Financial decisions and market performance in Chinese mergers and acquisitions

We examine merger and acquisition (M&A) financing decisions of Chinese acquirers in the 2003-2017 period. Applying the sequential logit regression, we find that the threat of change in control structure, dilution of voting power, financial condition, and growth opportunities have a huge bearing on the acquirer’s financing decision. We find that after a decision has been made to pay for the M&A using cash, a large acquirer with growth opportunities and single controlling shareholder use internally generated funds relative to debt financing. An overvalued acquirer with huge cash reserves prefers to use debt financing. Relative to stock financing, a large acquirer with growth opportunities acquiring large targets prefers to use internally generated funds while a mature acquirer with huge cash reserves prefers stock financing relative to cash financing. We also find that markets react differently to various sources of financing acquisitions upon announcements. For pure cash transactions, stock financing has the highest returns and debt financing second with cash recording the lowest returns. The study demonstrates that the source of cash plays a significant role in influencing corporate managers financing decisions and market perceptions.