Financing methods and the acquirer’s stock performance of Nairobi Securities Exchange-listed firms

Abstract

The method of financing mergers and acquisitions is an important part of capital structure decisions. Mergers and acquisitions can either be cash-funded, equity-funded, or both. The purpose of this study was to examine the impact of financing methods on the stock performance of mergers and acquisitions (M&A) among firms listed on the Nairobi Securities Exchange (NSE). Specifically, the study aimed to assess how cash, equity, and mixed financing methods influence cumulative abnormal returns (CAR) following M&A announcements. Grounded in theories such as Agency Theory, Efficient market Hypothesis and Synergy Theory, the research explored the dynamics of capital structure decisions and their implications for shareholder value. The methodology employed included an event study approach, analyzing a sample of nine companies involved in M&A transactions between 2013 and 2020. Data was collected from the NSE and other public sources, and statistical analysis was conducted using SPSS and Excel. The findings revealed that firms utilizing equity and mixed financing methods generally produce statistically significant positive abnormal returns compared to those relying solely on cash financing. This suggests that market participants may perceive equity and mixed financing as more favorable due to potential synergies. The study concluded that the choice of financing method significantly affects stock performance in M&A contexts, emphasizing the importance of strategic decision-making for corporate financial managers and investors. The implications of these findings highlight the need for firms to carefully evaluate their financing options in M&A transactions to enhance shareholder value and optimize financial outcomes. The study is of significance to practitioners as pertains better evaluation of the impact of alternative financing options on valuation. The study revealed valuable insights into the impact of financing methods on the stock performance of NSE-listed companies but was limited by its reliance on secondary data’s potential reporting biases, and a restricted time frame that may have excluded long-term trends and unaccounted external variables.