Liquidity and information asymmetry considerations in corporate takeovers

ABSTRACT

We examine how stock market liquidity and information asymmetry considerations influence the wealth effects of Mergers and Acquisitions (M&As). We present a simple model predicting that M&As of listed targets that have relatively illiquid stocks are profitable for acquirers due to (a) the weak bargaining power of the targets’ shareholders, and (b) the limited information asymmetry concerns when evaluating takeover synergies. Our results show that cash-financed M&As of listed targets that have relatively illiquid stocks are associated with an increase in acquirer risk-adjusted returns. These gains are equivalent to those realized from comparable private target M&As. When engaging in stock-financed listed-target M&As, acquirers with liquid stocks enjoy significant gains when the targets have relatively illiquid stocks. This result holds especially when the deal is announced during periods of deterioration in the overall stock market liquidity. Lastly, we find that liquidity considerations affect the acquirer’s choice of the target firm’s listing status, as well as the M&A method of payment.     

The evidence of bidders' overpayment in takeovers: the valuation ratios approach

Empirically, bidder returns at the time of takeover announcements are negative. This paper investigates the relation between bidder returns and overpayment in mergers and tender offers while controlling for other potentially important factors. Unlike other studies, the paper measures overpayment using two valuation ratios: earnings-price ratio and book-to-market ratio. Results show these ratios are important in explaining negative bidder returns. The paper also finds that the payment method in mergers and tender offers produces an information effect.     

Bid-Ask Spreads,Information Asymmetry,and Abnormal Investor Sentiment: Evidence from Closed-End Funds

Using a sample of closed-end equity funds listed on the NYSE from 1994 to 1999, we investigate differences in spreads and adverse selection costs between the closed-end funds and a matched sample of common stocks. We find that spreads and adverse selection costs for the closed-end funds are significantly lower than those of control stocks. The results are consistent for the subperiods both before and after the minimum tick size change on NYSE on June 24, 1997. The differences of spreads and adverse selection costs cannot be attributed to the differences in the characteristics of the closed-end funds and the matched sample of common stocks. Lastly, we find that abnormal investor sentiment and adverse selection costs of closed-end funds are positively correlated over time.     

Twitter investor sentiment and corporate earnings announcements

We examine the impact of firm-specific investor sentiment (FSIS) on stock returns for negative and positive earnings surprises. Using a measure constructed from firm-specific tweets, we find that FSIS has a greater impact on stock returns for negative relative to positive earnings surprises. We further show that the impact of FSIS is greater for firms whose valuation is uncertain and difficult to arbitrage. Moreover, we provide evidence of return reversals over post-announcement periods. Our results highlight the importance of FSIS around earnings announcements.     

Spreading the sin: An empirical assessment from corporate takeovers

An acquisition of a company involved in socially undesirable activities can have important value implications. On the one hand, stocks in sin industries can be undervalued, and positive wealth effects might be created through risk sharing and a halo effect. On the other hand, acquiring sin stocks could increase litigation risk and the chance of product boycotts, and could hurt relations with employees and other stakeholders. Moreover, many investors avoid investments in sin stocks by applying negative screening. This article empirically establishes that shareholders of acquirer firms on average discount sin acquisitions. The negative wealth effects are stronger in countries with a greater focus on corporate social responsibility and for deals that are more likely to receive public attention. The article concludes that the costs of “sin” are considerable.     

Debt, debt structure and corporate performance after unsuccessful takeovers: evidence from targets that remain independent

Significant increases in the level of target leverage have been previously documented following unsuccessful takeover attempts. This increased leverage may signal managerial commitment to improved performance, suggesting that corporate performance and leverage should be positively related. If, however, the increased leverage leads to further managerial entrenchment, then corporate performance and leverage should be negatively related. In this paper, we reexamine both motivations for the observed increase in leverage. Furthermore, we argue that changes in the composition of debt are also important, besides changes in the level of leverage. In particular, bank debt has frequently been assigned a proactive, beneficial monitoring role in the literature. Besides confirming the increase in the level of leverage, we also document increases in bank debt surrounding cancelled takeovers. As a result, we find a more complex relation between corporate performance and debt use: Overall, the relation between corporate performance and leverage is negative, as predicted by a dominant entrenchment effect. However, increases in bank debt reduce the adverse effect of the increase in the level of leverage.     

Economic policy uncertainty and corporate inventory holdings: evidence from China

We investigate the impact of economic policy uncertainty (EPU) on corporate inventory holdings in China over the period 2007–2017. We find that EPU leads firms to significantly reduce inventory holdings and this effect is particularly pronounced among non-state-owned enterprises. The adjustment of inventory holdings enhances firms’ operating and market performance consequently. In addition, firms with greater financial constraints or stronger external governance are more affected by EPU. Further exploration shows that EPU induces high precautionary cash holdings, which crowds out inventories. Our results illustrate that firms reallocate between inventories and cash to cope with uncertainty associated with economic policy changes.     

Investor Sentiment and Stock Returns: Evidence from Turkey

This paper investigates the relation between investor sentiment and stock returns on the Istanbul Stock Exchange, employing vector autoregressive (VAR) analysis and Granger causality tests. The sample period extends from July 1997 to June 2005. In the VAR models, stock portfolio returns and investor sentiment proxies are used as endogenous variables. Two dummy variables accounting for natural and economic crises are used as exogenous variables. The analysis results suggest that, excepting shares of equity issues in aggregate issues, stock portfolio returns seem to affect all investor sentiment proxies, namely closed-end fund discount, mutual fund flows, odd-lot sales-to-purchases ratio, and repo holdings of mutual funds. Investor sentiment does not appear to forecast future stock returns; only the turnover ratio of the stock market seems to have forecasting potential.     

Uncertainty during tender offers and the measurement of shareholder wealth effects

Uncertainty concerning the ultimate outcome of tender offers may affect the measurement of changes in shareholder wealth. The uncertainty regarding the outcome of tender offers is measured by estimating the probability of acceptance of tender offers during the period when the tender offers are outstanding. The estimated probability of acceptance of tender offers implies that the amount of uncertainty prior to knowledge of the ultimate outcome is substantial and affects the measurement of expected equity gains. The uncertainty-adjusted measure of the change in shareholder wealth indicates that previous studies may have underestimated the gains expected to result from tender offers.     

State-owned capital and corporate social responsibility of private-holding companies: evidence from China

The undertaking of corporate social responsibility (CSR) has become a topic of widespread concern in society. Utilising a sample of 9872 private-holding companies listed on the Shanghai and Shenzhen securities markets from 2009 to 2019, this study examines the impact of state-owned capital on CSR activities. We find that CSR is enhanced when the proportion of state-owned capital in a private-holding listed company exceeds 5 percent. The appointment of directors, supervisors, and senior management by state-owned shareholders, and the participation of state-owned investment in company operation further promote the fulfilment of CSR in private-holding listed companies. This research not only enriches the literature on the economic consequences of state-owned equity holdings in private companies, but also provides empirical evidence regarding the outcomes of improvement of corporate governance mechanisms.     

Incentives for corporate tax planning and reporting: Empirical evidence from Australia

This study extends prior research on the willingness of firms to significantly decrease their corporate taxes. It specifically examines the associations between corporate tax avoidance and the reported significant uncertainty of a firm’s tax position, the tax expertise and tax affiliations of its directors, and the performance-based remuneration incentives of its key management personnel. Based on a dataset of 200 publicly listed Australian firms over the 2006–2010 period (1000 firm years), we find that the reported uncertainty of a firm’s tax position, the tax expertise of its directors, and the performance-based remuneration incentives of its key management personnel are significantly positively associated with tax avoidance. Conversely, firms with board members who have at least one tax-related affiliation are significantly negatively associated with tax avoidance.     

Economic policy uncertainty and corporate cash policy: International evidence

I investigate the influences of economic policy uncertainty on corporate cash policy. The findings show that there is a positive association between economic policy uncertainty and cash holdings, as well as the propensity to save cash out of operating cash flow. Further analyses suggests that economic policy uncertainty affects corporate cash policy by influencing firms’ precautionary saving motives and the effect is larger when firms have difficulty in raising external finance. Using the new index developed by Baker et al. (2016), I extend the literature on economic policy uncertainty and show that it is an important macro-level factor in influencing corporate cash policy.     

Investigating the valuation effects of reverse takeovers: evidence from Europe

This study examines a European sample of 222 private firms that opted for going public through a reverse takeover transaction during the period 1992–2011. In particular, our study investigates whether reverse takeovers announcements are value-increasing transactions, especially in countries that follow strong governance structures. Moreover, the post-reverse takeover stock price and operating performance is also at the epicenter of the current study. Employing the classical event study methodology, we document significant wealth gains for the shareholders of public firms involved in reverse takeovers. The market reaction is stronger when stricter corporate governance structures prevail in the countries where public firms trade. However, the short-term gains seem to revert to substantial losses over the long-term lending support to the overreaction phenomenon. We further detect negligible improvement in the post-reverse takeover financial performance of the new entity raising further concerns over the efficacy of such transactions.     

The Effect of Investor Sentiment on Feedback Trading and Trading Frequency: Evidence from Taiwan Intraday Data

Abstract

Although extensive literature has suggested that investor sentiment may be one of the most important factors in explaining investor trading frequency and trading strategies, how individual investors are significantly influenced by sentiment remains underexplored. The feature of numerous individual investors in the Taiwan stock market provides an avenue to examine the relationship of investor sentiment to trading frequency and positive-feedback trading according to intraday data. Using a vector autoregression model to measure feedback trading in one-minute intervals, we find that trading frequency appears to increase in periods of rising market, suggesting that investor sentiment–driven trading increases market trading frequency without relying on past experiences to conduct trading behavior.     

The impact of corporate governance on auditor choice: Evidence from China

As the largest and fastest growing emerging market, China is becoming more and more important to investors throughout the world. The purpose of this paper is to investigate the determinants of firms’ auditor choice in China in respect of their corporate governance mechanism. Normally firms have to take a trade-off in their auditor choice decisions, i.e., to hire high-quality auditors to signal effective audit monitoring and good corporate governance to lower their capital raising costs, or to select low-quality auditors with less effective audit monitoring in order to reap private benefits derived from weak corporate governance and less-transparent disclosure (the opaqueness gains). We develop a logit regression model to test the impact of firms’ internal corporate governance mechanism on auditor choice decisions made by IPO firms getting listed during a bear market period of 2001–2004 in China. Three variables are used to proxy for firms’ internal corporate governance mechanism, i.e., the ownership concentration, the size of the supervisory board (SB), and the duality of CEO and chairman of board of directors (BoDs). We classify all auditors in China into large auditors (Top 10) and others (non-Top 10), assuming the large auditors can provide higher quality audit services. The empirical results show that firms with larger controlling shareholders, with smaller size of SB, or in which CEO and BoDs chairman are the same person, are less likely to hire a Top 10 (high-quality) auditor. This suggests that when benefits from lowering capital raising costs are trivial, firms with weaker internal corporate governance mechanism are inclined to choose a low-quality auditor so as to capture and sustain their opaqueness gains. On the other hand, with improvement of corporate governance, firms should be more likely to appoint high-quality auditors.     

Uncertainty and Export Performance: Evidence from 18 Countries

We study a sample of nine developed and nine developing countries to evaluate the questions of how foreign income uncertainty and real exchange rate (RER) uncertainty impact international trade and how those impacts vary according to stage of development. RER uncertainty has a negative and significant impact on export growth for six of the nine less developed countries in our sample, while it has an insignificant effect for a majority of the developed countries. In both groups, foreign income uncertainty has a more pervasively significant (and frequently larger) influence on trade than does RER uncertainty.     

Futures Market Sentiment and Institutional Investor Behavior in the Spot Market: The Emerging Market in Taiwan

This paper investigates whether and how futures market sentiment and stock market returns heterogeneously affect the trading activities of institutional investors in the spot market in Taiwan. Our empirical results suggest that foreign investors are net sellers whenever futures market sentiment is bullish and net buyers when investor sentiment is bearish. The two types of domestic institutional investors have poor sentiment timing abilities and the price-pressure effect may account for the behavioral differences among institutional investors. In addition, all three institutional investors are momentum traders. Nevertheless, the momentum trading of foreigners is consistent with an information-based model and that of two local institutional investors, as behavior-based models suggest. This indicates that the same trading momentum strategy can lead to different outcomes for different investors, and both information- and behavior-based momentum trading can exist contemporaneously in the Taiwanese stock market.     

媒体报道与IPO绩效:信息不对称还是投资者情绪?——基于创业板上市公司的研究

本文以创业板开板以来至2011年4月底的所有创业板IPO公司为研究样本,通过讨论IPO前不同时期的媒体报道情况对IPO绩效的影响,探讨了媒体在IPO过程中所扮演的角色。在控制样本自选择偏差后,发现招股公告日至上市日之间的短期媒体报道与IPO抑价和首日换手率均呈显著的正相关关系,符合投资者情绪假说;而招股公告日前一年的长期媒体报道与IPO抑价也显著正相关,但是和首日换手率之间的关系并不显著,信息不对称假说未得到支持。本文认为信息不对称假说未得到支持可能与市场以情绪投资为主、忽视价值投资的现象有关。     

Information Uncertainty and Post-Earnings-Announcement-Drift

Abstract:  We examine whether rational investor responses to information uncertainty (IU) explain properties of and returns to the post-earnings-announcement-drift (PEAD) trading anomaly. Consistent with a rational learning explanation, we find that: (1) unexpected earnings (UE) signals that are characterized as having greater IU have more muted initial market reactions; (2) extreme UE portfolios are characterized by securities with higher IU than non-extreme UE portfolios; and (3) within the extreme UE portfolios, high IU securities are more prevalent and earn larger abnormal returns than low IU securities. Further tests show that prior evidence of greater PEAD profitability for higher idiosyncratic volatility securities is explained by the greater information uncertainty associated with these securities.