Stock-Financed M&As of Newly Listed Firms

Newly listed firms are more and more active in Mergers and Acquisitions (M&As). The ‘stock as currency' motivation explains why firms use publicly traded stocks as acquisition currency after their Initial Public Offering (IPO). We extend its implications by focusing on the role played by stock liquidity, which entails potential benefits not only for prospective acquirers, but also for targets. We find that 16.3% of the population of 3,433 IPOs during 1995-2009 in the stock exchanges of the four largest European economies become acquirers within three years of the IPO, while 16.8% are targeted. Firms with more liquid stocks are more likely to become acquirers and, if so, complete a larger number of stock-financed acquisitions. At the same time, more liquid firms are also more likely to be acquired, and at higher valuations. Our firm-level findings, supported by time-series regressions, imply that firms should time their IPO decisions based on liquidity considerations in order to facilitate their subsequent M&A activity not only as acquirer, but also as target