How Much Is Too Much: Are Merger Premiums Too High?

Is it too much to pay target firm shareholders a 50% premium on top of market price? Or is it too much to pay a 100% premium when pursuing mergers and acquisitions? How much is too much? In this paper, we examine how the extent of merger premiums paid impacts both the long‐run and announcement period stock returns of acquiring firms. We find no evidence that acquirers paying high premiums underperform those paying relatively low premiums in three years following mergers, and the result is robust after controlling for a variety of firm and deal characteristics. Short term cumulative abnormal returns are moreover positively correlated to the level of the premium paid by acquirers. Our evidence therefore suggests that high merger premiums paid are unlikely to be responsible for acquirers' long‐run post merger underperformance.     

Bond market access and acquisitions: empirical evidence from the European market

We investigate whether access to bond markets affects acquisition activity of the European firms between 1999 and 2014. Our study provides insight into the effect that the growing European bond market has on corporate investment activity. We find that access to the bond markets, measured by the existence of a credit rating, has a significant effect on the tendency of firms to make acquisitions. The effect is strongest in Continental Europe and during times of high acquisition activity. We further find that consistent with prior U.S. evidence, bond market access has an inverse effect on abnormal returns generated by the acquisitions. That finding suggests that firms with superior access to financing pursue targets of lesser quality.     

Target Company Cross‐border Effects in Acquisitions into the UK

We analyse the abnormal returns to target shareholders in cross‐border and domestic acquisitions of UK companies. The cross‐border effect during the bid month is small (0.84%), although cross‐border targets gain significantly more than domestic targets during the months surrounding the bid. We find no evidence for the level of abnormal returns in cross‐border acquisitions to be associated with market access or exchange rate effects, and only limited support for an international diversification effect. However, the cross‐border effect appears to be associated with significant payment effects, and there is no significant residual cross‐border effect once various bid characteristics are controlled for.     

Officers’ fiduciary duties and acquisition outcomes

Using a Delaware case law that recognized officers’ distinct fiduciary duties for the first time in 2009, I examine the effect of officers' fiduciary duties (OFDs) on corporate acquisitions. I find that firms with entrenched officers prior to 2009 experienced increased announcement-period abnormal stock returns, mainly because their acquisitions created more synergies and reduced officers’ incentives to preserve control. These firms increased liability insurance premium expenditures, but reduced value-decreasing acquisition frequencies. Furthermore, the effect of OFDs is more pronounced in firms where officers are not directors, have wealth risk, face less product market competition, are insulated from the market for corporate control, or are able to avoid board monitoring. Overall, OFDs are a critical corporate governance mechanism that works in tandem with other disciplinary mechanisms.     

The Emerging Role of the European Commission in Merger and Acquisition Monitoring: The Boeing–McDonnell Douglas Case

The object of this study is to evaluate the consequences of the application of the EEC Regulation 4064/89 to non–European companies. We focus on the Boeing–McDonnell Douglas merger case, one of the first non–European mergers considered by the Commission. The analysis of abnormal returns on the two securities shows that the threat of a ban of the merger by the Commission were not perceived as credible at first. But when Boeing decided to ask the support of the American government, just after the decision of the European Commission to extend its investigations to the long term exclusivity contracts, the role of the Commission emerged.     

Do Firms Use M&A Business to Pay for Analyst Coverage?

We find that acquirers in merger and acquisition (M&A) transactions are more likely to hire as advisors investment banks that provided analyst coverage for the acquirer prior to the transaction. We also find that compared to a matched control group of banks, the advisor banks are less likely to terminate and more likely to initiate analyst coverage of the acquirer after the transaction. Finally, the advisor banks that initiate coverage after the transaction collect higher fees. These findings suggest that firms value analyst coverage and use M&A advisor appointments and advisor fees to compensate for it.     

Stock market liquidity and firm value

This paper investigates the relation between stock liquidity and firm performance. The study shows that firms with liquid stocks have better performance as measured by the firm market-to-book ratio. This result is robust to the inclusion of industry or firm fixed effects, a control for idiosyncratic risk, a control for endogenous liquidity using two-stage least squares, and the use of alternative measures of liquidity. To identify the causal effect of liquidity on firm performance, we study an exogenous shock to liquidity—the decimalization of stock trading—and show that the increase in liquidity around decimalization improves firm performance. The causes of liquidity's beneficial effect are investigated: Liquidity increases the information content of market prices and of performance-sensitive managerial compensation. Finally, momentum trading, analyst coverage, investor overreaction, and the effect of liquidity on discount rates or expected returns do not appear to drive the results.     

Does CEO reputation matter for capital investments?

This paper examines the association between CEO reputation and corporate capital investments. The efficient contracting hypothesis predicts a positive association between CEO reputation and wealth effects of corporate capital investments. In contrast, the rent extraction hypothesis predicts that the wealth effects of capital investments are negatively associated with CEO reputation. We find that the stock market's responses to announcements of capital investments are more favorable for firms with more reputable CEOs. Moreover, CEO reputation mitigates the negative stock price reaction associated with announcements of capital investments by firms with high free cash flow and low growth opportunities. Additional analysis indicates that firms with more reputable CEOs exhibit significantly better post-investment operating performance improvements than those with less reputable CEOs, especially in firms with high free cash flow and low growth opportunities. Collectively, our results suggest that the efficient contracting hypothesis dominates the rent extraction hypothesis in terms of net economic impact of capital investments on the investing firm.     

Dividends and price momentum

Stock market evidence shows that momentum profits are lower among dividend-paying firms than their non-paying counterparts due to differences in losers’ returns. Additionally, dividend maintenance is associated with higher returns for losers but not for winners. Finally, buying winners that increased their dividends and shorting losers that decreased their dividends enhances momentum profits. Consistent with the evidence, the behavioral models suggest that investors underreact to the losers’ positive dividend-maintaining news, reducing their return momentum and shrinking the payers’ momentum profit. Also, underreaction to positive news from winners’ dividend-increasing announcements as well as to negative news from losers’ dividend-decreasing announcements explains the higher momentum profits for strategies based on these stocks. The results do not appear consistent with risk-based explanations.     

The dividend month premium

We find an asset pricing anomaly whereby companies have positive abnormal returns in months when they are predicted to issue a dividend. Abnormal returns in predicted dividend months are high relative to other companies and relative to dividend-paying companies in months without a predicted dividend, making risk-based explanations unlikely. The anomaly is as large as the value premium, but less volatile. The premium is consistent with price pressure from dividend-seeking investors. Measures of liquidity and demand for dividends are associated with larger price increases in the period before the ex-day (when there is no news about the dividend) and larger reversals afterward.