*** -4.890*** -4.568*** 8.586*** 8.095*** 8.336*
[2.24] [-1.79] [-2.10] [-2.73] [-2.95] [-2.72] [5.02] [4.81] [4.97]
No. observations 1,022 1,022 1,022
Wald test 199.34 201.64 201.64
P-value 0.000 0.000 0.000
Pseudo R2 0.1449 0.1443 0.1443
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Table 4. Determinants of the Proportion of Cash Payment
Two-limit Tobit regressions are estimated where the dependent variable is the proportion of cash
payment, %Cash PMT. The measures of differences in dividend policies include One is Payer,Diff.DivYield, andDiff.Div/Book, which are discussed in Section 2.2. All tests use the QML robust standard
errors and t statistics which are reported in brackets. The symbols ***, **, and * represent statistical
significance at the 1%, 5%, and 10% level, respectively. Coefficients onRelative Size have been multipliedby 10,000 for presentation purposes. All of the control variables are discussed in Section 3.2.
Dependent variable: %Cash PMT
Dividend Differential
One is Payer 0.298 [3.29]***
Diff.DivYield 13.432 [2.32]**
Acquirer DivYield -11.387 [-2.11]**
Diff.Div/Book 1.668 [2.70]***
Acquirer Div/Book -1.221 [-2.48]**
Deal Characteristics
Deal Premium 0.212 [2.01]** 0.232 [2.19]** 0.230 [2.16]**
ln (Deal Value) 0.115 [1.97]** 0.056 [1.45] 0.049 [1.50]
Related Deal -0.006 [-0.08] -0.028 [-0.35] -0.041 [-0.50]
Hostile -0.332 [-1.10] -0.318 [-1.04] -0.319 [-1.04]
Tender Offer 0.874 [6.37]*** 0.876 [6.36]*** 0.878 [6.36]***
Acquirer Characteristics
Insider Ownership -0.212 [-0.58] -0.319 [-0.87] -0.268 [-0.73]
Insider Ownership2 -0.029 [-0.16] 0.024 [0.13] 0.007 [0.04]
Leverage 0.714 [3.45]*** 0.820 [3.97]*** 0.794 [3.81]***
Leverage -0.427 [-1.00] -0.492 [-1.14] -0.440 [-1.03]
PPE/Book 0.053 [0.45] 0.078 [0.65] 0.089 [0.74]
Market/Book -0.038 [-1.10] -0.037 [-1.07] -0.039 [-1.12]Cash/Deal value 0.008 [3.03]*** 0.009 [3.08]*** 0.009 [3.11]***
Prereturns -0.679 [-3.13]*** -0.701 [-3.22]*** -0.690 [-3.16]***
Target Characteristics
Relative Size -0.144 [-1.18] -0.157 [-1.27] -0.151 [-1.23]
Insider Ownership -1.557 [-2.53]** -0.016 [-2.59]*** -0.016 [-2.61]***
Insider Ownership2 1.723 [2.55]** 0.171 [2.53]** 0.175 [2.59]***
Institutional Ownership 1.112 [5.62]*** 1.168 [5.87]*** 1.172 [5.90]***
Leverage -0.727 [-3.96]*** -0.758 [-4.12]*** -0.757 [-4.10]***
Market/Book 0.047 [1.32] 0.051 [1.42] 0.051 [1.42]
Intercept 1.896 [2.76]*** 1.833 [2.64]*** 1.902 [2.75]***
No. observations 1,022 1,022 1,022
Wald test 199.99 193.44 190.29
P-value 0.000 0.000 0.000
Pseudo R2 0.145 0.100 0.099
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Table 5. Univariate Tests for Announcement Returns
Announcement returns are measured as the cumulative abnormal returns (CARs) relative to the CRSP
value-weighted market index over three day [-1, 1] and five day [-2, 2] horizons. The sample is divided intothree groups based on the method of payment. Tests for statistically significant differences are from t-tests
between the Stock Only group and other groups. The symbols ***, **, and * represent statistical
significance at the 1%, 5%, and 10% level, respectively.
Cash Only Mixed Payment Stock Only Overall
Acquirer CARs (%) [-1, 1] 0.41 *** -2.08 ** -3.06 -1.45
[-2, 2] 0.57 *** -1.74 *** -3.59 -1.41
Target CARs (%) [-1, 1] 30.71 *** 19.93 19.46 23.81
[-2, 2] 31.37 *** 20.86 20.25 24.60
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Table 6. Determinants of Announcement Returns
This table reports the results of OLS regressions that test the determinants of takeover announcement returns, definedas the cumulative abnormal returns (CARs) over the three-day [-1, +1] and five-day [-2, +2] windows. The dependentvariable in Panel A is target CARs, while it is acquirer CARs in Panel B. The measures of differences in dividend
policies include One is Payer,Diff.DivYield, andDiff.Div/Book, which are discussed in Section 2.2. The t-statistics arebased on White robust standard errors. The symbols ***, **, and * represent statistical significance at the 1%, 5%, and
10% level, respectively. Coefficients onRelative Size have been multiplied by 10,000 for presentation purposes. Allof the control variables are discussed in Section 3.2.
Panel A. Target Announcement Returns
Dependent Variables Target CAR [-1,1] Target CAR [-2,2]
Dividend Differential
Stock OnlyOne is Payer -0.026** -0.059**
[-2.27] [-2.16]
One is Payer -0.011 -0.003[-0.51] [-0.12]
Stock OnlyDiff.DivYield -0.029** -0.045**
[-2.02] [-2.35]
Diff.DivYield -0.242
-0.322[-0.84] [-1.08]
Stock OnlyDiff.Div/Book -0.079 -0.509
[-1.08] [-0.85]
Diff.Div/Book -0.049 -0.041
[-0.52] [-0.44]
Stock Only -0.058*** -0.059*** -0.059*** -0.059*** -0.060*** -0.062***
[-3.55] [-3.70] [-3.71] [-3.50] [-3.73] [-3.85]
Acquirer Characteristicsln(Market Value) 0.019*** 0.019*** 0.019*** 0.021*** 0.021*** 0.021***
[4.08] [3.82] [3.85] [4.35] [4.20] [4.22]
Market/Book 0.008 0.008 0.008 0.007 0.007 0.007
[1.25] [1.25] [1.27] [1.15] [1.13] [1.13]
Leverage -0.071 -0.073* -0.072* -0.086* -0.086* -0.086*
[-1.64] [-1.67] [-1.65] [-1.96] [-1.95] [-1.94]
PPE/Book -0.018 -0.020 -0.019 -0.018 -0.018 -0.018
[-0.96] [-1.06] [-1.02] [-0.92] [-0.94] [-0.95]
Target CharacteristicsRelative Size -0.044*** -0.043*** -0.043*** -0.044*** -0.044*** -0.045***
[-3.19] [-3.12] [-3.14] [-3.16] [-3.15] [-3.23]
Institutional Ownership -0.120*** -0.123*** -0.122*** -0.136*** -0.138*** -0.137***
[-3.50] [-3.60] [-3.57] [-3.92] [-4.00] [-3.96]
Leverage -0.140*** -0.137*** -0.138*** -0.134*** -0.133*** -0.134***
[-4.14] [-4.10] [-4.12] [-3.95] [-3.96] [-3.99]
Stock Return Volatility 0.150*** 0.146*** 0.146*** 0.149*** 0.147*** 0.148***
[4.55] [4.51] [4.52] [4.56] [4.57] [4.59]
Market/Book -0.009 -0.009 -0.009 -0.007 -0.007 -0.007
[-1.47] [-1.50] [-1.49] [-1.15] [-1.16] [-1.15]Intercept 0.258*** 0.263*** 0.261*** 0.264*** 0.268*** 0.267***
[5.87] [5.87] [5.90] [5.77] [5.74] [5.80]
No. observations 1,022 1,022 1,022 1,022 1,022 1,022
F test 8.34 11.57 8.42 8.95 12.37 9.11P-value 0.000 0.000 0.000 0.000 0.000 0.000Adj. R2 0.117 0.116 0.116 0.123 0.123 0.228
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Panel B. Acquirer Announcement Returns
Dependent Variables Acquirer CAR [-1,1] Acquirer CAR [-2,2]
Dividend Differential
Stock OnlyOne is Payer -0.015** -0.019 *
[-2.23] [-1.68]
One is Payer 0.009 *** 0.016 **
[2.66] [2.20]
Stock OnlyDiff.DivYield -0.113 -0.168
[-0.98] [-1.51]
Diff.DivYield 0.126 0.041
[1.22] [0.43]
Stock OnlyDiff.Div/Book -0.008* -0.237 *
[-1.73] [-1.81]
Diff.Div/Book 0.060 0.045
[1.70] * [1.32]
Stock Only -0.015 ** -0.020 *** -0.019 *** -0.024 *** -0.029 *** -0.029 ***
[-2.41] [-3.53] [-3.30] [-3.64] [-4.67] [-4.59]
Acquirer Characteristics
ln(Market Value) 0.002 * 0.003 ** 0.003 * 0.002 0.003 * 0.003 *
[1.74] [1.97] [1.90] [1.07] [1.83] [1.73]
Market/Book -0.003 -0.004 -0.004 * -0.005 ** -0.005 ** -0.005 **
[-1.46] [-1.63] [-1.78] [-2.07] [-2.21] [-2.36]
Leverage 0.009 0.010 0.009 0.007 0.008 0.007
[0.65] [0.71] [0.62] [0.47] [0.55] [0.46]
PPE/Book 0.009 * 0.011 * 0.010 * 0.012 * 0.014 ** 0.012 *
[1.88] [1.93] [1.70] [1.77] [2.13] [1.91]
Target Characteristics
Relative Size -0.011 ** -0.013 *** -0.013 *** -0.010 * -0.012 ** -0.012 **
[-2.54] [-3.07] [-3.00] [-1.91] [-2.23] [-2.28]
Institutional Ownership -0.016 ** -0.015 ** -0.016 ** -0.020 * -0.019 * -0.019 *
[1.98] [-2.47] [-2.49] [-1.81] [-1.75] [-1.73]
Leverage 0.010 0.006 0.007 0.010 0.007 0.008
[0.96] [0.60] [0.65] [0.92] [0.67] [0.70]
Stock Return Volatility 0.011 * 0.014 ** 0.013 * 0.006 0.008 * 0.008
[1.77] [2.34] [1.68] [1.24] [1.86] [1.45]
Market/Book 0.002 0.003 0.003 0.003 0.003 0.003
[0.96] [1.15] [1.14] [1.38] [1.58] [1.57]
Intercept -0.035 * -0.041 ** -0.038 ** -0.026 -0.031 * -0.028
[-1.90] [-2.21] [-2.11] [-1.42] [-1.67] [-1.56]
No. observations 1,022 1,022 1,022 1,022 1,022 1,022
F test 5.57 5.95 4.92 4.96 4.34 4.09
P-value 0.000 0.000 0.000 0.000 0.000 0.000
Adj. R2 0.056 0.051 0.049 0.063 0.059 0.059
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Table 7. Two-Stage Analysis of Announcement Returns
This table reports the results of two-stage least squares (2SLS) regressions that test the determinants of takeover announcement returns
of both target and acquiring firms. The two-step approach when the interaction term is an endogenous variable is discussed in Section2.3. In Panel A, One is Payeris used as the measure of dividend differential, whileDiff.DivYieldandDiff.Div/Bookare used in Panel
B and Panel C, respectively. These measures are discussed in Section 2.2. The t-statistics based on robust standard errors are reported
in parentheses below coefficient values. The symbols ***, **, and * represent statistical significance at the 1%, 5%, and 10% level,
respectively. Coefficients onRelative Size have been multiplied by 10,000 for presentation purposes. All of the control variables arediscussed in Section 3.2.
Panel A. One is Payeras a Measure of Dividend Differential
1st stage regressions 2nd stage regressions
%Stock* Target CARs Acquirer CARsDependent Variables %Stock One is Payer [-1,1] [-2,2] [-1,1] [-2,2]
Dividend Differential
%StockOne is Payer -0.012** -0.033* -0.008* -0.007
[-2.02] [-1.78] [-1.88] [-1.65]
%Stock -0.133*** -0.138*** -0.060*** -0.070***
[-3.20] [-3.26] [-3.96] [-4.45]One is Payer (1) -0.062* -0.084*** -0.020 -0.020 0.005 0.002
[-1.71] [-3.35] [-0.57] [-0.59] [0.53] [0.19]
Acquirer Characteristicsln(Market Value) -0.038*** -0.018*** 0.015*** 0.017*** 0.000 0.000
[-5.42] [-4.41] [3.00] [3.34] [0.12] [-0.09]
Market/Book -0.001 0.004 0.009 0.008 -0.003 -0.004*
[-0.13] [0.76] [1.46] [1.31] [-1.28] [-1.82]Leverage -0.014 0.010 -0.064 -0.080* 0.011 0.010
[-0.25] [0.43] [-1.49] [-1.83] [0.78] [0.65]
PPE/Book -0.040 -0.011 -0.026 -0.025 0.005 0.008
[-1.30] [-0.65] [-1.36] [-1.29] [0.85] [1.18]Target Characteristics
Relative Size 0.135*** 0.042*** -0.025* -0.026* -0.002 -0.001
[5.72] [3.25] [-1.67] [-1.68] [-0.45] [-0.14]Institutional Ownership -0.029 0.044* -0.129
*** -0.146*** -0.023** -0.026**
[-0.62] [1.68] [-3.71] [-4.17] [-2.18] [-2.39]Leverage 0.147*** 0.064*** -0.113*** -0.108*** 0.021* 0.023*
[3.00] [2.70] [-3.27] [-3.12] [1.93] [1.92]
Stock Return Volatility -0.159*** -0.014 0.135*** 0.134*** 0.003 -0.002[-3.25] [-0.59] [3.98] [3.99] [0.29] [-0.22]
Market/Book 0.024*** -0.001 -0.008 -0.006 0.003 0.004
[3.18] [-0.17] [-1.25] [-0.93] [1.18] [1.53]
Instrumental VariablesAverage Acquirer 0.502*** 0.004
Industry %Stock (2) [5.69] [0.40]
Average Target 0.499*** -0.028**Industry %Stock (3) [5.66] [-2.19]
(1) (2) -0.016 0.447***[-0.10] [3.40]
(1) (3) 0.073 0.672***
[0.50] [5.87]Intercept 0.260*** 0.082** 0.326*** 0.334*** -0.001 0.010
[3.62] [2.56] [6.52] [6.47] [-0.04] [0.53]
No. observations 1,022 1,022 1,022 1,022 1,022 1,022
F test 88.34 29.29 8.50 9.13 5.80 5.52
P-value 0.000 0.000 0.000 0.000 0.000 0.000Adj. R2 0.372 0.561 11.890 12.420 0.069 0.071
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Panel B.Diff.DivYieldas a Measure of Dividend Differential
1st stage regressions 2nd stage regressions
%Stock* Target CARs Acquirer CARs
Dependent Variables %Stock Diff.DivYield [-1,1] [-2,2] [-1,1] [-2,2]
Dividends Differences
%StockDiff.DivYield -0.327** -0.260** -0.007 -0.016
[-2.31] [-2.08] [-1.32] [-1.07]
%Stock -0.129*** -0.130*** -0.062*** -0.071***
[-3.42] [-3.40] [-4.94] [-5.47]
Diff.DivYield (1) -0.514 -0.157*** -0.126 -0.205 0.092 -0.024
[-0.69] [-4.58] [-0.36] [-0.56] [0.90] [-0.21]
Acquirer Characteristics
ln(Market Value) -0.041*** 0.000** 0.014*** 0.015*** 0.001 0.000
[-6.03] [-2.15] [2.71] [3.06] [0.29] [-0.02]
Market/Book -0.001 0.000 0.009 0.008 -0.003 -0.004*
[-0.11] [1.11] [1.45] [1.32] [-1.27] [-1.81]
Leverage -0.019 -0.001 -0.069 -0.082* 0.012 0.010
[-0.32] [-0.63] [-1.59] [-1.86] [0.84] [0.71]
PPE/Book -0.044 0.000 -0.030 -0.028 0.006 0.008
[-1.45] [0.10] [-1.53] [-1.40] [1.01] [1.30]
Target Characteristics
Relative Size 0.140*** 0.001*** -0.023 -0.024 -0.003 -0.001
[5.80] [2.72] [-1.57] [-1.61] [-0.52] [-0.16]
Institutional Ownership -0.035*** -0.001 -0.133*** -0.148*** -0.022** -0.026**
[-2.75] [-1.32] [-3.84] [-4.24] [-2.12] [-2.36]
Leverage 0.154*** 0.000 -0.110*** -0.106*** 0.020* 0.022*
[3.12] [-0.41] [-3.18] [-3.05] [1.85] [1.90]
Stock Return Volatility -0.171*** 0.000 0.129*** 0.130*** 0.004 -0.001
[-3.56] [-0.18] [3.82] [3.90] [0.42] [-0.15]
Market/Book 0.024*** 0.000 -0.008 -0.007 0.003 0.004
[3.08] [-0.69] [-1.33] [-1.01] [1.25] [1.59]
Instrumental Variables
Average Acquirer 0.516*** -0.001
Industry %Stock (2) [6.80] [-0.61]
Average Target 0.511*** -0.001
Industry %Stock (3) [6.78] [-1.48]
(1) (2) -2.623 0.466**
[-0.98] [2.56]
(1) (3) 2.525 1.044***
[1.02] [3.18]
Intercept 0.266*** 0.002** 0.333*** 0.338*** -0.002 0.009
[3.71] [2.54] [6.51] [6.42] [-0.12] [0.46]
No. observations 1,022 1,022 1,022 1,022 1,022 1,022
F test 84.17 19.74 9.02 9.70 6.48 5.57
P-value 0.000 0.000 0.000 0.000 0.000 0.000
Adj. R2 0.371 0.857 0.118 0.125 0.069 0.070
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Panel C.Diff.Div/Bookas a Measure of Dividend Differential
1st stage regressions 2nd stage regressions
%Stock* Target CARs Acquirer CARs
Dependent Variables %Stock Diff.Div/Book [-1,1] [-2,2] [-1,1] [-2,2]Dividend Differential
%StockDiff.Div/Book -0.365 -0.286 -0.001 -0.006
[-1.40] [-1.22] [-1.01] [-1.35]
%Stock -0.128*** -0.130*** -0.061*** -0.070***
[-3.42] [-3.42] [-4.79] [-5.34]
Diff.Div/Book (1) 0.015 0.028 0.020 0.016 0.033 0.003
[0.05] [0.28] [0.07] [0.06] [0.50] [0.04]
Acquirer Characteristics
ln(Market Value) -0.041*** 0.000*** 0.014*** 0.016*** 0.000 0.000
[-5.96] [-2.62] [2.76] [3.11] [0.25] [-0.04]
Market/Book 0.000 0.000 0.009 0.009 -0.003 -0.004*
[0.06] [-0.90] [1.51] [1.37] [-1.35] [-1.86]
Leverage -0.017 -0.002 -0.068 -0.082* 0.011 0.010
[-0.30] [-1.10] [-1.55] [-1.83] [0.79] [0.66]
PPE/Book -0.042 0.000 -0.028 -0.027 0.005 0.008
[-1.33] [-0.25] [-1.43] [-1.33] [0.90] [1.21]
Target Characteristics
Relative Size 0.139*** 0.002*** -0.023 -0.024 -0.002 -0.001
[5.84] [3.33] [-1.55] [-1.59] [-0.50] [-0.17]
Institutional Ownership -0.033 0.000 -0.132*** -0.147*** -0.022** -0.026**
[-0.72] [-0.08] [-3.82] [-4.22] [-2.14] [-2.36]
Leverage 0.153*** 0.003** -0.110*** -0.106*** 0.020* 0.022*
[3.11] [2.08] [-3.18] [-3.05] [1.88] [1.91]
Stock Return Volatility -0.169*** -0.002** 0.129*** 0.130*** 0.004 -0.001
[-3.51] [-2.05] [3.83] [3.91] [0.40] [-0.15]Market/Book 0.024*** 0.000 -0.008 -0.007 0.003 0.004
[3.07] [-0.45] [-1.34] [-1.01] [1.24] [1.59]
Instrumental Variables
Average Acquirer 0.542*** 0.006**
Industry %Stock (2) [6.62] [2.01]
Average Target 0.490*** -0.005*
Industry %Stock (3) [5.96] [-1.78]
(1) (2) -3.144 0.226***
[-1.24] [2.67]
(1) (3) 2.488 1.016***
[1.08] [3.63]
Intercept 0.255*** 0.003 0.330*** 0.334*** -0.001 0.010
[3.59] [1.10] [6.50] [6.42] [-0.05] [0.50]
No. observations 1,022 1,022 1,022 1,022 1,022 1,022
F test 88.41 106.26 8.60 9.27 5.61 5.26
P-value 0.000 0.000 0.000 0.000 0.000 0.000
Adj. R2 0.372 0.819 0.119 0.124 0.068 0.070