Impact of industry characteristics on the method of payment in mergers

Most research that attempts to explain the method of payment used in mergers focuses on firm-specific characteristics, but ignores the influence of industry characteristics. We investigate how industry factors influence the method of payment decision in mergers (as measured by proportion of stock financing) and report two major findings. First, we find little support for the contention of the overvaluation hypothesis that stock financing rises during merger waves. The influence of the merger wave is conditioned on industry characteristics that are occurring during the wave. Second, the influence of firm characteristics on the method of payment varies with industry conditions. For example, the association between the bidder's free cash flow level or financial leverage and the method of payment is dependent on the prevailing growth in the corresponding industry. Overall, our findings are more consistent with the neoclassical rather than the overvaluation hypothesis.