Earnouts as Payment Currency and Value Gains to Bidder Shareholders

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Chapter 2.3.1, Cash and Stock:
A broad literature has evolved analysing the impact of stock and cash as method of financing on bidder shareholder wealth. Travlos (1987) analyses takeover bids in the period of 1972 to 1981 and finds that bidder stockholders experience significant losses for stock-only bids but normal returns for cash financed bids at the takeover announcement. Moreover, Huang and Walking (1987) provide evidence for the years 1977 to 1983. In this sample period cash financed takeovers result in significantly and substantially higher abnormal returns than stock or mixed financed takeovers. Furthermore, Amihud et al. (1990), Martin (1996) and Ghosh and Ruland (1998)) study the US corporate takeover market in a sample period from 1978 to 1988 and come to similar conclusions. In addition, Eckbo et al. (1990) and Eckbo and Thorburn (2000) state that the average bidder announcement period abnormal stock return is lowest for stock-only deals, highest for cash-only deals, with mixed deals in between. The empirical evidence of negative abnormal return for stock financed takeover is consistent with the theory of the signaling effect of common stock, conveying negative information about overvaluation as discussed in chapter 2.2.1 (Faccio et al. (2006)). In contrast, Goergen and Renneboog (2004) find in their study on European takeovers that CARs in stock financed bids significantly surpass those in cash financed deals. This suggests that when competition in the market for corporate control is less intense the negative signaling effect of stock financing might be diluted.
However, results differ when target listing status is taken into account. Moeller et al. (2007) provide evidence that announcement period returns for public targets in the case of equity financing are negative, but positive for cash financing. Zero or positive bidder announcement returns are also found for stock financed acquisitions of private targets by Moeller et al. (2004),