Empirical Study On Determinants And Valuation Effect Of M&A Payment Methods In China

Stock payment of M&A in China has sprung up since2005, when the Split Share Structure Reform began. Yet most empirical study has not caught this new development in Chinese takeover market. This paper empirically studies on the determinants and evaluation effect of M&A payment methods chosen by Chinese listed companies, especially stock payment, which is rare before2005.We examine a sample of685transactions in Chinese takeover market from2006to2010using multinomial logistic regression model and event study methodology.The determinants of payment methods in M&A can be best explained by cost of capital, risk sharing and outside monitoring theories. Bidders with lower financial leverage, higher cash to transaction value ratio, and low Tobin’s q are more likely to use cash payment. M&A with higher relative transaction value are more likely to involve equity payment to share risk and stock with lower beta is more welcomed as payment currency. Bidders with higher ownership of institutional investors are able to identify payment method with higher returns.M&A with different payment methods have different valuation effects on acquiring companies. Acquisitions involving stock payment have much larger positive valuation effect than cash or asset offers in short-term. Cash payment and asset payment don’t create value for bidder’s shareholders, nor do they damage enterprise value.