DIRECT EVIDENCE ON THE MARKET‐DRIVEN ACQUISITION THEORY

We provide direct empirical evidence that share overvaluation is an important motive for firms to make stock acquisitions. We find that more overvalued firms are more likely to acquire with stock, and acquirers are more overvalued in successful stock mergers than in withdrawn mergers. Acquirers' overvaluation, on average, exceeds the targets' premium‐adjusted overvaluation. Shareholders of stock acquirers, whose overvaluation is greater than their targets' premium‐adjusted overvaluation, realize sustained wealth gains from one day before the merger announcement up to three years after the merger completion, as compared with a matching sample of similarly overvalued but nonacquiring firms.     

INTERSTATE BANKING DEREGULATION AND THE CHANGING NATURE OF BANK MERGERS

We examine a sample of 443 bank mergers between publicly traded banks announced during the 1990s to investigate empirically the role of full interstate banking deregulation. The pre‐deregulation 1990s are characterized by value creation, with mergers involving a high degree of branch overlap experiencing significant announcement gains. Bank mergers in the post‐deregulation 1990s, however, fail to create value, and mergers with a high degree of branch overlap actually experience significant losses. Consistent with prior research, these valuation consequences are magnified for large bank mergers in the 1990s. Overall, our results are consistent with the broader literature on corporate control, suggesting that an economic shock can materially alter industry structure and the economic rationale for the efficient reallocation of assets through merger activity.     

Competition For Board Seats Following Stock‐For‐Stock Mergers

We examine the board structure of firms following stock‐for‐stock mergers. We find that former target inside (outside) directors are more likely to join the combined firm board when target insiders (outsiders) have a relatively strong position on the pre‐merger target board. The relative size of the target firm, target firm profitability, and target blockholder ownership also influence whether target directors join the combined board. We conclude that competition for board seats on the combined board is won by target directors with greater bargaining positions.     

Cross-ownership,returns, and voting in mergers

We show that institutional shareholders of acquiring companies on average do not lose money around public merger announcements, because they hold substantial stakes in the targets and make up for the losses from the acquirers with the gains from the targets. Depending on their holdings in the target, acquirer shareholders generally realize different returns from the same merger, some losing money and others gaining. This conflict of interest is reflected in the mutual fund voting behavior: In mergers with negative acquirer announcement returns, cross-owners are significantly more likely to vote for the merger.     

Riding the merger wave: Uncertainty,reduced monitoring,and bad acquisitions

We show that acquisitions initiated during periods of high merger activity (“merger waves”) are accompanied by poorer quality of analysts' forecasts, greater uncertainty, and weaker CEO turnover-performance sensitivity. These conditions imply reduced monitoring and lower penalties for initiating inefficient mergers. Therefore, merger waves may foster agency-driven behavior, which, along with managerial herding, could lead to worse mergers. Consistent with this hypothesis, we find that the average long-term performance of acquisitions initiated during merger waves is significantly worse. We also find that corporate governance of in-wave acquirers is weaker, suggesting that agency problems may be present in merger wave acquisitions.     

An Examination of Gains to Acquirers of Mutual Thrifts in Merger Conversions

This paper examines the wealth impact of acquiring mutual thrifts in merger conversions. We find that these transactions produced wealth gains both before and after the passage of FIRREA. These gains, however, are statistically significant only in the post-FIRREA period, indicating that regulatory changes resulting from FIRREA made such mergers more appealing. Cross-sectional analyses indicate that merger conversions enhance value by providing an opportunity to expand into potentially lucrative markets. Acquisitions of mutuals that present substantial opportunities for branch closings lead to larger gains. In addition, acquirer gains increase with the relative size of the transaction and are larger for acquisitions in markets served by competing firms that are small relative to the merged entity. Contrary to popular belief, variations in bidder gains appear to be unrelated to changes in the regulatory capital position resulting from the merger conversion.     

How Much Is Too Much: Are Merger Premiums Too High?

Is it too much to pay target firm shareholders a 50% premium on top of market price? Or is it too much to pay a 100% premium when pursuing mergers and acquisitions? How much is too much? In this paper, we examine how the extent of merger premiums paid impacts both the long‐run and announcement period stock returns of acquiring firms. We find no evidence that acquirers paying high premiums underperform those paying relatively low premiums in three years following mergers, and the result is robust after controlling for a variety of firm and deal characteristics. Short term cumulative abnormal returns are moreover positively correlated to the level of the premium paid by acquirers. Our evidence therefore suggests that high merger premiums paid are unlikely to be responsible for acquirers' long‐run post merger underperformance.     

The Impact of Merger Bids on the Participating Firms' Security Holders

This paper investigates whether merger bids have an impact on the wealth of the participating firms' bondholders and stockholders. Monthly and daily bond and stock returns are calculated relative to the announcement date of a merger bid for a sample of conglomerate mergers. The results show that while the stockholders of target firms gain from a merger bid, no other securityholders either gain or lose. To provide direct evidence on the existence of “diversification effects” and “incentive effects,” we test whether the bondholders' returns are dependent upon the correlation between the returns of the merging firms and whether the size of the bondholders' and stockholders' returns in individual mergers are correlated. The results are consistent with a capital market that efficiently resolves conflicts of interest between stockholders and bondholders.     

Efficiency and Market Power Gains in Bank Megamergers: Evidence from Value Line Forecasts

This paper examines whether gains in bank megamergers occur due to efficiency improvements or the exercise of market power using financial statement line item forecasts from Value Line to infer the effect of the merger on prices and quantities. The average megamerger is associated with cost‐efficiency improvements. In the cross‐section, efficiency gains are limited to market expansion mergers while market overlap mergers and Too‐Big‐To‐Fail (TBTF) mergers exhibit monopoly gains. Efficiency gains dissipate when the resulting megabank size exceeds $150 billion in assets or 1.5% of gross domestic product indicating that banks thought to be TBTF are likely to be “Too‐Big‐To‐Be‐Efficient.”     

DO INSTITUTIONS PREFER HIGH‐VALUE ACQUIRERS? AN ANALYSIS OF TRADING IN STOCK‐FINANCED ACQUISITIONS

If owners of target shares in a stock‐for‐stock merger perceive the acquirer as overvalued, they should sell their holdings more aggressively to profit before such overvaluation dissipates. We study institutional owners of targets and find that slightly more than half liquidate their shares in stock mergers, consistent with high institutional‐share turnover rates found in the prior literature. However, share retention is higher when valuation measures suggest greater acquirer overvaluation, regardless of whether institutional owners generally prefer growth or value stock. Institutions that prefer large‐cap, growth stock are most enthusiastic about bids from large, high‐valuation acquirers, and substantially increase their stakes in such deals.     

Value creation around merger waves: The role of managerial compensation

This paper examines the relation between executive compensation and value creation in merger waves. The sensitivity of CEO wealth to firm risk increases the likelihood of out-of-wave merger transactions but has no influence on in-wave merger frequency. CEOs with compensation linked to firm risk have better out-of-wave merger performance in comparison to in-wave mergers. We also present evidence that cross-sectional acquirer return dispersion is greater for in-wave acquisitions. Our results suggest that the underperformance of acquiring firms during merger waves can be attributed in part to ineffective compensation incentives, and appropriate managerial incentives can create value, particularly in non-wave periods.     

SHAREHOLDER RETURNS TO USA ACQUIRED FIRMS IN FOREIGN AND DOMESTIC ACQUISITIONS

This research employs the residual methodology to examine whether gains to shareholders exist through international diversification. Under the assump tion that bid premiums (abnormal returns) are a proxy for expected gains in a merger, the magnitude of abnormal returns to acquired f m s in foreign and domestic mergers is determined using the market model. Any significant difference is imputed to expected gains from international diversification. Results indicate that although differences appear to exist, these differences are insignificant when method of payment and merger type are considered.     

Cross-border acquisitions of US financial institutions: Impact of macroeconomic factors

This study investigates the impact of mergers and acquisitions on US bidders and targets involved in cross-border mergers of financial institutions. The findings indicate that while US targets experience positive significant wealth gains, US bidders encounter insignificant wealth gains during the merger announcements. There are also differences in wealth gains with respect to industry classification and to the regional location of foreign targets and bidders. The macroeconomic variables, including foreign and US economic conditions, level of economic development of target country, exchange rate volatility along with the effectiveness of foreign government, relative size of participants, and control of target largely explain the wealth gains to bidders and targets.     

Corporate social responsibility and stakeholder value maximization: Evidence from mergers

Using a large sample of mergers in the US, we examine whether corporate social responsibility (CSR) creates value for acquiring firms' shareholders. We find that compared with low CSR acquirers, high CSR acquirers realize higher merger announcement returns, higher announcement returns on the value-weighted portfolio of the acquirer and the target, and larger increases in post-merger long-term operating performance. They also realize positive long-term stock returns, suggesting that the market does not fully value the benefits of CSR immediately. In addition, we find that mergers by high CSR acquirers take less time to complete and are less likely to fail than mergers by low CSR acquirers. These results suggest that acquirers' social performance is an important determinant of merger performance and the probability of its completion, and they support the stakeholder value maximization view of stakeholder theory.     

The impact of bank merger growth on CEO compensation

We examine the impact of bank mergers on chief executive officer (CEO) compensation during the period 1992–2014, a period characterised by significant banking consolidation. We show that CEO compensation is positively related to both merger growth and non‐merger internal growth, with the former relationship being higher in magnitude. While CEO pay–risk sensitivity is not significantly related to merger growth, CEO pay–performance sensitivity is negatively and significantly related to merger growth. Collectively, our results suggest that, through bank mergers, CEOs can earn higher compensation and decouple personal wealth from bank performance. Furthermore, we document a more severe agency problem in CEO compensation as a consequence of bank mergers relative to mergers in industrial firms. Finally, we find that the post‐financial crisis regulatory reform of executive compensation in banks has limited effectiveness in curbing the merger–pay links.     

The timing of financing decisions: An examination of the correlation in financing waves

Why do corporate financing events occur in waves? We challenge recent evidence of the importance of valuation cycles in driving financing waves by documenting that the aggregate pattern of stock repurchases mirrors that of equity issuance and mergers, despite repurchases involving an opposite transaction. We then show that trends in financing decisions result from differing responses to the same economic stimulus: growth in GDP. Specifically, economic expansion reduces the cost of equity relative to the cost of debt, inducing firms to issue equity, and increases cash flow and also causes varying degrees of uncertainty, increasing stock repurchases. We document similar trends and provide similar motivation for merger waves.     

Acquirer-target social ties and merger outcomes

This article investigates the effect of social ties between acquirers and targets on merger performance. We find that the extent of cross-firm social connection between directors and senior executives at the acquiring and the target firms has a significantly negative effect on the abnormal returns to the acquirer and to the combined entity upon merger announcement. Moreover, acquirer-target social ties significantly increase the likelihood that the target firm?s chief executive officer (CEO) and a larger fraction of the target firm?s pre-acquisition board of directors remain on the board of the combined firm after the merger. In addition, we find that acquirer CEOs are more likely to receive bonuses and are more richly compensated for completing mergers with targets that are highly connected to the acquiring firms, that acquisitions are more likely to take place between two firms that are well connected to each other through social ties, and that such acquisitions are more likely to subsequently be divested for performance-related reasons. Taken together, our results suggest that social ties between the acquirer and the target lead to poorer decision making and lower value creation for shareholders overall.     

Director gender and mergers and acquisitions

Does director gender influence CEO empire building? Does it affect the bid premium paid for target firms? Less overconfident female directors less overestimate merger gains. As a result, firms with female directors are less likely to make acquisitions and if they do, pay lower bid premia. Using acquisition bids by S&P 1500 companies during 1997–2009 we find that each additional female director is associated with 7.6% fewer bids, and each additional female director on a bidder board reduces the bid premium paid by 15.4%. Our findings support the notion that female directors help create shareholder value through their influence on acquisition decisions. We also discuss other possible interpretations of our findings.     

The Competitive Dynamics of Geographic Deregulation in Banking: Implications for Productive Efficiency

Deregulation of geographic restrictions in banking over the past 20 years has intensified both potential and actual competition in the industry. The accumulating empirical evidence suggests that potential efficiency gains associated with consolidating banks are often not realized. We evaluate the impact of this increased competition on the productive efficiency of non-merging banks confronted with new entry in their local markets and find that the incumbent banks respond by improving cost efficiency. Thus, studies evaluating the impact of bank mergers on the efficiency of the combining parties alone may be overlooking the most significant welfare-enhancing aspect of merger activity.     

The Importance of Industry Links in Merger Waves

We represent the economy as a network of industries connected through customer and supplier trade flows. Using this network topology, we find that stronger product market connections lead to a greater incidence of cross‐industry mergers. Furthermore, mergers propagate in waves across the network through customer‐supplier links. Merger activity transmits to close industries quickly and to distant industries with a delay. Finally, economy‐wide merger waves are driven by merger activity in industries that are centrally located in the product market network. Overall, we show that the network of real economic transactions helps to explain the formation and propagation of merger waves.