Acquirer's earnings quality and the choice of payment method in mergers and acquisitions

Purpose – The purpose of this paper is to investigate the role of acquirer's earnings quality on the choice of payment method in mergers and acquisitions (M&A). Design/methodology/approach – The paper applies a simultaneous equations model to address the concern of endogeneity between earnings quality and payment method in corporate acquisitions. In addition, a propensity score matching model is used for robustness purpose. Findings – Previous studies imply that short-term accruals have a significant impact on the choice of payment method in M&A. In this study, This paper shows that acquisition financing is not significantly affected by short-term earnings quality once control variables are considered. Instead, this paper finds that it is the long-term earnings quality of the acquirer that matters. Acquiring firms with poor (good) long-term earnings quality prefer lower (higher) cash payment in acquisitions. Their results are robust to different definitions of earnings quality. Research limitations/implications – Researchers should consider the effect of long-term earnings quality in their future investigations. Practical implications – Investors should be aware of this issue when evaluating corporate mergers. Originality/value – This is the first study to examine the impact of long-term quality of earnings on the choice of payment method in M&A.