Impact of industry characteristics on the method of payment in mergers

Most research that attempts to explain the method of payment used in mergers focuses on firm-specific characteristics, but ignores the influence of industry characteristics. We investigate how industry factors influence the method of payment decision in mergers (as measured by proportion of stock financing) and report two major findings. First, we find little support for the contention of the overvaluation hypothesis that stock financing rises during merger waves. The influence of the merger wave is conditioned on industry characteristics that are occurring during the wave. Second, the influence of firm characteristics on the method of payment varies with industry conditions. For example, the association between the bidder's free cash flow level or financial leverage and the method of payment is dependent on the prevailing growth in the corresponding industry. Overall, our findings are more consistent with the neoclassical rather than the overvaluation hypothesis.

► We investigate how industry characteristics influence the sources of merger financing across industries and over time. ► There is considerable variation across industries regarding the impact of levels of free cash flow, financial leverage, equity overvaluation, and target value information asymmetry, on the method of payment. ► Our analysis shows that the influence of the merger wave on the proportion of stock financing of mergers is conditioned on industry characteristics during the wave. ► We find little support for the prediction of the overvaluation hypothesis that the method of payment in a merger wave should be overwhelmingly that of stock.