The Choice of Stock Over Cash Payments in Mergers and Acquisitions: A Market-Failure Account and Empirical Evidence

Payments in mergers and acquisitions (M&As) can be all cash, all stock, or any combination of the two. However, using stock instead of cash in M&A payments has clear weaknesses that must be offset (e.g., valuation difficulty). In this study, we argue that stock payments can save on the costs of using the M&A market, which serves to compensate the inherent weaknesses of stock deals. Our empirical findings confirm that stock should account for a greater percentage of the payment in M&As that feature higher transaction costs. The market-failure account for stock payments that we offer contributes to the M&A literatures in both finance and management.