The liquidity and trading activity effects of acquisition payment methods: evidence from the announcements of private firms' acquisitions

Eleonora Monaco*, Gbenga Ibikunle, Riccardo Palumbo, Zeyu Zhang

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

Abstract

We investigate how the liquidity and trading activity effects of the announcement of the acquisition of private targets vary by payment method. We find significant increases in trading activity around acquisition announcement dates irrespective of the payment method used; however, fluctuations are lower for acquisitions financed by earnouts and cash. Similarly, the stocks of acquirers using cash and earnouts are also less affected by a general loss of liquidity that accompanies announcements. We show that these effects are explained by the interpretation of cash acquisition by the market as an option used when acquirers perceive no risk of being adversely selected, and the potential of earnout as an adverse selection risk reduction tool.
Original languageEnglish
Article number102187
Pages (from-to)1-22
Number of pages22
JournalInternational Review of Financial Analysis
Volume82
DOIs
Publication statusPublished - Jul 2022

Keywords

  • Acquisition announcements
  • Earnout financing
  • Information asymmetry
  • Liquidity
  • Payment methods

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