Debt covenants and asset versus equity acquisitions

We examine whether the presence of loan covenants leads firms to choose either an asset or equity acquisitions. Asset acquisitions involve the selective purchase of a target company's assets, and equity acquisitions involve acquisitions of common stocks. We document that firms with loan covenants are more likely to engage in asset acquisitions as opposed to equity acquisitions. Our results are robust to alternative measures of loan covenants and to endogeneity concerns. Furthermore, the association between loan covenants and asset acquisitions is stronger among firms with greater debt covenant intensity, more severe agency problems, and lower profitability. Acquirers facing more intense competition within their industries are also likely to choose asset acquisitions. Our findings suggest that acquirers' incentives to avoid wealth transfer at the expense of debtholders drive the relation between debt covenants and choice of acquisition structure.     

Reputational concerns in the market for corporate control

This paper explores whether corporate acquirers consider environmental reputations when planning and structuring takeovers. We find that firms with an environmentally toxic reputation, which have the greatest potential for negative spillovers to their merger partners, have a lower associated probability of being both acquirers and targets. Acquirers are more likely to pair with similar reputation firms and are less likely to acquire firms with lower reputations. Most notably, green firms in our sample never acquire toxic firms. Acquirers that buy firms with differing environmental reputations use a higher percentage of stock in their acquisition offers. We further show that the returns to acquirers are lower when they acquire firms outside of their area. Collectively, these findings suggest that managers account for potential negative spillover effects in acquisition decisions.     

Fire sale acquisitions: Myth vs. reality

We provide empirical evidence on the conjecture that in economic crises, firms could be forced to sell at deep discounts, or fire sale prices. Using the conventional stock price near the announcement date, we find instead distressed firms in crisis periods receive a 30% higher offer premium than distressed firms in normal periods; they also receive a 34% higher premium than non-distressed firms in crisis periods. Acquirers also do not gain, at announcement and over the long-term. Acquirers, however, may perceive they realize fire sale discounts if the reference is the targets’ highest price in the previous 52 weeks.     

Gains from Mergers and Acquisitions Around the World: New Evidence

Using a global M&A data set, this paper provides evidence that the empirical observations relating public acquisitions to, at best, zero abnormal returns, and their stock-financed subset to negative abnormal returns for acquiring firms around the deal announcement are not unanimous across countries. Acquirers beyond the most competitive takeover markets (the United States, United Kingdom, and Canada) pay lower premia and realize gains, while share-for-share offers are at least non-value-destroying for their shareholders. In contrast, target shareholders within these markets gain significantly less, implying that the benefits generated are more evenly split between the involved parties.     

The effect of managers on M&As

In this paper, we document diverse levels of managerial ability and firm performance in the cross section of acquiring firms. Acquirers with strong managerial ability realize higher announcement-period abnormal returns and experience better post-merger firm performance than their low-ability counterparts. Our results are robust to endogeneity concerns and show that the observed variation in acquirer abnormal returns is attributed to the heterogeneity of managerial ability fixed effects across acquirers. Managerial ability adds value to acquirers, especially in stock-financed acquisitions, implying that the method of payment is not driving the negative stock-financed valuation effect documented in previous literature. Moreover, we find that target firms with strongly ingrained growth potential and low levels of financial constraint and bankruptcy risk are highly favored by skilled acquiring managers.     

Earnings management,audit adjustments,and the financing of corporate acquisitions: Evidence from China

Acquirers are motivated to overstate earnings prior to stock-financed acquisitions. We hypothesize that audits help to detect and correct such overstatements. We test this using a difference-in-differences design, which compares audit adjustments to earnings for stock-financed and cash-financed acquirers before versus after the acquisitions. Consistent with our hypothesis, we find larger downward adjustments in the audits immediately before stock-financed acquisitions. Further analysis of regulatory sanctions suggests the downward adjustments are in fact warranted, rather than auditors being overly conservative. Moreover, modifications in audit reports suggest that downward adjustments do not correct all of the reporting irregularities in audited financial statements.     

Does the Management's Forecast of Merger Synergies Explain the Premium Paid,the Method of Payment,and Merger Motives?

I study a sample of 336 mergers and acquisitions (M&A) deals to investigate the effect of managements’ estimate of synergy on the reservation price and the payment method. I find that synergy does not explain the premium paid implying that it may have been announced to induce shareholders to endorse the deal. Acquiring firms are more likely to overpay if they have low growth potential, while the target firm is large, has higher premerger operating performance, and high growth potential. Acquirers may be serving their own self‐interests as they are more likely to exceed their reservation price if they receive low compensation and if entrenchment provisions are in place. I also find that these acquisitions lead to postmerger shareholders’ wealth destruction, which is more pronounced when acquirers overpay. I document that the greater the synergy and the acquirer firm‐specific overvaluation, the higher the likelihood of settling the deal with more shares.     

The role of directors with related supply chain industry experience in corporate acquisition decisions

We examine the extent to which directors with supply chain experience (DSCs) on corporate boards create informational advantages that improve strategies and outcomes related to mergers and acquisitions (M&A). Our results suggest that DSCs play a dual role by motivating value-enhancing acquisitions while simultaneously deterring value-destroying ones. The nature and extent of these effects depend on such factors as the size of the acquiring firm and the level of uncertainty in its operating environment. Furthermore, we find that DSCs are positively associated with abnormal announcement returns. Acquirers with at least one DSC outperform their counterparts without DSCs by 3.1% during a three-day window around the announcement. Our results hold after we address endogeneity concerns using multiple methods. Finally, we show that acquirer board representation by DSCs is positively related to post-merger operating performance and negatively related to the premium paid for the target.     

Exploring the Double‐Sided Effect of Information Asymmetry and Uncertainty in Mergers and Acquisitions

We examine the joint effect of bidder and target information asymmetry and uncertainty on the payment consideration and subsequent wealth effects in a large sample of acquisitions with both listed and private targets. In line with a risk‐sharing argument, we find that acquisitions of targets characterized by higher uncertainty are more likely to be settled with stock. In contrast, higher target information asymmetry increases the likelihood of a cash payment, consistent with bidders strategically exploiting superior information. Acquirers of more opaque targets obtain a larger fraction of total acquisition gains and avoid sharing these gains with target shareholders by offering cash.     

Impact of Acquisitions on Thrift Performance

This study focuses on the risk and return performance of savings and loans that were active acquirers during the early and mid-eighties relative to that of non-acquirers. Acquirers took on more risks than nonacquirers, but were less profitable. Separating acquirers by the health of their acquisitions, acquirers of both healthy and troubled associations or of troubled associations only were more highly leveraged and saw their profitability erode over the post-acquisition period. These results suggest that the problems of integration are compounded when there are multiple acquisitions over a relatively short period of time and when the acquired association is unhealthy.     

Does carbon risk matter for corporate acquisition decisions?

In this study, we examine whether carbon risk matters in acquisitions. Using a firm's carbon emissions to proxy for carbon risk, we examine whether an acquirer's level of carbon emissions is related to the decision to engage in acquisitions and achieve subsequent acquisition returns. The results show that firms with higher emissions have an increased likelihood of acquiring foreign targets while, at the same time, having a decreased likelihood of acquiring domestic targets. Acquirers with large carbon footprints seek out targets in foreign countries that have low gross domestic product (GDP) or weak environmental, regulatory, or governance standards. We also examine the relationship between carbon emissions and announcement returns. We find that cross-border acquisition announcement returns are higher when acquirers with high carbon emissions acquire targets in countries with fewer regulations or weaker environmental standards. Focusing on the interplay of corporate social responsibility (CSR) and carbon emissions, we find that investors censure acquirers that promote CSR while also having high carbon emissions, thus resulting in worse abnormal returns. This is particularly the case if the target country is wealthy or has stronger country governance or strong environmental protection. Our findings add insight on the channels through which a focus on reducing carbon risk can add value for shareholders.     

The Young and the Restless: A Study of Age and Acquisition Propensity of CEOs of UK Firms

Using a large sample of CEOs of UK firms, we show that CEO age is a key determinant of acquisition activity. We find that younger CEOs are more likely to acquire another firm and spend more on large capital expenditures. We argue that while younger CEOs of both UK and US firms undertake more acquisitions than their older peers, their motivations for acquisitions might differ. We find that the stock market perceives acquisitions by younger CEOs to be of a higher quality. Following previous studies, we use CEO tenure as a proxy for reputation, and find that large acquisitions enhance CEO reputation, especially for younger CEOs. In contrast to the previous findings for CEOs of US firms, we determine that the compensation of CEOs in the UK does not increase after acquisitions. This absence of a compensation incentive for CEOs of UK firms is consistent with the idea that the UK compensation structure is more restrictive and has a smaller equity‐based component. Our evidence is also inconsistent with an overconfidence effect. Overall, our results provide consistent evidence of executive signaling by younger CEOs of UK firms eager to distinguish themselves.     

How do partial acquisitions affect the wealth of acquiring firms? The case of Japanese firms

This study examines how and why partial acquisitions affect the wealth of acquiring firms in Japan. Few studies have focused on acquiring firms in partial acquisitions, whereas many studies have investigated target firms. The empirical results show that the shareholder wealth of acquiring firms, which can increase through partial acquisitions, is much lower than that of target firms. In addition, acquiring firms and their targets differ in how they enhance their wealth from partial acquisitions—acquiring firms can enhance their wealth by exploiting the wealth of target firms, while target firms can enhance their wealth by obtaining support from acquiring firms.     

Stealth Acquisitions and Product Market Competition

We examine whether and how firms structure their merger and acquisition deals to avoid antitrust scrutiny. There are approximately 40% more mergers and acquisitions (M&As) than expected just below deal value thresholds that trigger antitrust review. These “stealth acquisitions” tend to involve financial and governance contract terms that afford greater scope for negotiating and assigning lower deal values. We also show that the equity values, gross margins, and product prices of acquiring firms and their competitors increase following such acquisitions. Our results suggest that acquirers manipulate M&As to avoid antitrust scrutiny, thereby benefiting their own shareholders but potentially harming other corporate stakeholders.     

International acquisitions and shareholder wealth Evidence from the Netherlands

In this article, we test wealth effects of international acquisitions using a sample of foreign acquisitions by Dutch firms during the period 1990–96. We find weak evidence that cross-border acquisitions are wealth-creating corporate activities, especially for acquisitions in the U.S. We observe further that for the West European acquisitions, benefits from internalization are larger for companies having relatively less international exposure and making acquisitions outside of their main activities.     

Corporate Acquisitions,Diversification, and the Firm's Life Cycle

Agency theories predict that older firms make value‐destroying acquisitions to benefit managers. Neoclassical theories predict instead that such firms make wealth‐increasing acquisitions to exploit underutilized assets. Using IPO cohorts, we establish that, while younger firms make more related and diversifying acquisitions than mature firms, the acquisition rate follows a U‐shape over firms’ life cycle. Consistent with neoclassical theories, we show that acquiring firms have better performance and growth opportunities and create wealth through acquisitions of nonpublic firms throughout their life. Consistent with agency theories, older firms experience negative stock price reactions for acquisitions of public firms.     

The Industry Life Cycle,Acquisitions and Investment: Does Firm Organization Matter?

We examine the effect of industry life‐cycle stages on within‐industry acquisitions and capital expenditures by conglomerates and single‐segment firms controlling for endogeneity of organizational form. We find greater differences in acquisitions than in capital expenditures, which are similar across organizational types. In particular, 36% of the growth recorded by conglomerate segments in growth industries comes from acquisitions, versus 9% for single‐segment firms. In growth industries, the effect of financial dependence on acquisitions and plant openings is mitigated for conglomerate firms. Plants acquired by conglomerate firms increase in productivity. The results suggest that organizational forms' comparative advantages differ across industry conditions.     

Managerial Ownership, the Method of Payment for Acquisitions, and Executive Job Retention

This study investigates how acquiring and target firm managers' preferences for control rights motivate the payment for corporate acquisitions. We expect that managers of target firms who value influence in combined firms will prefer to receive stock. One reason top managers desire influence is to enhance their chances of retaining jobs in the combined firm. Our analysis shows a strong, positive association between managerial ownership of target firms and the likelihood of acquisitions for stock. We also find that managers of target firms are more likely to retain jobs in combined firms when they receive stock rather than cash.     

Financial Structure,Acquisition Opportunities,and Firm Locations

This paper investigates the relation between firms' locations and their corporate finance decisions. We develop a model where being located within an industry cluster increases opportunities to make acquisitions, and to facilitate those acquisitions, firms within clusters maintain more financial slack. Consistent with our model we find that firms located within industry clusters make more acquisitions, and have lower debt ratios and larger cash balances than their industry peers located outside clusters. We also document that firms in high‐tech cities and growing cities maintain more financial slack. Overall, the evidence suggests that growth opportunities influence firms' financial decisions.     

Do CEOs gain more in foreign acquisitions than domestic acquisitions?

This paper examines the impact of domestic and foreign acquisitions on chief executive officer (CEO) compensation packages using a sample of 147 completed bids by UK companies from 1999 to 2005. We find that foreign acquisitions lead to higher CEO compensation than domestic acquisitions. Overall, our findings suggest that CEOs have strong incentives to do foreign acquisitions rather than domestic acquisitions since they receive larger compensation following a foreign acquisition regardless of how poor firm performance is. Furthermore, we observe a positive and significant relation between CEO compensation and firm size during the pre-acquisition period for firms involved in foreign acquisitions, thus their CEOs would expect to increase their compensation package through foreign acquisitions. However, our results show that there is no significant link between firm size and CEO compensation during the pre-acquisition period for firms involved in domestic acquisitions.