Put Your Money Where Your Mouth is : Treasury Shares as Currency

This paper examines the historical question of whether treasury shares and newly issued shares are equivalent by considering their use in stock based M&A transactions. We quantify the differential market response to M&A announcements when bidders have sufficient currency in the form of cash or treasury shares to execute the deal versus bidders with insufficient currency. We confirm prior findings of a nonnegative market reaction to cash mergers of public targets and determine that this finding holds irrespective of the sufficiency of their currency on hand. In addition, we find that the presence of sufficient currency at the date of a stock M&A announcement leads to a significantly more favorable market reaction for public targets. Our results demonstrate that the legal equivalency of treasury and newly issued shares does not extend to these forms of currencies being economically equivalent