Industry structure and horizontal takeovers: Analysis of wealth effects on rivals,suppliers, and corporate customers

We examine the wealth effects of horizontal takeovers on rivals of the merging firms, and on firms in the takeover industry's supplier and customer industries. Inconsistent with the collusion and buyer power motives, we find significant positive abnormal returns to rivals, suppliers, and corporate customers for the subsample of takeovers with positive combined wealth effect to target and bidder shareholders. Overall, our findings suggest that the average takeover in our sample is driven by efficiency considerations. However, we find evidence suggesting that horizontal takeovers increase the buyer power of the merging firms if suppliers are concentrated.     

IMPACTS OF RELATIVE SIZE AND INDUSTRIAL RELATEDNESS ON RETURNS TO SHAREHOLDERS OF ACQUIRING FIRMS

The premise of this paper is that in mergers the manageability of acquisitions significantly affects the wealth of shareholders of acquiring firms. Specifically, the relative size of partners as well as the industrial relatedness of the two firms are examined. The test period allows for the determination of announcement, interim, and consummation effects of the mergers on shareholder wealth. It is found that acquisitions of relatively large firms from unrelated industries lead to significant declines in the wealth of shareholders of acquiring firms, and that this result is most pronounced when the period is extended beyond the announcement through the effective dates.     

Cross-Border M&As Involving an Emerging Market

This study analyzes Korean firms’ motives for cross-border M&As, Asia’s representative emerging capital market, from the perspective of financial attributes, and defines the effects of group attributes of cross-border M&As on the wealth of acquiring firms’ shareholders. As for the group attributes of cross-border M&As, shareholders of small firms with high ROA do not like cross-border M&As, because the shareholders of small acquiring firms with sufficient internal growth factors are reluctant to transfer their present wealth to shareholders of foreign target firms. We also verify that the diversification effect with regard to cross-border M&As is accompanied by the diversification discount, but that firms with ample internal funds due to their high ROA like entering into new industries through cross-border M&As. Lastly, when target companies are listed in countries with highly uncertain GDP growth rates, acquiring firms’ value decreased.     

AN INVESTIGATION OF PREFERRED STOCK FINANCING BY BANK AND NONBANK FINANCIAL INSTITUTIONS

We investigate the shareholder wealth effects of announcements of preferred stock issues made by financial institutions. Fixed-rate straight preferred stock and convertible preferred stock issue announcements result in insignificant common share price responses. However, the average stock price reaction to announcements of adjustable-rate preferred stock issues is positive and significant for banking firms. Our findings suggest that banks' common shareholders react positively to adjustable-rate preferred stock issue announcements because such securities provide a relatively low-cost way of increasing the primary capital used to satisfy legal minimum capital requirements without diluting common equity voting rights.     

Who benefits from bond tender offers in Europe?

This paper investigates the wealth effects of European cash tender offers for bonds during the period from 1996 to 2005. European bond offers are made to refinance (35% of cases), to reduce debt (40%) or triggered by an ownership change (25%). We investigate the wealth effects to both bondholders and shareholders. Cash tender offers for bonds turn out to be value creating for firms; with bondholders taking most of the gains on a relative basis. We find no evidence of wealth transfers from shareholders to bondholders: bondholders are paid an average tender premium of 3.9% but shareholders do not experience a significant wealth loss. Shareholders even benefit from making refinancing bond tender offers after a drop in interest rates. The wealth effects to both bondholders and shareholders increase in the remaining time to maturity. This suggests that tendering the bonds, rather than waiting for them to mature, is a win-win situation for both types of security holders.     

The benefits of geographical and product expansion in the financial service industry

Residual analysis techniques are used to evaluate acquiring firm shareholder perceptions of the benefits of product expansion by nonbanking firms into the banking industry and of the relaxation of restrictions on interstate banking. The results are consistent with other merger studies that fail to find significant returns to shareholders of acquiring firms and suggest either that such benefits do not exist or they are distributed to the shareholders of the acquired firm.Finance Department, University of KentuckySchool of Business, University of North Carolina at Chapel Hill     

Managerial rights,use of investment banks,and the wealth effects for acquiring firms’ shareholders

We examine the relation between managerial rights in acquiring firms and the decision to use an investment bank in merger and acquisition deals, and explore whether this relation impacts the wealth effects for acquiring firms’ shareholders. We find that acquiring firms whose managers have relatively strong rights are more likely to use investment banks to facilitate deals and are more likely to use reputable banks. The wealth effects to acquiring firms are inversely related to the use of investment banks when managerial rights are relatively strong. However, the wealth loss is mitigated when acquiring firms use reputable investment banks.     

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.     

The impact of firm's ownership advantages and economic status of destination country on the wealth effects of international joint ventures

Prior studies provide inconclusive evidence on the wealth effects of international joint ventures (IJVs) on the firm's market value. While some studies document that IJVs benefit shareholders of firms that engage in such activities, others reveal conflicting results. This study provides additional evidence on this issue. On average, shareholders of U.S. multinationals that engage in IJVs benefit from such activities. Specifically, shareholders benefit more from IJVs when their firms possess a higher degree of ownership advantages. This study also finds that higher returns are associated with IJVs with developed countries than with developing countries by U.S. multinationals.     

The Impact of Country Diversification on Wealth Effects in Cross-Border Mergers

We posit that country diversification via cross‐border mergers creates wealth by providing benefits for firms that are not available to their shareholders. We hypothesize that these benefits are inversely related to the extent of co‐movement in the economies of the bidder's and target's countries. We examine the wealth effects of U.S. targets and bidders involved in cross‐border mergers with firms in other countries during 1982–1991. We show that wealth effects vary, depending on country affiliations of two merging firms, and are inversely related to the degree of economic co‐movement between the two countries.     

Stockholder returns and international acquisitions of financial firms: An emphasis on banking

The wealth effects for shareholders of American financial firms involved in foreign acquisitions and also the wealth effects for shareholders of U.S. target firms acquired by foreign concerns are the topics of this study. The findings indicate that stockholders of U.S. bidding financial firms (and its subset of banks) earn neither abnormal gains nor suffer abnormal losses upon the announcement of an acquisition or regulatory approval. On the other hand, stockholders of U.S. target financial firms (and its subset of banks) earn significant abnormal profits at both the announcement of the proposed acquisition and the announcement of regulatory approval of the acquisition. The wealth effects for these two samples are also compared to samples in which both parties to the acquisition are U.S. firms. The research suggests that there is no significant difference in the size of the announcement gains or losses for either stockholders of the target or bidding firms based on whether the acquisition is foreign or domestic. These findings conflict with prior research which indicates that, for firms in general, stockholders of U.S. targets earn significantly greater wealth benefits when they are acquired by foreign firms than by domestic firms. Overall, these results are consistent with a competitive market for acquisitions of financial firms in which buyers do not earn or lose at the announcement of an acquisition, and in which abnormal gains are received only by the sellers.     

The Effects of International Joint Ventures on Shareholder Wealth

The purposes of this study are to measure the wealth effects of international joint ventures on the U.S. firms' shareholders and to determine whether these effects are related to the economics status of the partner's home country. The results indicate that overall investor reactions to joint ventures with foreign firms are negative and that only joint ventures with firms from lesser developed countries have nonnegative effects on shareholders' wealth. These findings are in contrast with previous reports of positive stock price reactions to both dimestic and international joint ventures.     

THE WEALTH EFFECTS OF VOLUNTARY SELLOFFS: IMPLICATIONS FOR DIVESTING AND ACQUIRING FIRMS

Previous research examining the wealth effects of voluntary selloffs has shown positive stock price movements around the announcement date for divesting firms. Shareholders realize positive economic gains from selloffs. One recent study indicates that shareholders of acquiring firms also realize economic gains. This study examines the division of economic gains between divesting and acquiring firms and the impact of the firm's financial condition and relative selloff size on the level of economic gains. Significant positive price movements are observed for divesting firms immediately prior to and on the announcement date. Some evidence of positive, although not significant, price movements is found for acquiring firms. These results suggest shareholders of divesting firms realize economic gains from selloffs while shareholders of acquiring firms neither gain nor lose. Also, as divesting firms sell off larger portions of their total assets, their shareholders realize greater economic gains; the division of economic gains becomes more one-sided (in favor of divesting firms) as the relative size of the selloff increases.     

A Re-Examination of the Wealth Expropriation Hypothesis: The Case of Captive Finance Subsidiaries

This paper re-examines Kim, McConnell, and Greenwood's (1977) study of captive finance subsidiaries. We suggest that, as long as firms are concerned with reputation, shareholders will find it costly to engage in deliberate wealth expropriation and thus have no incentives to do so. Using a sample of fourteen firms with publicly traded debt, we compute and test the statistical significance of abnormal returns to shareholders, bondholders, and the firm when captives are incorporated. We find that shareholders gain 14.9 percent, bondholders lose 2.3 percent, and firm value increases a significant 10.4 percent. Our results are inconsistent with wealth expropriation and lend support to the importance of reputation to firms.     

Corporate Mergers and Shareholder Wealth Effects: 1977-1986

The paper investigates the distribution of returns to shareholders of UK companies involved in acquisitions during the period 1977-1986. Three control models were used in the analysis: the market model with parameters identified through OLS regression, a model based on adjusted betas, and finally an index-relative model. Abnormal returns were identified around both bid announcement and outcome dates for bidders and targets in completed and abandoned bids. Examination was also made of the distribution of wealth changes for bidders and targets separately and for both in combination. The results demonstrate that, although there is no net wealth decrease to shareholders in total as a result of takeover activity, shareholders of bidder firms do suffer wealth decreases. By contrast, shareholders in target firms obtained significant, positive wealth increases in both completed and abandoned bids.     

The Shareholder Wealth Effects of Insurance Securitization: Preliminary Evidence from the Catastrophe Bond Market

Insurance securitization has long been hailed as an important tool to increase the underwriting capacity for companies exposed to catastrophe-related risks. However, global volumes of insurance securitization have remained surprisingly low to date which raises questions over its benefits. In this paper, we examine changes in the market value of insurance and reinsurance firms which announce their engagement in insurance securitization by issuing catastrophe (Cat) bonds. Consistent with the hitherto underwhelming contribution of Cat bonds to global catastrophe coverage, we do not find evidence that Cat bonds lead to strong wealth gains for shareholders in the issuing firm. More importantly, we report large variations in the distribution of wealth effects in response to the issue announcement. We show that the wealth effects for shareholders in firms which issue Cat bonds appear to be driven by explanations according to which Cat bonds offer cost savings relative to other forms of catastrophe risk management (and less by the potential of Cat bonds to hedge catastrophe risk). Thus, abnormal returns are particularly large for issues by firms which face low levels of loss uncertainty (which reduces the information acquisition costs in financial markets) as well as for issues during periods when prices for catastrophe coverage (including Cat bonds) are low.     

Can investors restrict managerial behavior in distressed firms?

In this article, we show that only distressed firms not identified as distressed by creditors are able to transfer wealth from creditors to shareholders. Using the number of years to future bankruptcy as a proxy for genuine distress and measures based on observable firm characteristics as proxies for perceived distress, genuinely distressed firms incorrectly perceived as healthy cut payouts to shareholders more slowly and invest more aggressively as uncertainty increases than correctly identified distressed firms. Consistent with the idea that incorrectly identified distressed firms actively hide their troubles, we show that they tend to follow more aggressive accounting policies and often resort to earnings misstatements. We also show that they are often not restricted by covenants and can borrow further debt capital at affordable rates, suggesting that a lack of monitoring by creditors allows them to transfer wealth to shareholders.     

Real Estate Mergers: Corporate Control &; Shareholder Wealth

This study contributes new evidence to distinguish why mergers occur in the real estate industry by quantifying the combined firm return for nearly three decades of real estate mergers. As a measure of the overall change in shareholder wealth created by a merger, the combined firm return plays a key role in differentiating competing merger theories and is quantified for the real estate industry for the first time. Findings from this study are consistent with the notion that real estate mergers occur because firms with superior management acquire other firms that possess unexploited opportunities to cut costs and increase earnings (the inefficient management hypothesis). Furthermore, the results indicate that real estate mergers generally create wealth, as shareholders at best realize modest gains and at worst break even.     

Financing constraints and share pledges: Evidence from the share pledge reform in China

Financing constraints are important to triggering controlling shareholders' share pledges. However, the related literature faces two major challenges: the endogeneity problem and the lack of direct evidence of why and how individual share pledges can ease corporate financing constraints. Based on China's Share Pledge Reform (SPR) in Q4 2012 and the phenomenon that private firms face discrimination when obtaining bank loans, this paper studies the impact of financing constraints on share pledging behavior and its mechanisms by building a difference-in-differences (DID) model. The SPR makes it more convenient for shareholders to raise money through share pledges, and shareholders of private firms facing stronger financing constraints are more vulnerable to this reform than are state-owned enterprises (SOEs). After the SPR, the probability of share pledging by controlling shareholders of private firms is approximately 23.04% higher than that of controlling shareholders of SOEs, and the pledge ratio is approximately 16.53% higher. Further tests reveal that, after the SPR, controlling shareholders of private firms are more inclined than those of SOEs to provide loans to the company to alleviate its financing constraints. Heterogeneity tests further corroborate the finding that this effect is more significant in private firms that are smaller and do not have shareholders of banking and institutional firms among their top ten shareholders.     

SHAREHOLDER-MANAGEMENT CONFLICT AND EVENT RISK COVENANTS

Event risk covenants (ERCs), such as poison puts, can protect bondholders from losses related to highly leveraged transactions. Previous observers argue that managers could use ERCs primarily to benefit shareholders or to entrench, and the evidence on the shareholder wealth effects of ERCs is conflicting. Using data not previously exploited and an innovative method of isolating the wealth effects of ERCs, we find that ERCs decrease shareholder wealth. Additional evidence suggests that firms with greater shareholder-management conflict are more likely to use ERCs. Overall, the evidence from this study supports the entrenchment view of ERCs.