Dissecting Bidder Security Returns on Payment Methods

The choice of payment methods in M&A deals can affect bidder stock and bond value through two channels simultaneously: signaling and wealth transfer. We propose a method to disentangle these two effects by combining observed bidder stock and bond abnormal returns around deal announcements. Our findings indicate that the negative average bidder stock return in stock deals is mostly caused by signaling, and the negative average bidder bond return in cash deals is mostly due to wealth transfer. We also hypothesize that signaling is related to bidder information uncertainty, while wealth transfer is related to deal significance and bidder default risk. Cross-sectional analysis supports our conjecture