Stock payment and the effects of institutional and cultural differences: A study of shareholder value creation in cross-border M&As

Recognizing that cross-border mergers and acquisitions (M&As) are not alike in terms of how the payment method is structured, this paper investigates the role of stock payment that results in ownership sharing with foreign targets. Based on our empirical analysis using a sample of 4720 cross-border M&A deals during 1997-2012, we find that stock payment in cross-border M&As has a detrimental effect on shareholder value because of the negative signaling effect. We further show that stock payment can be beneficial when a foreign target located in a weaker institutional environment and when the cultural distance is larger. This implies that stock payment can be beneficial in deals with particularly large information asymmetry and agency problem. Upon the completion of a cross-border M&A, the acquirer and foreign target will form a new principal-agent relationship and our findings propose that stock payment can serve as an effective incentive mechanism that aligns the goals of the acquirer and target.