Foreign competition and acquisitions

I provide evidence on the impact of foreign competition on firms' propensities to engage in mergers and acquisitions. Using import tariff reductions as exogenous shocks that increase foreign competition, I find that affected firms are more likely to make acquisitions following tariff reductions. Cross-sectional tests show that this association is more pronounced for single segment firms, capital intensive firms, firms with higher profit margins, and firms with better growth opportunities, which suggests that this association is stronger for firms that are affected by increased competition to a greater extent and firms that stand to gain more from acquisitions when faced with increased competition. Moreover, the positive relation between acquisition propensities and tariff cuts is more pronounced for financially unconstrained firms and during times of high capital liquidity, which implies that it is easier for firms with greater access to capital to respond to increases in foreign competition by making acquisitions. Finally, I find some evidence that the acquisitions made in response to tariff decreases are associated with better firm profitability ratios in the following year, indicating that firms respond to increased competition by making acquisitions to improve their operational efficiency.     

Distributive inefficiency in horizontal mergers: Evidence from wealth transfers between merging firms and their customers

The ultimate goal of antitrust enforcement is to maximize the surplus consumers enjoy by enhancing production efficiency and eliminating market power. Previous literature focuses on the average net wealth effects on merging firms and their stakeholder firms and reports evidence of efficiency gains while no evidence of market power in horizontal mergers. In this paper, we examine how efficiency gains distribute between the merging firms and their customer firms. We find a significant negative relation between the combined abnormal returns on the merging firms and those on their customer firms, demonstrating a wealth transfer effect. Such a negative relation is more pronounced when market power is likely to be more intensive. On average, the merging firms gain, and their customers do not lose. Our results suggest that market power allows merging firms to withhold merger gains that would have been passed to the downstream under perfect competition and prevents customers from enjoying the whole consumer surplus. Distributive inefficiency exists in horizontal mergers.     

The effects of anticipated future investments on firm value: evidence from mergers and acquisitions

I examine the long-term valuation consequence of investment in mergers and acquisitions on acquiring firms through the “anticipation effect,” in which forward-looking prices embed investors’ expectations about the profitability of firms’ future acquisitions. Using a sample of firms with past acquisitions, I find that their market valuations depend on both the profitability of their past acquisitions and their current free cash flow. Among firms with positive free cash flow (when future acquisitions are likely), those with a worse history of value-destroying acquisitions experience lower market valuations. Among firms with negative free cash flow (when future acquisitions are less likely), firm value is not systematically related to acquisition history. These findings are consistent with investors forming expectations about the profitability of future acquisitions based on realized acquisition outcomes and valuing these firms based on their likelihood of making future acquisitions. They also provide support for using observed market prices as a proxy for investors’ expectations about future investment opportunities.     

The deregulatory effects of the Telecommunications Act of 1996 on the broadcasting industry: Expectations vs. reality

The broadcasting industry experienced drastic deregulation with the passage of the Telecommunications Act of 1996. This study examines the capital market reactions to the passage of the Act and aftermath changes in profitability and efficiency in the broadcasting industry. This study finds that the deregulation, particularly relaxing the rules for broadcast ownership, had significant positive effects on stock returns for the broadcasting firms. Among them, firms focusing on broadcasting business and small television groups gained more from the deregulation in terms of increases in market value, as opposed to diversified and large television groups. The longitudinal analysis indicates that the profitability of broadcasting firms in terms of return on sales improved after the Act. This can mainly be attributed to broadcasting firm’s increased market power that resulted from increased industry concentration. Profitability in terms of return on assets, however, deteriorated after the Act, which can be attributed to decreased operating efficiency represented by asset turnover. We find no evidence that the deregulation improved the broadcasting industry’s efficiency of employees to generate sales. Our findings question the notion that the deregulation would help the industry to improve its operating efficiency by achieving economies of scale.     

Block Share Purchases and Corporate Performance

This paper investigates the causes and consequences of activist block share purchases in the 1980s. We find that activist investors were most likely to purchase large blocks of shares in highly diversified firms with poor profitability. Activists were not less likely to purchase blocks in firms with shark repellents and employee stock ownership plans. Activist block purchases were followed by increases in asset divestitures, decreases in mergers and acquisitions, and abnormal share price appreciation. Industry-adjusted operating profitability also rose. This evidence supports the view that the market for partial corporate control plays an important role in limiting agency costs in U.S. corporations.     

IPO waves, product market competition, and the going public decision: Theory and evidence

We develop a new rationale for initial public offering (IPO) waves based on product market considerations. Two firms, with differing productivity levels, compete in an industry with a significant probability of a positive productivity shock. Going public, though costly, not only allows a firm to raise external capital cheaply, but also enables it to grab market share from its private competitors. We solve for the decision of each firm to go public versus remain private, and the optimal timing of going public. In equilibrium, even firms with sufficient internal capital to fund their new investment may go public, driven by the possibility of their product market competitors going public. IPO waves may arise in equilibrium even in industries which do not experience a productivity shock. Our model predicts that firms going public during an IPO wave will have lower productivity and post-IPO profitability but larger cash holdings than those going public off the wave; it makes similar predictions for firms going public later versus earlier in an IPO wave. We empirically test and find support for these predictions.     

Relative equity market valuation conditions and acquirers’ gains

We examine whether the relative equity market valuation conditions (EMVCs) in the countries of merging firms help acquirers’ managers to time the announcements of both domestic and foreign targets. After controlling for several deal- and merging firm-specific features we find that the number of acquisitions and acquirers’ gains are higher during periods of high-EMVCs at home, irrespective of the domicile of the target. We also find that the higher gains of foreign target acquisitions realized during periods of high-EMVCs at home stem from acquiring targets based in the RoW (=World-G7), rather than the G6 (=G7-UK) group of countries. We argue that this is due to the low correlation of EMVCs between the UK (home) and the RoW group of countries. However, these gains disappear or even reverse during the post-announcement period. Moreover, acquisitions of targets domiciled in the RoW (G6) countries yield higher (lower) gains than acquisitions of domestic targets during periods of high-EMVCs at home. This suggests that the relative EMVCs between the merging firms’ countries allow acquirers’ managers to time the market and acquire targets at a discount, particularly in countries in which acquirers’ stocks are likely to be more overvalued than the targets’ stocks.     

Product market effects of IFRS adoption

Prior literature finds that International Financial Reporting Standards (IFRS) adopters enjoy lower financing costs subsequent to IFRS adoption. We predict and find that mandatory IFRS adopters exploit lower financing costs to increase market share vis-à-vis non-adopters. This effect is robust across several different model specifications in a sample capturing the universe of public and private firms in the EU, in a matched sample of public and private firms, and in a public firm sample comparing mandatory and voluntary IFRS adopters. We further find that IFRS is associated with an increase (decrease) in industry sales concentration (competition), consistent with large public firms increasing market share. In supplemental analyses, we find that mandatory adopters issue more equity and debt after IFRS adoption and that larger market share gains accrue to those mandatory IFRS adopters that issue more equity and debt after IFRS adoption. Overall, we provide evidence of unintended product market consequences of IFRS adoption.     

The value of control: Evidence from full and partial acquisitions in the real estate industry

We investigate the differential wealth effects of (1) full and partial control acquisitions, (2) nonreal estate, real estate and REIT participants, and (3) single- and multiple-bidder events. We find that target firms earn positive excess returns at the announcement of partial and full acquisitions, but acquisitions that result in control earn larger excess returns than noncontrol acquisitions. An examination of industry differences shows that real estate firms or REITs do not earn higher returns relative to nonreal estate firms. Our analysis of market structure finds that bidders that are not involved in an acquisition program earn greater announcement period returns than prior acquirers. For target firms, we find that those with a single offer earn higher returns than those with subsequent offers. A cross-sectional regression analysis shows that while market structure is important in explaining returns, the main determining factor for target firms is the degree of control sought.     

Does operating performance really improve following corporate acquisitions?

Previous research indicates that operating performance improves following corporate acquisitions relative to industry-median firms. Such performance results are likely to be biased because acquiring firms undertake acquisitions following a period of superior performance and they are generally larger than industry-median firms. Using firms matched on performance and size as a benchmark, I find no evidence that operating performance improves following acquisitions. I also analyze if performance is higher in cash acquisitions as suggested by various studies. The results indicate that cash flows increase significantly following acquisitions that are made with cash, but decline for stock acquisitions.