Are stock-financed takeovers opportunistic?

Abstract

We find that the probability of all-stock financed takeovers increases with measures of bidder overvaluation. However, when we instrument the bidder's pricing error using aggregate mutual fund flows, the reverse happens: greater overvaluation reduces the all-stock financing propensity. Since shocks to aggregate fund flows are exogenous to the payment method choice - while directly impacting bidder pricing errors - this evidence strongly rejects the notion that all-stock financed takeovers are "market driven". Bidders paying with stock tend to be small, non-dividend paying growth companies with low leverage, that recently made a seasoned equity offering. We also show that all-stock financing is more likely in high-tech industries, when the target and bidder operate in highly complementary industries are geographically close - factors that suggest the target is relatively informed about true bidder value. Overall, the evidence does not suggest a particular role for market mispricing in driving all-stock financed takeovers.