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The liquidity and trading activity effects of acquisition payment methods: Evidence from the announcements of private firms' acquisitions

Eleonora Monaco, Gbenga Ibikunle, Riccardo Palumbo and Zeyu Zhang

International Review of Financial Analysis, 2022, vol. 82, issue C

Abstract: We investigate how the liquidity and trading activity effects of the announcement of the acquisition of private targets vary by payment method. We find significant increases in trading activity around acquisition announcement dates irrespective of the payment method used; however, fluctuations are lower for acquisitions financed by earnouts and cash. Similarly, the stocks of acquirers using cash and earnouts are also less affected by a general loss of liquidity that accompanies announcements. We show that these effects are explained by the interpretation of cash acquisition by the market as an option used when acquirers perceive no risk of being adversely selected, and the potential of earnout as an adverse selection risk reduction tool.

Keywords: Earnout financing; Information asymmetry; Acquisition announcements; Liquidity; Payment methods (search for similar items in EconPapers)
JEL-codes: G12 G14 G34 (search for similar items in EconPapers)
Date: 2022
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DOI: 10.1016/j.irfa.2022.102187

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