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Does Short-Selling Potential Influence Mergers and Acquisitions Payment Choice?

Announcements of stock-financed mergers and acquisitions (M&As) may attract short selling of bidder shares by merger arbitrageurs. We hypothesize that bidders that face higher short-selling potential (SSP) include a higher proportion of cash in their M&A payments in order to reduce the negative price pressure resulting from merger arbitrage short sales. Consistent with this prediction, we find a positive impact of the ex-ante lending supply of bidder shares on the percentage of cash in M&A payments. Our M&A payment choice model controls for a wide range of M&A payment determinants. We corroborate our main result in subsequent tests, including a placebo analysis of bids for privately-held targets, a test of the moderating role of deal completion probability and merger arbitrage fund flows, and an analysis of bidders that switch payment methods. Our paper adds to a growing literature analyzing the interplay between corporate finance decisions and investor trades.