The value of (stock) liquidity in the M&A market

We study the value of stock liquidity in the market for corporate control. We argue that the degree of liquidity of the target’s stock spreads to the combined firm. Public acquirers, especially the ones controlled by (short-term oriented) institutions, value the liquidity of the stock of the target as it preserves the possibility of liquidating their position swiftly and without adversely moving the price. We test this hypothesis on the US M&A market between 1987 and 2007 and show that acquiring a more liquid firm makes the stock of the acquirer more liquid. Acquiring a more liquid target firm also affects other characteristics associated with liquidity, increasing media presence, investor attention and reducing the cost of raising equity in subsequent SEOs. This induces public acquirers – and especially more liquid ones – to prefer more liquid targets to less liquid ones. It also translates into a higher probability of completion and higher compensation for the target. These effects are concentrated in acquirers with significant ownership by short-term institutional investors as well as private acquirers contemplating to go public.