The use of contingent value rights in M&A : an empirical review

Abstract

This paper contributes to the literature on payment methods in Mergers and Acquisitions (M&A). It seeks to establish how the use of Contingent Value Rights (CVRs) in M&A affect the probability of deal completion following a bid announcement. Further, the paper provides answers on how the stock market reacts to bidders’ issuing CVRs as part of their deal consideration package by estimating the bidders’ cumulative abnormal returns (BCAR). It also presents a general definition of a CVR that acknowledges that there exist two main categories of the instrument. Namely, event-driven CVRs and performance CVRs. By utilizing more than 1,800 U.S. transactions, including 41 observed CVRs, we find robust evidence in favour of that CVRs have a significant positive impact on the probability of deal completion in M&A. More precisely, we run Probit regressions on matched sub-samples and estimate that the marginal probability increase on deal completion when using CVRs are 13.9% to 22.1%. BCAR is estimated using a market model. We find consistent evidence across all our regressions that indicates a negative relationship between BCAR and the use of CVRs. Moreover, the final matched sample regression shows that the issuance of event-driven CVRs have a negative, and statistically significant, effect of 5.08 percentage points on BCAR. To our knowledge, this paper is the first contribution on both how CVRs affect the deal completion probability, how event-driven CVRs affect BCAR, as well as to be presenting the first general definition of a CVR.