Overlapping Insiders and the Method of Payment in Acquisitions: New Tests and Evidence on Adverse Selection

We exploit an interesting setting of overlapping insiders between acquirers and targets in India to conduct direct tests of adverse selection in stock-financed acquisitions. Using a novel dataset, we find that cash-financed deals generate greater value for acquiring firms’ shareholders relative to stock-financed ones only when insiders are non-overlapping between acquiring and target firms. The underperformance of stock-financed deals relative to cash-financed ones in the case of non-overlapping insiders is consistent with the adverse selection effects of stock issues. Further, stock-financed deals with overlapping insiders outperform those without them. This result is consistent with the explanation that the presence of overlapping insiders on both sides of the deal mitigates the adverse selection in stock-financed acquisitions due to symmetric information between transacting parties. Our results are robust to sample selection bias and several robustness checks.