Effects of the Method of Payment and the Mode of Acquisition on Performance and Risk Metrics

We investigate post acquisition changes in risk characteristics as well as share and operating performance of U.S. firms involved in mergers that are paid for by stock, cash, and cash tender offers during 1975 to 1996. Our findings indicate that mergers, especially in conjunction with cash payments, are risk increasing transactions. Our analyses of post acquisition risk changes show an increase in equity risk for cash mergers over three years around the acquisitions. The full sample of mergers also shows an increase in the intrinsic business risk during the same period (controlling for method of payment does not change the results). There is a significant post acquisition decline in the degree of operating leverage for mergers. There is no change in risk and performance metrics following acquisitions that are by tender offer. However, debt-to-equity ratios rise for tender offers while liquidity and size decline following acquisitions. Finally, we find no evidence of risk adjusted post acquisition abnormal returns in our samples