Measuring Takeover Premiums in Cross-Border Mergers and Acquisitions: Insights from Turkey

We investigate whether the merger announcement dates provided in a popular mergers and acquisitions (M&A) database, SDC, serve as accurate event dates for estimating the wealth effects of mergers on target firms located in Turkey. We find that 74 percent of SDC’s merger announcement dates are preceded by merger-related events such as merger rumors, target firms’ search for potential acquirers, and early-stage merger negotiation announcements. Target cumulative abnormal return (CAR) estimates around these early dates are almost twice as large as the CAR estimates around SDC’s merger announcement dates. We argue that our findings have implications for the recently flourishing cross-border M&A literature.     

Do CRA‐Related Events Affect Shareholder Wealth? The Case of Bank Mergers

This study explores how Community Reinvestment Act (CRA) protests and their resolution affect the market value of merging banks. We find, in contrast to earlier research, that CRA‐related events are not associated with significant negative market reactions for either bidder or target institutions. Rather, the market does not seem to respond strongly to CRA‐related events at all. The results appear to stem from the choice of an estimation period for establishing an institution's baseline stock‐market price dynamics that does not include abnormal security price movements induced by the merger announcement.     

The impact of bank merger growth on CEO compensation

We examine the impact of bank mergers on chief executive officer (CEO) compensation during the period 1992–2014, a period characterised by significant banking consolidation. We show that CEO compensation is positively related to both merger growth and non‐merger internal growth, with the former relationship being higher in magnitude. While CEO pay–risk sensitivity is not significantly related to merger growth, CEO pay–performance sensitivity is negatively and significantly related to merger growth. Collectively, our results suggest that, through bank mergers, CEOs can earn higher compensation and decouple personal wealth from bank performance. Furthermore, we document a more severe agency problem in CEO compensation as a consequence of bank mergers relative to mergers in industrial firms. Finally, we find that the post‐financial crisis regulatory reform of executive compensation in banks has limited effectiveness in curbing the merger–pay links.     

Liquidity and Returns to Target Shareholders in the Market for Corporate Control: Evidence from the US Markets

In this paper we analyze how stock market liquidity affects the abnormal return to target firms in mergers and tender offers. We predict that target firms with poorer stock market liquidity receive larger announcement day abnormal returns based on the following considerations. First, target firms with poorer stock market liquidity receive greater liquidity improvements after a merger or tender offer. Second, deals that involve less liquid targets are less anticipated and/or more likely to be completed. Third, less liquid stocks have more diverse reservation prices across shareholders and thus require a higher takeover return. Consistent with these expectations, we show that abnormal returns to target firms’ shareholders are significantly and positively related to the difference in liquidity (measured by the bid‐ask spread) between acquirers and targets as well as the magnitude of target firms’ liquidity improvement.     

EXPLORING THE LINK BETWEEN INFORMATION QUALITY AND SYSTEMATIC RISK

We examine the effect of information quality around earnings announcements and insider trading events on equity systematic risk. Our results indicate that observed systematic risk significantly increases after these events. Consistent with the insights provided by our framework, the change in systematic risk is increasing in the ratio of event‐related to pre‐event information quality. Our results have implications for all empirical work attempting to model security returns around firm and macroeconomic announcements.     

The Impact of Bank Consolidation on Commercial Borrower Welfare

We estimate the impact of bank merger announcements on borrowers' stock prices for publicly traded Norwegian firms. Borrowers of target banks lose about 0.8% in equity value, while borrowers of acquiring banks earn positive abnormal returns, suggesting that borrower welfare is influenced by a strategic focus favoring acquiring borrowers. Bank mergers lead to higher relationship exit rates among borrowers of target banks. Larger merger‐induced increases in relationship termination rates are associated with less negative abnormal returns, suggesting that firms with low switching costs switch banks, while similar firms with high switching costs are locked into their current relationship.     

Dynamic efficiencies of the 1997 Boeing‐McDonnell Douglas merger

We evaluate the welfare effects of the 1997 Boeing‐McDonnell Douglas merger in the medium‐sized, wide‐body aircraft industry. We find that the merger led to lower prices. To explain the price drop, we develop a dynamic oligopoly game with learning‐by‐doing. We quantify the welfare effects of the merger by incorporating both increased market power and merger efficiencies from accelerated learning‐by‐doing. Our dynamic analysis indicates that net consumer surplus increased by as much as $5.14 billion, whereas a static model ignoring efficiencies of learning‐by‐doing predicts a $0.92 billion loss.     

Endogenous Events and Long-Run Returns

We analyze event abnormal returns when returns predict events.In fixed samples, we show that the expected abnormal returnis negative and becomes more negative as the holding periodincreases. Asymptotically, abnormal returns converge to zeroprovided that the process of the number of events is stationary.Nonstationarity in the process of the number of events is neededto generate a large negative bias. We present theory and simulationsfor the specific case of a lognormal model to characterize themagnitude of the small-sample bias. We illustrate the theoryby analyzing long-term returns after initial public offerings(IPOs) and seasoned equity offerings (SEOs).     

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.     

Shareholder Value Creation in European M&As

This paper looks at the value generated to shareholders by the announcement of mergers and acquisitions involving firms in the European Union over the period 1998–2000. Cumulative abnormal shareholder returns due to the announcement of a merger reflect a revision of the expected value resulting from future synergies or wealth redistribution among stakeholders. Target firm shareholders receive on average a statistically significant cumulative abnormal return of 9% in a one‐month window centred on the announcement date. Acquirers’ cumulative abnormal returns are null on average. When distinguishing in terms of the geographical and sectoral dimensions of the merger deals, our main finding is that mergers in industries that had previously been under government control or that are still heavily regulated generate lower value than M&A announcements in unregulated industries. This low value creation in regulated industries becomes significantly negative when the merger involves two firms from different countries and is primarily due to the lower positive return that shareholders of the target firm enjoy upon the announcement of the merger. This evidence is consistent with the existence of obstacles (such as cultural, legal, or transaction barriers) to the successful conclusion of this type of transaction, which lessen the probability of the merger actually being completed as announced and, therefore, reduce its expected value.     

Informed Trading around Merger Announcements: An Empirical Test Using Transaction Volume and Open Interest in Options Market

This paper provides empirical evidence on the level of trading activity in the stock options market prior to the announcement of a merger or an acquisition. Our analysis shows that there is a significant increase in the trading activity of call and put options for companies involved in a takeover prior to the rumor of an acquisition or merger. This result is robust to both the volume of option contracts traded and the open interest. The increased trading suggests that there is a significant level of informed trading in the options market prior to the announcement of a corporate event. In addition, abnormal trading activity in the options market appears to lead abnormal trading volume in the equity market. This finding supports the hypothesis that the options market plays an important role in price discovery.     

Equity‐Based Incentives,Risk Aversion,and Merger‐Related Risk‐Taking Behavior

We find that post‐merger equity risk is negatively related to the sensitivity of CEO wealth to stock return volatility (vega), but is concentrated in CEOs with high proportions of options and options that are more in‐the‐money. The probability of industrial diversification also increases in vega. Additional tests show that the decline in post‐merger equity risk results in a significant decrease in shareholder wealth. This decrease is concentrated among firms with CEOs having the highest delta and the highest delta and vega. Our results suggest that the increased convexity provided by option‐based compensation does not necessarily increase risk‐taking behavior by CEOs.     

Uncertainty or Misvaluation? New Evidence on Determinants of Merger Activity from the Banking Industry

We use data from the past 30 years of takeover activity in the U.S. banking industry to test competing neoclassical and misvaluation merger theories. Test results are consistent with evidence in the literature that merger activity is significantly related to both structural industry change and stock price misvaluation. Our primary contribution is to show that changes in misvaluation reflect a rise in industry‐wide risk taking and that increases in risk originate from changes in industry structure due to deregulation. A measure of bank risk taking subsumes the power of stock price misvaluation to explain subsequent merger activity.     

Market reaction to the merger announcements of US banks: A non-parametric X-efficiency framework

This paper investigates the short-term market reaction of nine profit-efficiency, pre-classified merger deals of US banks over the time period from 1992 to 2003. The findings show that mergers combining low efficiency acquirers and targets create significant market returns following the merger event, while mergers combining the least efficient acquirers with moderately efficient targets diminish the acquirer's wealth more than any other type of merger. Furthermore, findings show that acquirers generally lose about 2.5% of their wealth upon the merger announcement while targets experience, on average, significant market returns of 15.5% following the merger announcement.The findings of the cross sectional analysis show that the CARs of acquirers are positively related to their technical efficiency and geographic diversification, while targets' CARs are negatively related to both target size and revenue efficiency.     

It Takes Two: The Incidence and Effectiveness of Co‐CEOs

This study examines the phenomenon of co‐CEOs within publicly traded firms. Although shared executive leadership is not widespread, it occurs within some very prominent firms. We find that co‐CEOs generally complement each other in terms of educational background or executive responsibilities. Our results show that firms most likely to appoint co‐CEOs have lower leverage, a more limited firm focus, less independent board structure, fewer advising directors, lower institutional ownership, and greater levels of merger activity. The governance structure of co‐CEO firms suggests that co‐CEOships can serve as an alternative governance mechanism, with co‐CEO mutual monitoring substituting for board or external monitoring and co‐CEO complementary skills substituting for board advising. An event study indicates that the market reacts positively to appointments of co‐CEOs while a propensity score analysis shows that the presence of co‐CEOs increases firm valuation.     

The long-term performance of acquiring firms: A re-examination of an anomaly

In this paper, we investigate the long-term stock return performance of Canadian acquiring firms in the post-event period by using 1300 M&A events in the 1993–2002 period. We use both event-time and calendar-time approaches and conduct robustness tests for benchmarks, methodological choices, statistical techniques and other related factors such as payment methods. We also assess the role of governance variables. Contrary to stylized facts reported in US studies, neither do we find negative abnormal long-term abnormal stock market returns once we account for methodological discrepancies nor do we find negative long-term operating performance in the post-acquisition periods for the acquirer following an acquisition event. We also find that the Canadian market reacts positively to acquisition announcements but corrects for this reaction within a short period of time. Overall we find that Canadian acquisitions do not show value destruction or overpayment.     

The effect of merger anticipation on bidder and target firm announcement period returns

This paper examines investors' anticipation of bidder and target merger candidacy and if investor anticipations about candidacy affect the distribution of value between bidder and target firm shareholders. We find that bidder firms can be predicted more accurately than target firms. To investigate how merger announcement period returns are distributed among bidder and target shareholders, we control for different degrees of predictability in bidder and target selection and find that the difference between bidder and target firm three-day cumulative abnormal returns around a merger announcement decreases significantly. Thus, the evidence supports the hypothesis that the asymmetry in investor anticipations about merger candidacy causes disparity in bidder and target firm announcement period abnormal returns.     

What Effect Did AIG's Bailout,and the Preceding Events,Have on Its Competitors?

We examine the effect of American International Group's (AIG) bailout, and the events leading up to it, on its insurance industry rivals. The reaction of rivals to AIG‐related events depends on the relative strength of two competing effects. The contagion effect implies that rival returns will decrease following negative events affecting AIG. In contrast, competitive effects will occur if investors expect that rivals will be able to benefit from AIG's downfall. Using three‐factor multivariate regression model event study methodology, we find evidence of both effects around several key dates in AIG's decline.     

Executive compensation and informed trading in acquiring firms around merger announcements

This paper analyzes informed trading in acquiring firms through (stock) merger announcements. We show that pre-announcement abnormal option volumes in acquiring firms strongly increase ahead of a stock merger (by approximately 300%). Furthermore, we show that the direction of option trades (puts or calls) prior to an announcement can predict post-announcement stock returns. Our results also indicate that higher wealth-to-performance sensitivities of top executives are related to higher abnormal put than call option trading before stock merger announcements. Overall, our results support the view that top executives have a hedging motive. They tend to purchase protection against, e.g., confounding (negative) information policies and/or empire-building mergers with negative NPVs, in order to avoid short-term salary losses (lower bonuses, lower stock options, etc.).     

Equity Issuance and Adverse Selection: A Direct Test Using Conditional Stock Offers

We conduct a unique test of adverse selection in the equity issuance process. While common stock is the dominant means of payment in bank mergers, stock acquisition agreements provide target shareholders with varying degrees of protection against adverse price movements in the bidder's stock between the time of the merger agreement and the time of merger completion. We show that it is the degree of protection against adverse price changes and not the percent of stock offered in a bank merger that explains bidder merger announcement abnormal returns. This result is difficult to explain outside of an adverse selection framework.