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.     

Does takeover competition affect acquisition choices and bidding firm performance? Australian evidence

We examine the influence of takeover competition on three acquisition choices: (i) public versus private target acquisitions; (ii) stock versus cash financed acquisitions; and (iii) related versus unrelated acquisitions. We find strong evidence of acquirers’ preference for public targets, stock swaps and business focus, in the face of takeover competition. Further, we find that the takeover competition has a positive influence on the bid premium paid to acquirer public targets and those financed with stock issues; competitive bids offered to acquire related targets are associated with significantly low bid premiums. In the short-term announcement window, competition-induced bids to acquire public targets and those financed with stock are penalised by the capital market. However, only stock-financed takeovers undertaken in a competitive takeover market show a long-run decline in performance of acquirers.     

M&As performance in the European financial industry

This paper looks at the performance record of M&As that took place in the European Union financial industry in the period 1998–2002. First, the paper reports evidence on shareholder returns from the merger. Merger announcements implied positive excess returns to the shareholders of the target company around the date of the announcement, with a slight positive excess-return on the 3-months period prior to announcement. Returns to shareholders of the acquiring firms were essentially zero around announcement. One year after the announcement, excess returns were not significantly different from zero for both targets and acquirers. The paper also provides evidence on changes in the operating performance for the subsample of merges involving banks. M&As usually involved targets with lower operating performance than the average in their sector. The transaction resulted in significant improvements in the target banks performance beginning on average 2 years after the transaction was completed. Return on equity of the target companies increased by an average of 7%, and these firms also experience efficiency improvements.     

The probability of informed trading and mergers and acquisitions

This paper investigates the role of the probability of informed trading (PIN) in mergers and acquisitions (M&A). We show that acquirers with higher PINs use more cash to finance their deals due to their higher cost of equity, and acquirers use more equity financing when acquiring targets with higher PINs to share the information risk with the target shareholders. We also find that acquirers and targets with higher PINs both experience higher announcement returns when cash financing is used, indicating that PINs are priced in the M&A market.     

Do targets grab the cash in takeovers: The role of earnings management

Extant research on Mergers and Acquisitions (M&A) provides evidence that acquirers underperform subsequent to the takeover completion. Such evidence is more unequivocal for acquirers that finance the acquisition by issuing equity relative to those that use cash. Current literature recognizes various reasons for this underperformance, most of which suggest overvaluation of the acquirers and/or overpayment for the targets at the time of acquisition announcement. Alternatively, this paper aims to investigate whether acquirers' post-takeover abnormal return is also attributed to target firms' real and/or accrual earnings management. Our results indicate that, on average, targets manage earnings upwards using real transactions rather than accruals, during the year preceding the takeover. More specifically, we find evidence of earnings management through sales among targets of cash acquisitions and that it is significantly and negatively related to the post-acquisition performance of the acquirers. These findings suggest that there is an association between the method of financing in acquisitions and earnings management in target firms, which could impact the post-takeover performance of acquirers.     

Sources of value gains in minority equity investments by private equity funds: Evidence from block share acquisitions

Using block share acquisitions made by private equity (PE) funds, we examine the sources of value gains in PE minority equity investments. We find that compared with non-PE acquirers, PE acquirers are more likely to place representatives with finance experience or those with experience in the target's industry on the target's board when the need for target oversight and/or advice is higher. The targets in PE acquisitions, particularly poorly performing targets, targets with high R&D intensity, and targets with PE-appointed directors who have experience in the target's industry, realize both higher announcement returns and better post-acquisition operating performance than do targets in non-PE acquisitions. These findings suggest that the governance and operational engineering that PE acquirers apply to their targets constitutes important sources of value creation in PE minority equity investments.     

The Long-Horizon Performance of REIT Mergers

We study long-horizon shareholder returns in a comprehensive sample of Real Estate Investment Trust (REIT) mergers, to test whether or not the anomaly of post-merger underperformance observed in conventional firms applies to the case of REITs. Constructing synthetic benchmark portfolios controlling for firm size and for book-to-market value ratio, we find that 60-month buy-and-hold abnormal returns for REIT acquirers are significantly negative at approximately −10%, supporting the position that REIT merger acquirers underperform non-merging REITs in the long run. We find no evidence to challenge previous studies reporting positive announcement period returns for acquirers when the target is privately held, but we do find evidence that these positive returns do not persist. The long term performance of acquiring REITs is approximately the same whether the target is public or private.

The long-run performance of acquiring firms in mergers and acquisitions: Does managerial ability matter?

This paper examines the association between the managerial ability of acquiring firms and their long-term performance after mergers and acquisitions (M&As). Based on M&A data for U.S. firms from 2000 to 2012, we find that acquiring firms with higher managerial ability achieve better long-term operating performance and stock returns. We also find that the positive effect of managerial ability on long-term performance is more pronounced when acquirers and target firms belong to the same industry. The result suggests that managers who have higher ability to manage their firms, i.e., to generate higher revenues for given resources, are more capable of achieving higher synergy benefits and better post-acquisition performance in same-industry acquisitions than in cross-industry acquisitions.     

Social connections,reference point and acquisition premium

This paper examines the impact of acquirer-target social connections along with the target 52-week high (Baker et al., 2012) on acquisition premiums. We show that acquisition premium is more sensitive to first-degree connection than the reference point, suggesting that information is the main driving force for determining acquisition premiums. The findings also indicate that connected directors are more likely to favour firms where they hold higher positions and negotiate favourable premiums. Acquirers pay lower premiums when target directors are retained in the new entity. Connected acquirers are also more likely to finance their deals with equity. Overall, this paper provides support to the information flow hypothesis that acquirers with social connections have better access to target information and enhanced bargaining power in negotiations.     

The effect of mergers on credit union performance

The motivation for mergers in the credit union industry differs from the commercial bank industry due to the lack of residual claimants to benefit from wealth gains. In the cooperative ownership environment of credit unions, the owners/members gain utility via the rates offered for loans and deposits. Credit union regulators also gain utility when mergers remove risky credit unions from the industry. We measure these utility gains using the event study method of Bauer [Bauer, K., 2008. Detecting abnormal credit union performance. Journal of Banking and Finance 32, 573–586] employing quadrant tests based on a multivariate test of equality of centroids. We find gains to the owners/members of the target credit union and to the regulators but not to the acquiring firm. We posit that the acquiring credit unions may encounter regulatory pressure to merge. In addition, the owners/members of the acquiring firm may avoid potential disutility in the cooperative insurance environment were the target firm allowed to fail.     

Stock Splits as a Manipulation Tool: Evidence from Mergers and Acquisitions

We document that acquiring firms are more likely than nonacquiring firms to split their stocks before making acquisition announcements, especially when acquisitions are financed by stock and when the deals are large. Our findings support the hypothesis that some acquiring firms use stock splits to manipulate their equity values prior to acquisition announcements. Using earnings quality as a proxy for firms' intention to manipulate, we find that acquirers with low earnings quality (i.e., acquirers that are more likely to use stock splits to manipulate their stock values) have lower long‐run stock returns compared with their benchmarks, especially when the deals are financed with stock. In contrast, acquirers with high earnings quality do not show that pattern. Our evidence complements and extends the findings in the literature that some acquirers manipulate their stock prices before stock‐swap acquisitions. This study suggests that target shareholders should use information such as earnings quality and stock splits to discriminate among acquirers and ensure that exchanges are conducted on fair terms.     

Indexing mergers and acquisitions

We measure the efficiency of mergers and acquisitions by putting forward an index (the ‘M&A Index’) based on stochastic frontier analysis. The M&A Index is calculated for each takeover deal and is standardized between 0 and 1. An acquisition with a higher index encompasses higher efficiency. We find that takeover bids with higher M&A Indices are more likely to succeed. Moreover, the M&A Index shows a strong and positive relation with the acquirers’ post-acquisition stock performance in the short run and operating performance in the long run. After constructing three portfolios under a buy-and-hold strategy, we find that efficient portfolios with the highest indices earn higher equity returns and monthly alphas than inefficient portfolios with the lowest indices. Overall, our findings indicate that the M&A Index is positively associated with merger outcomes for acquirers.     

Private Versus State Ownership and Spillover of Investor Protection Standards in Interprovince Mergers: Evidence from China's Emerging Market

This paper examines the spillover effects of investor protection standards for interprovince mergers in China's emerging markets. Using a sample of 372 mergers, we find that if the provincial investor protection of the acquirer is better than that of the target, a privately owned acquirer will get significantly higher abnormal returns, whereas a local state-owned acquirer will not. Additional evidence indicates that in contrast to the crossborder acquirers or the private acquirers, the local state-owned acquirers in interprovince mergers come from provinces with worse fiscal conditions and prefer to acquire targets in provinces with better investor protection or fiscal conditions.     

Target's organisational form and returns to Australian bidders in cross‐border acquisitions

We present large sample evidence on return performances of Australian acquirers who bid for public and private targets in cross‐border acquisitions. While placing a particular emphasis on the method of payment and the shareholder protection offered by the target country, we analyse the impact of various bid, firm and foreign‐acquisition‐specific characteristics on bidding firms' abnormal returns. We find that Australian investors perceive cross‐border acquisitions as value‐creating exercises regardless of the organisational form of the target acquired. However, bidders for private targets earn higher return when the method of payment is stock and the targets are located in high investor protection countries. We further find that the abnormal returns are conditional to the relative size of the target, bid frequency, target country destination and the preacquisition financial performance of bidding firms.     

I Feel Your Pain: The Effect of Regulator as a Minority Shareholder on Merger and Acquisition Performance

We examine the effect of a regulator-led advocate for minority shareholders on merger and acquisition (M&A) performance in China. In recent years, the China Securities Regulatory Commission established the China Securities Investor Services Center (CSISC), which began its ownership of 100 shares of public firms in 2016. The CSISC advocates for the interests of minority shareholders proactively. Focusing on abnormal stock returns in M&A announcements, we find that acquirers that have the CSISC as a shareholder (CSISC acquirers) exhibit higher positive abnormal stock returns than non-CSISC acquirers. Cross-sectional analysis suggests that the core results are mainly driven by firms with severe agency problems and weak external/internal monitoring, and those not controlled by the state. In addition, we find that CSISC acquirers have better long-term performance and encounter more M&A failures than non-CSISC acquirers. Our findings indicate that although the CSISC only holds 100 shares of listed companies, it plays an effective role in monitoring and driving firms to make appropriate M&A decisions.     

The role of corporate governance in shaping accruals manipulation prior to acquisitions

Based on stock swap transactions involving public acquirers originating from the UK between 1998 and 2011, this paper investigates the role of corporate governance in shaping accruals manipulation prior to stock swap deals. In contrast to common claims that strong corporate governance constrains accruals manipulation, my results show that well-governed acquirers engage more aggressively in income-increasing accruals manipulation than those with weak governance. This finding is consistent with a role of corporate governance that incentivises managerial actions in the interests of firms’ shareholders. Overall, this finding highlights the setting-specific nature of the earnings management and corporate governance relation. My results are robust to different discretionary accrual models, differences in the firm's growth structure, merger and acquisition control variables, a control group of 100% cash acquirers, an analysis of buy-and-hold abnormal returns, and potential sample selection problems.     

Heterogeneity in the information content of 8-K disclosures about private targets: Acquirer size and target significance

In this paper, we empirically analyze the disclosures required by the Securities Exchange Commission (SEC) for acquisitions of privately held target firms by public acquirers. We find that 8-K disclosures filed by public acquirers within a week after the announcement date of the takeover of a privately held target firm materially affect the pricing and the trading of the acquirers' shares around the event date, but only for large acquiring firms. This impact is economically significant even for targets classified as “insignificant” by the SEC, but again, only for large acquirers. Our results suggest that it may be optimal to further reduce the disclosure costs faced by smaller acquirers in acquisitions of private targets.     

Naked M&A Transactions: How the Lack of Local Expertise in Cross‐Border Deals Can Negatively Affect Acquirer Performance – and How Informed Institutional Investors can Mitigate This Effect

This paper tests how informed investors with local expertise can affect cross‐border deal success using a comprehensive dataset of corporate acquirers’ share registers. We posit that deals in which long‐term investors have a high level of expertise in the target firm's region are more likely to perform better than if the deal is ‘naked’, i.e., when such regional expertise amongst the investors is low. We show that the strength of this effect depends upon an index of country‐level M&A maturity which measures the relative divergence between acquirer and target countries. Specifically, we investigate whether acquirers investing in countries with low M&A maturity gain greater benefit from investors with regional expertise. We present evidence which confirms the hypothesis that acquirers in cross‐border corporate transactions are more likely to be successful if the acquirer's investors have a higher level of expertise in the target region, and that this effect is strongest when the maturity for corporate transactions of the target country is low. This provides a specific setting which is consistent with earlier theoretical work that argues in general that information flows should not just be from firms to capital markets but also in the opposite direction, and that this flow of information is particularly important whenever information is dispersed.     

Are Differences in Acquiring Bank Profit Efficiency Priced in Financial Markets?

We analyze 271 bank mergers for 1986–2001 to attempt to determine if differences among acquirers in profit efficiency are priced in financial markets. We find that the acquirer’s pre-merger profit efficiency (as well as its experience in handling other mergers) has positive effects on the wealth of the acquiring bank’s shareholders. We also find that more profit efficient acquiring banks produce lower abnormal returns for the target, suggesting that well managed (i.e., more profit-efficient) banks are less likely to overpay when they enter into a merger agreement. Financial market participants apparently take something akin to the econometric concept of profit efficiency into account when they make decisions about bank stock purchases and sales around merger announcement dates.      

Improved method for detecting acquirer fixed effects

Large merger and acquisition (M&A) samples feature the pervasive presence of repetitive acquirers. They offer an attractive empirical context for revealing the presence of acquirer fixed effects (permanent abnormal performance). But panel data M&A are quite heterogeneous; just a few acquirers undertake many M&As. Does this feature affect statistical inference? To investigate the issue, our study relies on simulations based on real data sets. The results suggest the existence of a bias, confirming suspicions reported in the extant literature about the validity of fixed-effect regression based statistics (R- square, adjusted R- square and fixed effects Fisher tests) used to detect the presence and significance of acquirer fixed effects. We introduce a new resampling method to detect acquirer fixed effects with attractive statistical properties (size and power) for samples of acquirers that complete at least five acquisitions. The proposed method confirms the presence of acquirer fixed effects but only for a marginal fraction of the acquirer population. This result is robust to endogenous attrition and varying time periods between successive transactions.