We examine how stock liquidity affects acquisitions. We hypothesize that liquidity enhances acquirer
stock as an acquisition currency, especially when the target is relatively less liquid. As hypothesized,
more liquid firms are more likely to make acquisitions and the difference in stock liquidity between
acquirer and target firms increases payment with stock, reduces acquisition premiums, and improves
acquirer announcement returns in equity deals. To exploit benefits of liquidity, firms take steps to
improve stock liquidity prior to stock acquisitions. Our empirical identification relies on policy
initiatives that exogenously increase stock liquidity.
Mergers and Acquisitions