Acquiring Firm Characteristics and the Medium of Exchange

An analysis of 35 cash mergers and 88 stock mergers shows that acquiring firms that use cash as the medium of exchange in a merger have different financial and operating characteristics than acquiring firms that use stock. Acquiring firms with large asset bases, low leverage, low return on assets, and high price/earnings ratios tend to exchange stock in order to acquire other companies while highly levered small firms with high return on assets prefer to use cash. Because the characteristics of acquiring firms differ across exchange mediums, research contrasting returns to shareholders based upon the medium of exchange must control for the underlying factors differentiating the firms in each group.