Bidder opportunism, familiarity, and the M&A payment choice

A familiarity bias of target shareholders allows bidders to opportunistically choose the payment method in mergers and acquisitions. We employ the Stambaugh, Yu and Yuan (2015) mispricing score to identify overvalued bidders, reconfirming that overvaluation is a central driver of the payment choice. Using an instrumental variable based on exogenous price pressure, we provide causal evidence for bidder opportunism. Further analyses show that target shareholders more familiar with the bidder are more likely to accept equity despite particularly adverse market reactions. Our results suggest that behavioral biases of shareholders contribute to the transmission of stock market inefficiencies to the market for corporate control.