Investor protection's effect on the method of payment in M&A : an empirical study on how the method of payment in corporate acquisitions is affected by the level of investor protection in the country of the acquiror

Abstract

When shareholders of target companies get paid with stock, they may face an increased risk of expropriation by becoming minority shareholders in a new company. Thus, when target shareholders receive bids from companies regulated by countries with weaker investor protection, their propensity to accept stock as part of considerations will be lower. To test this intuitive prediction, we look at acquisitions by companies from 38 countries with varying degrees of investor protection. The results show a positive relationship between investor protection and the fraction of stock in the method of payment in acquisitions. Furthermore, cross-border transactions amplify this effect.