Stock Acquisitions, Investor Recognition, and Announcement Returns

We examine how using stock as the method of payment affects a bidder’s investor base and investor recognition, and the bidder announcement return. We hypothesize that relative to a cash acquisition, a stock acquisition would increase the bidder’s investor base and lower Merton’s (1987) shadow cost, which in turn contributes positively to the bidder announcement return. Our results support this hypothesis and suggest that the less established bidders acquiring private targets in particular benefit from the shadow cost reduction. These findings also provide a complementary explanation for the documented positive bidder returns when bidders use stocks to acquire private targets.