Liquidity and firm characteristics: Evidence from mergers and acquisitions

We explore factors affecting liquidity by examining the relation between liquidity changes and changes in firm characteristics around mergers and acquisitions. We find that spreads decline as the number of analysts, number of shareholders, number of market makers, firm size, and volume increase or as volatility decreases. Increased volume and firm size, and decreased volatility, are associated with increased depth. We find no evidence diversifying and non-diversifying mergers affect liquidity differently. We note that mergers and acquisitions are associated with reductions, on average, in spreads but that the reductions are fully explained by the accompanying changes in firm characteristics.     

The value of CEOs' supply chain experience: Evidence from mergers and acquisitions

Acquirer CEOs with experience in the target's industry supply chain (‘supply chain CEOs’) are associated with wealth effects of first-order importance: they earn 1.5% higher merger announcement returns. Conversely, their targets get a lower share of the merger gains. Acquisitions by supply chain CEOs also exhibit higher synergies, better post-deal accounting performance, and less goodwill written off. These findings withstand checks for endogeneity, anticipation bias, and numerous robustness tests. In takeovers by supply chain CEOs, superior acquirer performance stems from both value creation and rents negotiated away from target shareholders.     

Cross-listing and legal bonding: Evidence from mergers and acquisitions

Using a sample of foreign acquisitions of US targets, this study examines the extent to which cross-listing in the US leads to legal and regulatory bonding, and/or whether reputational bonding proxied by financial intermediaries monitoring, an often ignored component of the bonding mechanism, is an important factor in US investors decision to hold shares in cross-listed firms. We find that compared to US firms, cross-listed firms are less likely to use equity in takeovers of US targets. Further, cross-listed firms from countries with poorer legal protections are less likely to finance with equity and pay higher premiums than cross-listed firms from countries with better legal protections. Using analysts’ coverage and institutional following as proxies for financial intermediary monitoring, we find some support for the importance of reputational bonding. The evidence suggests that while cross-listing reduces barriers to investment, there are limits to its ability to completely subsume both the legal environment and the importance of the monitoring of financial intermediaries. This further suggests that the extent of actual legal and regulatory bonding by cross-listed firms may be more limited than often assumed.     

CEO pay incentives and risk-taking: Evidence from bank acquisitions

We analyze how the structure of executive compensation affects the risk choices made by bank CEOs. For a sample of acquiring U.S. banks, we employ the Merton distance to default model to show that CEOs with higher pay-risk sensitivity engage in risk-inducing mergers. Our findings are driven by two types of acquisitions: acquisitions completed during the last decade (after bank deregulation had expanded banks' risk-taking opportunities) and acquisitions completed by the largest banks in our sample (where shareholders benefit from ‘too big to fail’ support by regulators and gain most from shifting risk to other stakeholders). Our results control for CEO pay-performance sensitivity and offer evidence consistent with a causal link between financial stability and the risk-taking incentives embedded in the executive compensation contracts at banks.     

Investment decisions and internal capital markets: Evidence from acquisitions

In this paper, we examine the workings of internal capital markets in diversified firms that engage in related and unrelated corporate acquisitions. Our evidence indicates that bidders invest outside their core business (diversify) when the cash flows of their core business fall behind those of their non-core lines of business. However, bidders invest inside their core business (i.e., undertake non-diversifying investments) when their core business experiences superior cash flows. We also find that bidders whose core business are in industries with low growth prospects engage in diversifying acquisitions while bidders whose core business are in high growth industries undertake non-diversifying acquisitions. The pre-acquisition evidence, then, suggests that firms tend to diversify when the cash flows and the growth opportunities of their core business are considerably lower than those of their non-core business. Subsequent to acquisitions we find that diversifying bidders continue to allocate financial resources from less profitable business segments (i.e., core business) to more profitable business segments (i.e., non-core business). Given the low profitability of diversifying bidders’ core business, this capital resource allocation suggests that diversification increases do not result in capital allocation inefficiencies. The evidence for non-diversifying bidders, however, supports the existence of “corporate socialism” in the sense that there is transfer of funds from the profitable (core) to the less profitable (non-core) business segments in multi-segment bidders. We find that the capital expenditures of bidders’ non-core business segments rely on both core and non-core cash flows.     

The attenuation effect of social media: Evidence from acquisitions by large firms

We examine the role of social media in firm acquisitions. Twitter utilizes the “push” technology that allows firms to reduce information asymmetry by disseminating news to a broader set of investors in a timely manner. Using hand collected acquisition announcements from Twitter covering the period from 2009 to 2012, we find that the acquirer size is a main determinant of disclosing acquisition announcements on Twitter. Large acquirers announce their acquisitions on Twitter and, as a result, are able to attenuate the anticipated negative market reaction at acquisition announcement. We find no evidence that the attenuation effect of announcing acquisitions on Twitter subsequently reverses or that announcing acquisitions on Twitter is positively associated with pre-announcement earnings management. Overall, our results suggest that Twitter has become an important investor relation channel for major corporate events such as acquisition announcements and that large acquirers can use this new channel to enhance stability in their stock prices.     

Learning, hubris and corporate serial acquisitions

Recent empirical research has shown that, from deal to deal, serial acquirers' cumulative abnormal returns (CAR) are declining. This has been most often attributed to CEOs hubris. We question this interpretation. Our theoretical analysis shows that (i) a declining CAR from deal to deal is not sufficient to reveal the presence of hubris, (ii) if CEOs are learning, economically motivated and rational, a declining CAR from deal to deal should be observed, (iii) predictions can be derived about the impact of learning and hubris on the time between successive deals and, finally, (iv) predictions about the CAR and about the time between successive deal trends lead to testable empirical hypotheses.     

Learning from repetitive acquisitions: Evidence from the time between deals

Knowledge gleaned from previous acquisitions may confer valuation expertise and other benefits. But numerous acquisitions also entail costs, due to problems of incorporating diverse units into an ever larger firm. Such benefits and costs are not directly observable from outside the firm. This article proposes a simple model to infer their relative importance, using the time between successive deals. The data requirements are minimal and allow the use of all mergers and acquisitions during 1992–2009 (more than 300,000 deals). The results provide evidence of learning gains through repetitive acquisitions, especially under CEO continuity and when successive deals are more similar.     

The efficiency of the buy-write strategy: Evidence from Australia

We examine the performance of the buy-write option strategy (BWS) on the Australian Stock Exchange and analyse whether such an investment opportunity violates the efficient market hypothesis on the basis of its risk and returns. This study investigates the relationship between buy-write portfolios returns and past trading volume and other fundamental financial factors including dividend yield, firm size, book to market ratio, earnings per share (EPS), price earnings ratio and value stocks within these portfolios. We also test the profitability of the buy-write strategy during bull and bear markets. Consistent with the literature, it is observed that BWS offers superior risk adjusted returns for low levels of out-of-moneyness and contrary evidence is observed for deeper out-of-money portfolios. Consistent with a preference for options with a maturity of around 3 months in Australia, this research shows that quarterly rebalancing periods offer better returns for the BWS.     

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.     

Pre-bid price run-ups and insider trading activity: Evidence from Canadian acquisitions

A sample of 128 Canadian acquisitions from 1985 through 1995 is used to examine the relationship between pre-bid price run-ups in target shares and insider trading activity. We find that abnormal stock price performance at an early stage before the acquisition announcement is due to actual trading by corporate insiders. However, the run-up immediately preceding the takeover announcement appears due to market anticipation about an impending bid for the target. Furthermore, our results identify the stages in the acquisition process at which each effect occurs.     

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.     

A new method for measuring CEO overconfidence: Evidence from acquisitions

This study proposes a new direct method of measuring managerial overconfidence using an acquisition setting. CEOs with significantly higher synergies forecast error (SFE), measured as the deviation between acquisition forecasted operating synergies and actual realized operating synergies, are more likely to exhibit traits of overconfidence. In support of this view, we find that synergies forecast error is positively related to takeover premium and negatively related to acquirer returns. Additionally, validation tests confirm that high SFE firms conduct more diversifying acquisitions. Reflecting, as well, the ex-ante power of the overconfidence measure in other settings, high SFE firms have a positive relation with capital expenditures, leverage, and innovation, and negative relation with equity issues.     

Determinants of board structure: Evidence from Australia

Linck et al. (2008) investigate the determinants of board structure in the US, an environment that features high litigation risk and low ownership concentration. In contrast, using a hand-collected data set that includes information from more than 1000 firms, this paper investigates the determinants of board structure in Australia, an environment that features low litigation risk and high ownership concentration. Multivariate analyses suggest that whereas board size and board independence increase with firm size, CEO duality decreases with firm size. Additional tests suggest that high ownership concentration increases board size, decreases board independence and increases CEO duality. These results imply that if high litigation risk against directors (as in the US) plays a monitoring role in corporate governance, ownership concentration appears to offer an alternative governance mechanism in countries such as Australia, which feature low litigation risk.     

One way out of the share pledging quagmire: Evidence from mergers and acquisitions

Share pledging by controlling shareholders is accompanied with a risk of control transfer when stock price decline triggers a margin call. This situation motivates controlling shareholders and firms to initiate value-enhancing activities to manage the pledging quagmire. Using a sample of Chinese listed firms, we find that firms with pledging controlling shareholders are more likely to implement mergers and acquisitions (M&As) than other firms. Their M&As also perform better, regardless of whether using short- or long-term stock returns or operating income as the performance measure. Furthermore, the positive effect of share pledging on M&As is more pronounced in non-state-owned enterprises, firms with individual controlling shareholders (especially families), firms with better governance, and firms with higher financial capabilities. Additional analyses on deal types also show that firms with pledging controlling shareholders are more likely to engage in diversified, non-affiliated, and cash-financed acquisitions. These results consistently suggest that M&As may effectively eliminate firms' pledging risks and that share pledging mitigates shareholders' conflict of interest regarding M&A decisions.     

The adverse selection effect of corporate cash reserve: Evidence from acquisitions solely financed by stock

Corporate cash reserve has an adverse selection effect. Specifically, if investors know a company does not have to issue to invest, an attempt to do so sends a strong signal of overvaluation. This notion has not been explicitly studied in the extant empirical literature, despite its intuitiveness. Using a sample of acquisitions solely financed by stock to exclude the potential complications of free cash flow, I find that announcement returns are lower for a bidder with a higher excess cash reserve. This effect is stronger in hot equity market years or when a bidder's standalone value is more difficult to evaluate. I also find evidence supporting the idea that targets request cash payment to remove “lemon” bidders in normal (non-hot equity market) years, but accept too many stock offers in hot equity market years. After acquisitions, high-excess-cash-reserve bidders operationally outperform low-excess-cash-reserve bidders. Further, they spend more funds on reducing debt but not more on investments, compared with low-excess-cash-reserve bidders. Combined, these results show that cash reserve has information costs. Further, they highlight the importance of the two-sided information asymmetry framework of Rhodes-Kropf and Viswanathan (2004) in describing merger outcomes without resorting to behavioral or agency explanations.     

Gaining a competitive edge through acquisitions: Evidence from the telecommunications industry

I study the announcement effects of all acquisitions in the recent telecom wave on both the acquirers and their industry competitors. I find evidence of negative rival returns (? 0.55%, t-stat = 2.47) by focusing on non-horizontal acquisitions where rivals are less susceptible to experience positive returns due to increased market power or expectation that some will become future targets themselves. I find that this effect is worse for closer rivals defined as having similar size and being in the same primary service area as the acquirer. Competitor returns are positively correlated with those of the acquirers suggesting that the negative impact experienced by competitors is driven by acquisitions in which the acquirer itself is earning negative abnormal returns. Results are broadly consistent with the Competitive Advantage Hypothesis that posits acquisitions are a means of corporate restructuring in a changing environment, awarding the acquirer a competitive edge and thereby making these acquisitions costly for their non-merging competitors.     

Cross-border mergers and acquisitions and corporate social responsibility: Evidence from Chinese listed firms

This study examines the impact of cross-border mergers and acquisitions (M&As) on acquirers’ corporate social responsibility (CSR). Based on a sample of Chinese listed firms, we find that firms with cross-border M&A activities experience an improvement in subsequent CSR performance. Specifically, the CSR rating is approximately 8.24% higher in firms with cross-border M&As than in those without such activities. We also find that this positive influence is more pronounced in firms with low initial CSR ratings than in those with high initial CSR ratings at the time when a cross-border M&A deal is completed. Additional analyses reveal that this positive effect is mainly driven by the target firms from countries with high social preference relative to China and that the enhancement in CSR driven by cross-border M&As translates into higher operating performance and easier access to finance. Overall, our findings demonstrate that cross-border M&As can serve as a critical channel for acquirers from a country with low institutional quality to build a better reputation through environmentally friendly behaviour and socially responsible engagement, and therefore gain capital market benefits.     

The Importance of Intellectual Capital for Firm Performance: Evidence from Australia

This study investigates the dynamic relationship between intellectual capital (IC) and firm performance (FP) through system generalised methods of moments, when previous studies produced divergent results based on static OLS or fixed‐effects estimations. Based on 571 listed firms in Australia for the period of 2005–2014 (5518 firm‐years) this study reveals that IC efficiency is positively significant with ROA and ROE – which endorses resource‐based theory. Further analysis shows that human capital, structural capital and physical capital are also significant and confidently endorse resource‐dependency and organisation‐learning theories. The findings of this study are vital for stakeholders such as management, shareholders and potential investors to understand the role of IC for FP. Moreover, the findings are particularly important for policy‐setters to highlight the importance of IC and develop a systematic framework for IC disclosure. This study also opens new avenues for future research to consider the dynamic nature of the IC–FP relationship and account for endogeneity.