LEGAL ENVIRONMENT,INTERNALIZATION, AND U.S. ACQUIRER GAINS IN FOREIGN TAKEOVERS

In examining takeovers of foreign targets by U.S. firms, we investigate the effect of the target country's legal environment on acquiring firm value. Our results indicate that acquirers of target firms located in civil law countries experience significant positive abnormal returns, especially when the acquirer possesses a high level of intangibles. Furthermore, we find that acquirers with high levels of intangibles are more likely to acquire target firms in civil law countries. These findings suggest that the transfer of intangibles overseas provides relatively larger efficiency benefits for multinational corporations in cases where the alternative, contracting in external markets, is more difficult.     

An analysis of the implications of uncertainty and agency problems on the wealth effects to acquirers of private firms

Extensive empirical work shows that bidders do not gain from the acquisition of publicly traded targets but experience positive excess returns in the acquisition of privately held firms. This study investigates how two important differences between private and public firms, namely, informational uncertainty and ownership characteristics, impact the returns to acquirers. A sample of targets that were acquired shortly after filing for an IPO was collected to circumvent the lack of information on private firms. In spite of the special characteristics of these targets, the listing effect is still prevalent in this sample. The results of the analysis are consistent with the hypothesis that acquirers gain in the acquisition of private firms because these targets have a relatively weaker bargaining position due to informational and agency problems and costly access to external capital markets to finance growth opportunities.     

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.     

Trust and cross-border mergers and acquisitions

A number of studies suggest that social trust matters for investment. Using different measures of trust from World Values Survey, we show that countries where people display higher levels of trust engage in more cross-border M&A activities. When they do, these acquirers pay lower premiums. To the extent that these acquirers also tend to engage in larger acquisitions as well, our findings suggest that a larger selection pool of potential targets and higher value targets enable these acquirers to negotiate for lower premiums. We do not find evidence of the significant effect for target country trust levels. Hence, trust may benefit those acquiring firms in cross-border transactions.     

Is the grass on the other side greener? Testing the cross-border effect for U.S. acquirers

Why do U.S. acquirers fare worse when acquiring targets in foreign countries than when acquiring domestic targets? This paper investigates reasons for the so called “cross-border effect” by examining the influence of target public status and competitiveness of the takeover market in the target country. Our findings show that the listing status of the target drives the cross-border effect in two opposite directions: acquirers of private targets fare worse in cross-border takeovers, while acquirers of public targets experience significantly higher gains in acquisitions of foreign targets. The positive cross-border benefit for acquirers of public targets is more pronounced if the target is from a country with a less competitive takeover market.     

The Relevance of Target Accounting Quality to the Long-Term Success of Cross-Border Mergers

Abstract:  We investigate a sample of cross-border mergers involving US firms that acquired foreign targets between 1985 and 1995. Our general interest is in the long-term success of the acquisitions, measured by the post-merger abnormal returns to the US acquirers. Our primary focus is the relationship between the quality of the foreign target's accounting disclosures and the acquisition's long-term success. Employing a procedure recommended by Lyon et al. (1999) , we find that US acquirers in cross-border mergers experience significantly negative long-term abnormal returns post-merger. These returns also are significantly more negative than those realized by a matched sample of US acquirers that acquired US targets. To investigate the potential association between the US acquirers' post-acquisition returns and target firms' accounting disclosures, we classify the merger transactions by target firm home country. We define variables to reflect the quality of accounting disclosures and control for other important country-specific features. The results reveal that post-merger abnormal returns are less negative for acquirers of targets based in countries where accounting data is less value relevant. This may be due to a higher cost of capital for target firms in these countries, resulting in a built-in discount in the pricing of targets. An examination of the premiums paid in a subset of 79 cross-border mergers reveals evidence consistent with this contention: premiums are lower for target firms based in countries where accounting data is less value relevant. These results suggest that shareholders of targets from such countries pay a price for their country's institutional framework that makes accounting information less value relevant.     

Partial acquisitions in emerging markets: A test of the strategic market entry and corporate control hypotheses

In this paper, we examine the motivations of acquirers undertaking partial acquisitions in emerging markets by testing two competing hypotheses: the market for corporate control hypothesis and the market entry hypothesis. We find that targets of cross-border acquisitions outperform targets of domestic acquisitions in the pre-acquisition period. While cross-border acquisitions have no significant impact on target firms' operating performance, targets of domestic acquisitions experience significant improvements in operating performance and substantial changes in ownership structure after the acquisition. The evidence suggests that domestic partial acquisitions in emerging markets serve as a market for corporate control, while cross-border partial acquisitions are motivated by the strategic market entry rationale.     

Are small firms less vulnerable to overpriced stock offers?

We show an inverted-U relation between targetiveness (probability of being targeted) and firm size. However, this pattern describes stock offers and is more pronounced during hot markets characterized by higher stock valuations. For cash offers we find a negative and monotonic relation. These contrasting patterns suggest that small firms (in the bottom NYSE size quartile) are less vulnerable to overpriced stock offers. In addition, we find that the stock acquirers of small targets are less overvalued than those of large targets, and that the announcement returns are less negative for stock acquirers of small targets than for those of large targets.     

The role of investment banker directors in M&A

We examine how directors with investment banking experience affect firms? acquisition behavior. We find that firms with investment bankers on the board have a higher probability of making acquisitions. Furthermore, acquirers with investment banker directors experience higher announcement returns, pay lower takeover premiums and advisory fees, and exhibit superior long-run performance. Overall, our results suggest that directors with investment banking experience help firms make better acquisitions, both by identifying suitable targets and by reducing the cost of the deals.     

The certification role of financial advisors in cross-border M&As

This paper examines the determinants of the choice of financial advisors and their impact on the announcement effects of US acquirers in cross-border M&As. Two hypotheses are tested: one pertains to the certification role of financial advisors, and the other relates to advisors' experience in target countries. Evidence supports the certification hypothesis in the selection of advisors, particularly in all-cash paid transactions where acquirers assume the entire risk of not realizing the expected synergy value. We also observe significantly more favorable shareholder reactions to the choice of US-domiciled advisors and foreign-domiciled advisors actively doing business in US markets. The fact that this positive reaction exists when the chosen US advisors do not have significant experience in the target country suggests how much US acquirers and shareholders value the certification role of financial advisors in cross-border M&As.     

Competition and the cost of debt

This paper empirically shows that the cost of bank debt is systematically higher for firms that operate in competitive product markets. Using various proxies for product market competition, and reductions of import tariff rates to capture exogenous changes to a firm's competitive environment, I find that competition has a significantly positive effect on the cost of bank debt. Moreover, the analysis reveals that the effect of competition is greater in industries in which small firms face financially strong rivals, in industries with intense strategic interactions between firms, and in illiquid industries. Overall, these findings suggest that banks price financial contracts by taking into account the risk that arises from product market competition.     

Can firms learn by observing? Evidence from cross-border M&As

In the presence of high uncertainty and limited experience, can observing the actions of other acquiring predecessors help firms make better acquisition decisions? Using a sample of cross-border M&As conducted by US acquirers in developing countries, we document a positive and significant relationship between an acquirer's performance and its predecessors' acquisition activity. This relationship is especially pronounced in the prevalence of news events about the outcome of predecessors' acquisitions, when predecessors consist of US peers from the same industry and/or when targets are based in culturally distant countries. Our findings shed light on one channel through which information spillovers across industries and acquiring firms could be a key driver of value creation in developing market cross-border M&As.     

An empirical investigation of mergers and acquisitions by Chinese listed companies, 1997–2007

We examine 136 M&A deals from 1997 to 2007 initiated by Chinese companies listed on the Shanghai and Shenzhen Stock Exchanges, where the acquirer gains complete control of the target. Our data shows that the Chinese M&A market is dominated by domestic deals with unlisted targets that are either stand-alone private firms or wholly owned subsidiaries. Acquirers experience significant positive abnormal stock returns around the announcement date and over the three years after the acquisition. These results are largely driven by state-owned firms, cash acquirers and firms that acquire related targets. Cross-sectional tests show that announcement period returns are related to the acquirer's ownership status, industry relatedness of the acquirer and target, capital structure changes of the acquirer and the nature of the unlisted target. We find no change in operating performance from the pre to the post acquisition period for the acquirers.     

Bond market access and investment

Prior research has shown that differential access to debt markets significantly affects capital structure. In this paper, we examine the effect of access to debt markets on investment decisions by using debt ratings to indicate bond market access. We find that rated firms are more likely to undertake acquisitions than nonrated firms. This finding remains even after accounting for firm characteristics, for the probability of being rated, and in matched sample analysis as well as in subsamples based on leverage, firm size, age and information opacity. Rated firms also pay higher premiums for their targets and receive less favorable market reaction to their acquisition announcements relative to non-rated firms. However, the average announcement returns to rated acquirers are non-negative. Collectively, these findings suggest that the lack of debt market access has a real effect on the ability to make investments as well as on the quality of these investments by creating underinvestment, instead of simply constraining overinvestment.     

Does carbon risk matter for corporate acquisition decisions?

In this study, we examine whether carbon risk matters in acquisitions. Using a firm's carbon emissions to proxy for carbon risk, we examine whether an acquirer's level of carbon emissions is related to the decision to engage in acquisitions and achieve subsequent acquisition returns. The results show that firms with higher emissions have an increased likelihood of acquiring foreign targets while, at the same time, having a decreased likelihood of acquiring domestic targets. Acquirers with large carbon footprints seek out targets in foreign countries that have low gross domestic product (GDP) or weak environmental, regulatory, or governance standards. We also examine the relationship between carbon emissions and announcement returns. We find that cross-border acquisition announcement returns are higher when acquirers with high carbon emissions acquire targets in countries with fewer regulations or weaker environmental standards. Focusing on the interplay of corporate social responsibility (CSR) and carbon emissions, we find that investors censure acquirers that promote CSR while also having high carbon emissions, thus resulting in worse abnormal returns. This is particularly the case if the target country is wealthy or has stronger country governance or strong environmental protection. Our findings add insight on the channels through which a focus on reducing carbon risk can add value for shareholders.     

Acquisitions and the cost of debt: Evidence from China

A large body of literature has examined the effect of mergers and acquisitions (M&As) on firm valuation, and generally find that M&As reduce acquirers' shareholder value. However, relatively little is known about the effect of M&As on the pricing of corporate debt by debtholders, especially for firms in less developed countries. Using a sample of Chinese listed firms with outstanding bonds from 2007 to 2020, we find that the cost of debt is lower for acquirers than for non-acquirers, and that the effect of acquisitions in reducing cost of debt is more pronounced for firms from provinces with less developed markets, for private firms, and for firms undertaking cross-province acquisitions. Our results are robust to a series of robustness checks that address various endogeneity concerns, including the use of a matched-sample approach, the use of the Heckman two-stage model and a change analysis, the control for acquirers' pre-acquisition bond yield spread, and the exclusion of acquisitions of publicly listed targets. Our analyses of provincial institutional factors show that the relationship between M&As and cost of debt is moderated by government relations to market, private economy development, and the development of market intermediaries and legal environment. We further document that acquirers have lower default risk during the post-acquisition period because of a coinsurance effect, and that acquirers attract more analyst following and investors after acquisitions. Overall, our results indicate that acquisitions can reduce cost of debt through reducing firms' default risk and information risk, and that institutional factors matter for the effect of M&As on the cost of debt.     

The value of access to finance: Evidence from M&As

We examine synergies in mergers and acquisitions (M&As) generated by firms’ comparative advantages in access to bank finance. We find robust evidence that greater access to bank finance increases firms’ attractiveness as acquisition targets. Targets’ comparative advantage in bank finance improves bank credit supply and reduces financing costs for the merged firms. These effects are more pronounced for acquirers with greater frictions in accessing bank loans and acquirers with greater growth opportunities. Overall, this paper reveals that targets, not just acquirers, contribute to financial synergies in M&As.     

Takeovers,market monitoring,and international corporate governance

We theoretically and empirically examine the role of international takeover markets in curtailing dominant shareholder moral hazard for firms with higher value‐added from acquisitions. In equilibrium, such firms strategically list shares in the markets of their targets and voluntarily dilute dominant shareholder control through capital‐raising events to lower their expected acquisition costs. Empirical tests, using a sample of foreign firms cross‐listing on U.S. stock exchanges during 1990–2003, support the framework. We find a strong influence of post‐listing dilution of dominant shareholder control through capital‐raising events on the likelihood of acquisitions and their cost to the acquirers, in both U.S. and non‐U.S. markets.     

Mandatory disclosure and learning from external market participants: Evidence from the JOBS act

This paper examines whether mandatory disclosure affects the extent to which firms learn from external market participants. Conventional wisdom suggests that mandatory disclosure should increase the total amount of information in financial markets. However, disclosure can also reduce investors' incentives to acquire and produce information. Using the JOBS Act to identify variations in disclosure requirements, this paper finds that firms with reduced disclosure requirements attract more informed investors and learn more from financial markets than those with stricter disclosure requirements. This learning is concentrated among firms that attract sophisticated investors, particularly those with industry expertise, and weakens once firms are forced to disclose more information. Overall, the results suggest that one benefit from regulators’ recent efforts to reduce U.S. firm disclosure requirements is an increase in firm learning.     

Glamour Acquirers, Method of Payment and Post‐acquisition Performance: The UK Evidence

We study the effect of different acquirer types, defined by financial status and their payment methods, on their short and long‐term performance, in terms of abnormal returns using a variety of benchmark models. For a sample of 519 UK acquirers during 1983–95, we examine the abnormal return performance of acquirers based on their pre‐bid financial status as either glamour or value acquirers using both the price to earnings (PE) ratio and market to book value ratio (MTBV). Value acquirers outperform glamour acquirers in the three‐year post‐acquisition period. One interpretation is that glamour firms have overvalued equity and tend to exploit their status and use it more often than cash to finance their acquisitions. As we move from glamour to value acquirers, there is a greater use of cash. Our results are broadly consistent with those for the US reported by Rau and Vermaelen (1998). However, in contrast to their study, we find stronger support for the method of payment hypothesis than for extrapolation hypothesis. Cash acquirers generate higher returns than equity acquirers, irrespective of their glamour/ value status. Our conclusions, based on four benchmark models for abnormal returns, suggest that stock markets in both the US and the UK may share a similar proclivity for over‐extrapolation of past performance, at least in the bid period. They also tend to reassess acquirer performance in the post‐acquisition period and correct this overextrapolation. These results have implications for the behavioural aspects of capital markets in both countries.