Expected market reaction and the choice of method of payment for acquistions

We hypothesize that a bidder's managers forecast the market's reaction to t he announcement of an acquisition and choose the method of payment that the y expect to provide the higher abnormal return. We find that most bidders c hose the method of payment with the higher expected abnormal return althoug h this result was stronger among the acquisitions for cash. In addition, th e bidders that announced acquisitions for cash received actual abnormal ret urns that were higher than our estimate of what they expected if they annou nced an acquisition for stock. Our analysis reveals that the managers' choi ces were related to the effects of taxes and asymmetric information.