Product market advertising effects on the method of payment in M&A

Abstract

Purpose

Prior literature suggests that managers have an incentive to increase stock prices prior to stock‐based acquisitions. This article aims to examine if there is any relationship between product market advertising and method of payments in mergers.

Design/methodology/approach

To examine the hypotheses the paper uses ordinary least squares (OLS) regressions and regressions based on a propensity score matching approach, which controls for the possibility that differences in firm characteristics are driving the results.

Findings

The paper finds that managers of firms that use stock to finance bids increase advertising intensity in the pre‐merger period and find that advertising is high prior to stock‐based mergers, relative to that of cash‐based acquirers. It also finds that managerial ownership in stock based acquiring firms is positively related to pre‐merger advertising intensity.

Research limitations/implications

Although this paper examines whether stock‐based acquirers increase their advertising intensity in the pre‐merger period to gain economic benefit it does not discuss in detail through which mechanism advertising affects stock price.

Practical implications

The paper provides a new perspective on the relationship between product market advertising of the acquirer and the method of payment in mergers. The results shown in this paper may motivate investors of the target firms to re‐evaluate the acquirers offer if the medium of payment is acquirers own stock.

Originality/value

To the authors' knowledge this paper is the first to document the link between advertising prior to a merger and the method of payment used in that merger.

Citation

Devos, E., Elliott, W.B. and Karim, M.A. (2013), "Product market advertising effects on the method of payment in M&A", Managerial Finance, Vol. 39 No. 4, pp. 362-383. https://doi.org/10.1108/03074351311306184