The effect of financing costs on the payment method in European M&A

This thesis aims to determine to what extend financing costs influence the payment method of mergers & acquisitions (M&A) in Europe. This study contributes to the literature by examining how macro-economic factors impact the payment method in M&A. Evidence indicates that lower interest rates stimulate cash payments in M&A financing decisions. Furthermore, the cost of equity relative to debt decreases when the economy grows, resulting in a preference for stock payment when GDP growth rate increases. In cross-border (foreign) acquisitions the interest rates seem to have less effect on cash payments. For GDP growth rate the negative correlation becomes stronger, indicating the likelihood of cash payments decrease further in cross-border M&A. When economies grow the investment opportunities decrease, forcing companies to look for riskier foreign investment opportunities. Hence, decrease the preference to pay with cash in M&A. The results show that differences in the costs of capital caused by both micro- and macro-level factors create a preference ranking over financing sources. This indicates the pecking order theory is also applicable to the payment method in M&A.