International Relations and M&A Deals: the Effect of International Sentiments on the Payment Method Choice

This paper focuses on the importance of bilateral international sentiments for the firm’s strategic bidding behavior in terms of cross-border M&A deals. In particular, I study the effect of sentiments on the choice of the payment method. Using the sample of 2807 cross-border M&A deals from 1990 to 2008 this research finds significant robust evidence in favor of positive correlation between target-acquirer political sentiments and the probability of using cash or close to cash payment methods. This result indicates that the mechanisms affecting the preference towards cash prevail over those that make target and acquirer choose stock payment instead. The acquirer-target sentiments significantly increase the probability of cash payment while decreasing the probability of toehold use in main analysis. Since a toehold strategy indicator is a dummy variable with two reference categories, cash and stocks, the negative sign can imply two results. First, once the acquirer-target sentiments grow, the proportion of cash in the payment mixture increases by such amount, so that the deal is totally financed in cash. Second, the proportion of stocks in the payment mixture increases by such amount, so that it exceeds the maximum of 5% and the payment method is not a toehold strategy anymore (proportion of cash for the deal take less than 95%). Moreover, in the robustness checks and supplementary analysis section the acquirer-target sentiments sometimes change significance indicating that the effect depends on the assumptions around the framework in which the bidding strategy decision is made. Overall, the results highlight the importance of separating the sentiments directions. Some of the results outlined in previous studies (e.g., Bertrand et al., 2014) may change once the analysis framework changes.