When does paying with stock beat paying with cash?

Paying with stock beats paying with cash when your shares are priced at or above their value, cash or debt is scarce, and the seller wants the upside. As of October 2026, the best recent evidence is a study of more than 6,000 U.S. IPO registrations (1990 to 2024) by Davidson Heath and Christopher Mace. It found that among newly public firms, stock payers trailed cash payers by 20 to 30 percentage points over three to five years. That gap is an average for newly public firms, not a rule for every acquirer.

When does paying with stock beat paying with cash?

Stock tends to win in four situations. It tends to lose in one.

Your shares are priced at or above what you think they are worth. You hand over less real value per dollar of purchase price.
Cash or debt is scarce. A small holding company often cannot borrow the full price. Shares do not need a lender.
The seller wants the upside. A seller who believes in the combined company may accept shares, and some sellers want tax deferral. See can a seller defer taxes by taking stock.
You want the seller to stay aligned. A seller who holds shares takes part in the outcome. See how you pay a seller with stock instead of cash.
It loses when your shares are cheap. Shares sold below their worth cost your existing holders more than the headline price.

The test is the price of your shares against their value, not stock against cash in the abstract.

What does the research say?

Three sources are worth knowing. Read each for what it measured.

Heath and Mace, "Stock as Currency." As summarized by the CLS Blue Sky Blog (Heath and Mace, July 14, 2026), the study covers more than 6,000 U.S. IPO registrations from 1990 to 2024. Completing an IPO raised the yearly chance of making an acquisition by about 12 percentage points. Nearly three-quarters of the extra deals were paid at least partly in stock, while all-cash deals barely changed. Among newly public firms, those that paid in stock trailed those that paid in cash by 20 to 30 percentage points over three to five years, and were 50 percent more likely to be delisted for poor performance.
Loughran and Vijh (1997). Per the Loughran and Vijh (1997) abstract, RePEc, the study looked at 947 acquisitions from 1970 to 1989. Over five years, acquirers that completed stock mergers had excess returns of about -25.0 percent. Acquirers that completed cash tender offers had about +61.7 percent.
Berkshire's rule. The Berkshire Hathaway 1983 shareholder letter says Berkshire prefers cash and will issue stock only when it receives as much business value as it gives.

What do these studies not show?

Read the limits before you quote them.

The 20 to 30 point gap is for newly public firms, not all acquirers. The study's design uses industry stock returns while firms wait to complete their IPOs.
The result is an average. It does not say a particular stock deal fails or that a cash deal succeeds.
The Loughran and Vijh sample ends in 1989. It is not a study of small holding companies.
Both studies center on what happened to acquirer shares. The Loughran and Vijh abstract adds that target shareholders who kept the acquirer's stock after stock mergers did not earn significantly positive excess returns over the full period. The CLS summary does not report what sellers received.

My view is that the research supports caution, not a ban. Stock-paid deals struggle when the stock was the cheapest way to say yes to a high price.

What does the cost difference look like in numbers?

Assumptions. A target is bought for $8,000,000. The acquirer's shares trade at $10.00. The deal is paid entirely in shares, so the acquirer issues 8,000,000 / 10 = 800,000 shares. The three cases differ only in what a share is really worth.

Shares worth $14.00 (undervalued): the 800,000 shares are worth 800,000 x 14 = $11,200,000. The real cost is 11.2 / 8 = 1.4 times the price, or 40 percent more.
Shares worth $10.00 (fairly valued): the real cost is $8,000,000, the same as cash.
Shares worth $7.00 (overvalued): the real cost is 800,000 x 7 = $5,600,000, which is 5.6 / 8 = 0.7 times the price, or 30 percent less.

You rarely know the true worth of your shares. That is why valuing your own stock comes before the decision.

How does the form of payment affect the seller?

Under the Treasury regulation on continuity of interest, a target owner must keep a substantial part of the value in the buyer's stock for a deal to be treated as a tax-deferred reorganization. The regulation gives no single percentage in its text, but its examples treat a deal with 40 percent stock as preserving continuity and deals with 25 percent or less as not preserving it. A deal that falls short generally does not qualify as a tax-deferred reorganization. This is a question for the seller's tax advisor.

Where these numbers come from: The study of IPO registrations is from the CLS Blue Sky Blog (Heath and Mace, July 14, 2026). Loughran and Vijh are from the Loughran and Vijh (1997) abstract, RePEc. Berkshire's stance is from its Berkshire Hathaway 1983 shareholder letter. The continuity-of-interest examples are from 26 CFR 1.368-1 (Cornell LII copy). The $8,000,000 price, the $10.00 share price and the three value cases are assumptions. Confirm tax treatment with a tax advisor.

What comes next

To test whether your own shares are a fair price to pay, see how you value your own stock when using it to buy a company.

Meraki Dealmakers is a service of Meraki Partners, LLC, an advisory firm. It is not a broker-dealer, investment adviser, business broker, law firm or accounting firm. This article is general information, not legal, tax or investment advice.

When does paying with stock beat paying with cash?