The Intra-Industry Effects of Going-Private Transactions

We demonstrate that bids to take firms private generate significantly positive valuation effects for industry rivals of target firms. These valuation effects cannot reflect either synergy or monopoly since no consolidation of operating firms is involved in such transactions. Participation by buyout specialists in the bid does not significantly affect these gains. Bids by outsiders and bids by incumbent managers generate similar valuation effects for industry rivals. The effect on share prices of industry rivals is inversely related to the capitalized values of rival firms relative to the target firm. We also report valuation effects for target firms.     

Multiple bids as a consequence of target management resistance: A count data approach

In this article, we focus on the question of target management resistance and the incidence of subsequent bids. A Poisson count data model is used where the dependent variable represents the number of bids (count) received and the independent variables comprise target management actions and firm specific characteristics. Of the target management actions considered, legal defense and the entry of a white knight are associated with additional bids. With respect to firm specific characteristics, we find that a high initial bid premium deters subsequent bids. Firm size is also significant and has an interesting relationship with the number of bids received. Larger target firms tend to receive more bids; however, the number of bids tails off for firms with assets exceedng $12 billion.     

Information Asymmetry, R&D, and Insider Gains

Although researchers have documented gains from insider trading, the sources of private information leading to information asymmetry and insider gains have not been comprehensively investigated. We focus on research and development (R&D)—an increasingly important yet poorly disclosed productive input—as a potential source of insider gains. Our findings, for the period from 1985 to 1997 indicate that insider gains in R&D-intensive firms are substantially larger than insider gains in firms without R&D. Insiders also take advantage of information on planned changes in R&D budgets. R&D is thus a major contributor to information asymmetry and insider gains, raising issues concerning management compensation, incentives, and disclosure policies.     

Asset Revaluations and Assessment of Borrowing Capacity

Prior research has found support for contracting, political cost and information asymmetry explanations for managements’ decision to revalue non-current assets. This study proposes that asset revaluations occur to signal available borrowing capacity via an increase in collateral values at the time of increases in secured debt and that the economic benefits associated with an asset revaluation will be greatest for firms when they are experiencing times of declining cash flows from operations. Results imply that firms that have undertaken an asset revaluation are more likely to be experiencing declining cash flows from operations than firms that have not revalued. This study also investigates whether the incidence of valuations coincides with increases in levels of secured borrowings due to lenders’ demands for current values of assets offered as collateral. The evidence indicates that firms are more likely to record an asset revaluation if they have increased their secured borrowings, and that most non-year-end revaluations emanate directly from contracting with lenders.     

The impact of debt on market reactions to the revaluation of noncurrent assets

This study provides evidence that noncurrent asset revaluations are differentially considered by market participants based on the level of debt in the capital structure. Contracting theory (e.g. Brown et al., Abacus 28 (1992) 36) implies that revaluations made by firms with high-debt levels may be viewed as being opportunistic, while revaluations for firms with low-debt levels may be viewed as reducing information asymmetry between the firm and capital providers. For a sample of New Zealand firm/years that excludes certain observations with extreme stock returns, we find that revaluations of fixed assets are more value-relevant for firms with low leverage than for firms with high leverage. This suggests that the value relevance of fixed asset valuations depends on management's motivation for making the revaluation. The results of the research should be considered within certain limitations such as a small sample.     

Rational expectations,analysts' forecasts of earnings and sources of value gains for takeover targets

Value gains to target firm shareholders in takeover bids may be due to potential synergy between bidder and target and/or potential target restructuring based on new information released by the bid. Since these two models have different implications for the anticipated earnings of the target as a stand-alone entity, analysts' earnings forecast revisions (AFR) for the target during the bid may provide evidence for the new information hypothesis. For 326 UK targets of takeover bids during 1987–1993, we estimate analysts' earnings forecast revisions using the Institutional Brokers Estimate System (IBES) and relate them to bid premia paid to target shareholders. Analysts revise their forecasts significantly up on bid announcement. For failed, especially failed hostile, bids, the earnings forecast revision and bid premium are more positively correlated than for successful and friendly bids. This is consistent with the rational expectations behaviour of target shareholders modelled by Grossman and Hart [S.J. Grossman, O.D. Hart, Bell Journal of Economics 11(1) (1980) 42; S.J. Grossman, O.D. Hart, Journal of Finance 36 (1981) 253].     

The Motivation for Takeovers in the UK

Abstract:  The motives for takeovers in the UK are investigated by examining the correlations between wealth gains for the target and both acquirer wealth gains and total wealth gains. The results are sensitive to whether the gains are measured over a long or short window, the method of measuring abnormal returns, and whether controls are included for the form of the bid consideration and the sign of total bid gains. There is evidence of bids motivated by synergy, but there is also evidence of the presence of hubris and weak evidence of bids with an agency motivation. Once controls for bid consideration and the sign of total gains are introduced the explanatory power of the models increases substantially and diversity of results about bid motivation also increases.     

Abnormal returns and asymmetric information surrounding strategic and financial acquisitions

Using takeover bids from the United States, we investigate the importance of information asymmetry in self-selection when evaluating the abnormal returns of financial versus strategic takeover targets during a period of possible informed trade. Sample selection bias due to differences in financial versus strategic takeover bid information environments is controlled for using Heckman's model. Results show that takeover announcements are not randomised, indicative of timed announcements, and further that private equity firms exhibit lower price impact post-announcement. We conclude that the long-term financial motive of private equity takeovers, coupled with higher private information pre-announcement, leads to lower abnormal returns post-announcement.     

Synergy or New Information as a Source of Wealth Change in Acquisitions: The Case of Abandoned Bids

Potential sources of wealth change from acquisition are claimed to include both the opportunity for synergistic benefits and new information about the companies involved. New information may involve revaluation of previously undervalued or under-utilised assets. In the current study analysis is undertaken of the pattern of returns to targets in abandoned bids in the UK which were initiated during the period 1977–1986. The results provide evidence to support the view that acquisitions are undertaken not only for synergistic reasons but also to acquire previously under-utilised assets. The results also provide support for the hypothesis that the market for corporate control acts as one of the disciplinary mechanisms to improve corporate profitability.     

Corporate Takeovers: Mode of Payment, Returns and Trading Activity

This paper examines the impact of takeover bids and, in particular, the method of payment to the shareholders of the target firms on the returns, trading activity and bid-ask spreads of target and bidding firms traded on the London Stock Exchange. It suggests that the shareholders of target firms benefit substantially from takeover activity while the shareholders of bidding firms do not suffer. The combined value of the firms engaged in takeover activity increases by a small percentage during the event period. However, the benefit from a takeover announcement to the shareholders of the target firm varies from year to year and has declined in the recent past. The magnitude of excess returns available to the shareholders is also dependent on the mode of payment. Prices of target (bidding) firms increase (decrease) most if the shareholders of the target firms are given an option to receive payment in shares or in cash. The findings also reveal that during the event period trading activity in target and bidding companies increases depending on the form in which payments to shareholders are made. In response to this increased liquidity, the bid-ask spreads of target and bidding firms decline during the event period.     

Corporate Risk Management under Information Asymmetry

This paper examines the financial and operational hedging activities of US pharmaceutical and biotech firms that are subject to a high level of information asymmetry stemming from R&D investments during 2001–2006. We find evidence in support of the information asymmetry hypothesis à la Froot, Scharfstein and Stein (1993) that hedging helps mitigate the under‐investment problem. Specifically, we find that the use of financial derivatives is associated with greater firm value and that the value enhancement is larger for firms subject to greater information asymmetry and better growth opportunities. There is a synergy between financial hedging and operational hedging where the latter is used to counter product development risk. The results are robust with respect to alternative performance measures, industry‐specific growth measures, and the endogeneity problem. Our work is differentiated from existing studies that examined commodity‐based industries without addressing information asymmetry.     

Cross-border acquisitions and shareholder wealth: Tests of the synergy and internalization hypotheses

In this paper, we test the synergy and internalization hypotheses for international acquisitions using a sample of foreign acquisitions of U.S. firms during the period 1979–1990. The major findings include: First, shareholders of our paired sample of U.S. targets and foreign acquirers experienced significantly positive combined wealth gains, $68 million on average, indicating that cross-border takeovers are generally synergy-creating activities. Second, shareholders of the U.S. targets realized significant wealth gains, regardless of the nationality of acquirers. Third, the Japanese acquisitions in our sample generated the largest net wealth gains, $398 million on average, which was shared by both target shareholders (43%) and acquirer shareholders (57%). Fourth, foreign acquirers benefitted from the targets' R&D capabilities, supporting the ‘reverse-internalization’ hypothesis.     

Board involvement in the M&A negotiation process

This paper examines whether the active engagement of target firm directors in the sale process affects merger outcomes. Using data manually extracted from merger-related SEC filings, I create two measures of target board involvement in merger negotiations: the number of days it takes for the board to meet after the beginning of the sale process and the number of board meetings held throughout the entire process. I find that early board involvement in merger talks increases target shareholder returns and premiums, especially when shareholders have weak control over their firms and are thus in greater need of board protection. Although the two measures of target board activity do not affect acquirer cumulative abnormal returns or the likelihood of competition, such activity does reduce the likelihood of an excessive target termination fee. Robustness analyses dismiss an alternative explanation whereby attractive initial bids lead to both early board involvement and attractive final bids.     

The Effects of Taxes,Agency Costs and Information Asymmetry on Earnings Management: A Comparison of Public and Private Firms

The realization of securities gains and losses to manage earnings in publicly-traded bank holding companies has been documented in a large number of studies, but very little is known about why managers engage in this behavior. Two possible explanations for earnings management put forth by Warfield, Wild, and Wild (1995) are that managers engage in this behavior either to circumvent accounting-based contracts designed to mitigate agency problems, or to reduce information asymmetry.We compare public and private banks' realizations of securities gains and losses to determine how their earnings management differs. We find that public banks consistently engage in more earnings management than private banks, and that the portion of their current period securities gains and losses attributable to earnings management is more positively associated with next period's earnings before securities gains and losses. These findings are consistent with earnings management occurring due to greater information asymmetry in public firms, and suggest that earnings management may not necessarily lead to the erosion in the quality of earnings suggested by Levitt (1998).     

Size matters: The impact of financial liberalization on individual firms

We attempt to answer the following questions: What are the revaluation effects and the impact on performance, volatility, and return correlation from stock market liberalization in emerging markets? These questions have been studied extensively at the market level but not at the firm level. Our results show significantly different impact of stock market liberalization across firms. Large firms tend to exhibit large revaluation effects, insignificant change in performance, large declines in volatility, and insignificant change in correlation from liberalization. Small firms show small revaluation effects, improved performance, smaller decline in volatility and decreases in correlation after liberalization.     

Acquisitions of solvent thrifts: Wealth effects and managerial motivations

We examine voluntary acquisitions of solvent stock-held thrift institutions since 1979, and find that bidding firms suffered losses, target firms gained, and the impact of the merger on the bidder-target pair was positive on average. During the post-FIR-REA period acquirers experienced smaller losses and targets experienced smaller gains relative to the pre-FIRREA period. An investigation into the motives of bidding firm management provides evidence indicating the presence of synergy, agency, and hubris motivations in the pre-FIRREA period. Although the acquisitions environment underwent substantial changes in the post-FIRREA period, we find no evidence of corresponding changes in acquisition motivations.     

Shareholder Wealth Effects of European Domestic and Cross‐border Takeover Bids

This paper analyses the short‐term wealth effects of large intra‐European takeover bids. We find announcement effects of 9% for the target firms compared to a statistically significant announcement effect of only 0.7% for the bidders. The type of takeover bid has a large impact on the short‐term wealth effects with hostile takeovers triggering substantially larger price reactions than friendly operations. When a UK firm is involved, the abnormal returns are higher than those of bids involving both a Continental European target and bidder. There is strong evidence that the means of payment in an offer has an impact on the share price. A high market‐to‐book ratio of the target leads to a higher bid premium, but triggers a negative price reaction for the bidding firm. We also investigate whether the predominant reason for takeovers is synergies, agency problems or managerial hubris. Our results suggest that synergies are the prime motivation for bids and that targets and bidders share the wealth gains.     

Information asymmetry,leverage and firm value: Do crisis and growth matter?

Drawing on pecking order and agency cost theories, we assess the extent to which information asymmetry is an important determinant of firm value and the extent to which this relationship is conditional on the leverage level of firms. We also assess the impact of information asymmetry on firm value during the pre and post 2007/09 financial crisis period and for high and low growth opportunity firms. Using a large sample of UK firms, our empirical findings suggest that information asymmetry adversely impacts firm value, and that this effect decreases with firm's leverage. We also find that leverage has a negative effect on firm value, and that the marginal effect of leverage is lower for information asymmetric firms. Further, we find that the relation between information asymmetry and firm value is more pronounced in the post-crisis period than the pre-crisis period. Finally, we show that the impact of information asymmetry on firm value is higher (lower) for firms with high (low) growth opportunities.     

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.     

Earnings Surprises in Analysts' Forecasts,Mandatory Disclosure,and Share Repurchases

This paper examines the impact of forecast errors and the mandatory disclosure of repurchase transactions required by 2003 Securities and Exchange Commission (SEC) regulations on share repurchases. We define forecast errors as the difference between analysts' forecasted earnings and actual earnings. We argue that firms with positive forecast errors imply greater information asymmetry, which may induce them to signal through share repurchases. We show that both the repurchase target and analysts' forecast revision are positively related to forecast errors. Furthermore, these associations are more pronounced in the low disclosure period (1989–2003) where greater information asymmetry between managers and outside investors is found, while increased transparency in the high disclosure period (2004–2006) leads to more significant improvement in long‐term performances for firms with positive forecast errors. The results are consistent with our expectations that the information asymmetry implied in forecast errors, along with a shock change from the introduction of the 2003 SEC regulation, affect both corporate and analysts' behaviour.