Takeover Waves

Horizontal takeovers often occur in waves. A sequence of takeovers is obtained in a Cournot setting with cost asymmetries. They are motivated by two different reasons: (1) a low realization of demand increases the profitability of takeovers; (2) takeovers raise the profitability of future takeovers. A possible explanation of merger races is also obtained by showing that firms buying in the first place pay a lower price for their targets.     

Takeover deterrents and cross partial ownership: The case of golden shares

We analyse takeovers in an industry with bilateral capital‐linked firms in cross partial ownership (CPO). Before merger, CPO reduces the profitability of involved firms, confirming the “outsider effect.” However, the impact of CPO upon merger profitability is two‐sided in a Cournot setting. CPO, by cointegrating profits, increases output collusion leading to anticompetitive effects with facilitated mergers in most cases. Nonetheless, a protective threshold exists for which CPO arrangements can reduce the incentives for hostile takeovers. This has potentially significant regulatory implications. An illustrative example showcases the potential relevance of CPO as a defence against hostile takeovers across different industries.     

Bankruptcy, Takeovers, and Wage Contracts

Takeovers give raiders the opportunity of breaking implicit contracts inside the firm. If implicit contracts are adopted by workers and management to reach more efficient outcomes, then the possibility of takeovers may cause a welfare loss. We show that, under some conditions, this argument can go through even if the firm and the workers can write explicit and complete contracts. The crucial assumption is that the profitability of the firm is linked to its financial situation, in the sense that a firm which has a high probability of bankruptcy will face fewer opportunities than a financially solid firm. In this framework, the possibility of takeovers imposes constraints on the set of feasible employment contracts, leading to inefficient outcomes.     

Management turnover and executive compensation in synergistic takeovers

The purpose of this paper is to provide a model of management turnover and executive compensation for a synergistic takeover. I extend a principal-agent model to include a synergy factor. I argue that the choice of management structure—turnover or no-turnover—provides an opportunity for the shareholder to efficiently utilize three elements of the incentive contracts: effort, insurance (risk-reduction) and synergy.I explain high turnover rates after takeovers, especially in conglomerate mergers as compared to horizontal mergers. Also, my model is consistent with empirical evidence that there is a high rate of management turnover in friendly as well as hostile takeovers and thus complements the model of the disciplinary role of takeovers. I also discuss an optimal compensation structure in synergistic takeovers compatible with their corresponding organizational forms.     

The role of takeovers in increasing efficiency

This paper extends the limited number of studies that examine whether the threat of takeovers serves as an efficiency-enforcement mechanism. A nonparametric programming approach is utilized to construct a measure of overall efficiency that is decomposed into technical and allocative components. Utilizing three inputs and five outputs, measures of efficiency are constructed for a sample of 578 banks from states that permit acquisitions and states that do not. The results indicate that, on average, banks that are subject to takeovers tend to be more efficient Furthermore, the lack of threat of takeovers appears to induce inefficiencies that are technical in nature. The evidence lends support to the hypothesis that the threat of takeovers improves efficiency in firms.     

An analysis of foreign takeovers in the United States

Using a sample of 96 US companies taken over by foreign companies during the period 1975-87, we assess foreign takeovers in two stages: pre-takeover and takeover. We find evidence that foreign firms target US firms whose operations are related to their own operations and that have low market-to-book ratios, suggesting foreign bidders acquire firms that provide a greater opportunity for market entry and synergistic gains. The synergistic gains appear to result from the foreign buyer using its own intangible assets (e.g. managerial skills) to improve the target. We also find that foreign takeover activity is aimed primarily at US industries that themselves make high levels of foreign direct investments, implying that the bidders use takeovers as a quick way to counteract rival firms' moves. We find evidence that foreign takeovers take place in relatively mature, low-growth industries and that foreign targets are, on average, smaller than the non-targets. The wealth effect on the announcement of a takeover is significantly higher for foreign takeovers than for takeovers by domestic firms. Also, we find that foreign bidders pay a slightly higher premium for targets whose operations are related to their own.     

The strategic choice of payment method in takeovers: The role of environmental,social and governance performance

Payment method choice in takeovers is mainly driven by both asymmetric information between the acquirer and the target and the acquirer's financial capability. In this paper, we examine whether increased transparency and better access to finance induced by environmental, social and governance (ESG) performance are associated with the strategic choice of payment method in takeovers. More specifically, we investigate how the acquirer's and the target's ESG coverage and different levels of ESG performance affect the probability of cash offers in a sample of 836 US takeovers from 1992 to 2014. In examining the target, our results suggest that ESG coverage is positively associated with the probability of cash offers, whereas we find a negative relationship for ESG concerns and no effect for ESG strengths. Upon examining the acquirer, ESG coverage and ESG concerns both increase the probability of cash offers; however, we do not find results supporting our prediction regarding the acquirer's ESG strengths. We infer that ESG coverage and level affect strategic considerations in the choice of the payment method in takeovers because they not only reduce information asymmetry, but also enhance financing capability.     

Influence of acquirer boards on M&A value creation: Evidence from Continental Europe

We examine how the size and the composition of acquirer boards are associated with shareholder abnormal returns for 2,230 M&As made by listed firms in Continental Europe. Although board size proves insignificant, our findings do offer some evidence as to a beneficial effect of board diversity on M&A value creation. Gender diversity appears marginally positively associated with acquirer shareholder abnormal returns. The fraction of foreign directors is in general not significantly positive, unless the rule of law in the acquirer country is weak. Nonetheless, nationality diversity in the board turns out harmful in purely domestic takeovers. The influence of age diversity is marginally positive, yet only in domestic and horizontal takeovers. Next, the fraction of independent directors has a robust positive effect on the acquirer CAR, while directors with multiple board appointments prove valuable especially through preventing firms from pursuing poor takeovers. Finally, CEO duality is detrimental only in industry‐diversifying deals initiated by acquirers that are not controlled by an individual or a family shareholder. Any negative CEO‐duality effect is mitigated when the acquirer‐country rule of law is strong.     

Re-connecting capitalism: prospects for the regulatory reform of the employee interest in UK takeovers

This article draws upon the disconnected capitalism thesis (DCT) to analyse UK takeovers and their implications for workers. The DCT refers to the disconnect between the source of value creation (the labour process) and the wider political economy. Specifically, we highlight a particular aspect of this disconnect whereby those who create value and have a long-term stake in firms (employees and managers at the firm level) are disconnected from decisions regarding takeovers, as a consequence of wider economic and political trends (processes of financialisation/marketisation and associated state support for a neoliberal takeover regime). We outline these trends and argue the case for a re-connect, which will require empowering employees and managers to have more influence in takeover decisions and, in turn, disempowering shareholders and financial intermediaries. The article thus highlights the regulatory space for takeovers and considers feasible policy options, a set of interlinked regulatory changes, which will in particular require a more assertive state.     

Fusionen und Übernahmen im Licht der Hybris – Überblick über den Forschungsstand

Although corporate acquisitions are ubiquitous a large number of M&A fails. One explanation for such failure is the hubris hypothesis for corporate takeovers. A decision maker affected with hubris (or overconfidence) will overestimate his abilities in raising potential synergies and is likely to make investment decisions destroying shareholder wealth. The growing literature on CEO hubris proposes various ways to measure hubris. We present these indicators and discuss possible advantages and drawbacks. (71 words)     

Disciplinary Takeovers and Industry Effects

This paper presents a disciplinary explanation for some seemingly paradoxical stylized facts from the takeover literature. Most notable among these are: (1) hostile takeovers are predicted better by industry-wide than by firm-specific performance failures; and (2) gains from a successful bid for a specific firm extend to other firms in the same industry. Our explanation is based on the idea that managerial incentives based on relative performance evaluation may induce an inefficient industry-wide equilibrium in which all firms underperform with respect to a value-maximizing firm, but no firm underperforms with respect to the industry average. A takeover can serve as a means to destroy such an inefficient industry-wide incentive equilibrium.     

Do institutional shareholders police management?

Some have argued that legislation limits the ability of institutional shareholders to discipline shirking management teams. However the level of takeover activity in the 1980s suggests that the cost of using takeovers to discipline management has decreased. This may give institutional shareholders the ability to participate actively in corporate governance. This paper presents an empirical examination that is consistent with this hypothesis. First, institutional ownership concentration varies across firms according to the benefits of policing firms in 1988. The relationship is less pronounced in 1980. Second, firms characterized by concentrated institutional ownership are more likely to use takeovers as the disciplinary mechanism. © 1997 John Wiley & Sons, Ltd.     

Corporate Control Through Board Dismissals and Takeovers

This paper examines some policy issues related to the interaction between internal and external corporate control mechanisms—board dismissals and takeovers—by focusing on the information aggregation and other effects related to this interaction. We model the functioning of corporate control mechanisms as an example of a multilayered principal-agent relationship in which shareholders delegate the task of monitoring management quality to the board and rely on the external takeover market to provide additional disciplining of the manager as well as of the board. This gives rise to two effects: (1) a substitution effect, whereby the takeover market partially substitutes for board dismissal of the manager, leading to greater lenience toward the manager by a board acting in the shareholders' best interest, and (2) a kick-in-the-pants effect, whereby the board is stricter with the manager because it may be dismissed by a successful acquirer who views it as lax. The interaction of these two effects leads to various implications about the behavior of boards and potential acquirers. In particular, a well-functioning internal control mechanism (the board) does not obviate the need for external control (takeovers). Moreover, somewhat counterintuitively, there may be a greater incidence of takeovers when the internal control mechanism is working well than when it is not.     

Determinants of the medium of payment used to acquire privately-held targets

Since private firms have a unique ownership structure, the method of payment decision when acquiring private firms is influenced by a different set of factors than the method of payment decision when acquiring public firms. We find that bidders are more likely to pay for private targets with stock when the capital gain tax rate is relatively high. This relationship is attributed to greater tax benefits to private owners who receive stock in periods when the capital gains tax is high. Bidders are more likely to use stock in takeovers when the targets are high-tech firms, which we attribute to protection against overpayment by using a contingent pricing method. Bidders are more likely to use cash in takeovers since the Sarbanes-Oxley Act, which we attribute to the higher level of due diligence by bidder managers and board members, and therefore a reduced need for contingent pricing methods like stock. Overall, the results suggest the likelihood of using stock to acquire private targets is positively related to the information asymmetry between the parties, while the likelihood of using cash is greater when conditions (such as SOX) reduce the information asymmetry.     

The role of executives in hostile takeover attempts

This paper proposes a two-stage game theoretic model where the discretionary power of executives acts as an implicit defense against hostile takeovers. Following managerial enterprise models, this paper analyzes the effects of discretionary power of target’s executives over R&D and advertising expenditures in defeating hostile takeover attempts. It is shown that in vertically differentiated industries, in equilibrium, target’s executives keep low level of R&D and advertising expenditures to make their firm an unattractive target for hostile takeovers. The model reveals that executives are influenced by their self-interest of monetary and non-monetary benefits and this self-interest makes the industry more differentiated.     

How does stakeholder engagement through environmental,social, and governance affect eco-efficiency and profitability efficiency? Zooming into Apple Inc.'s counterparts

As global ecological degradation intensifies, a trade-off has arisen between environmental protection and production efficiency to achieve sustainable development for the environment, society, and the company itself. However, the potential reverse causality relationship between environmental, social, and governance (ESG) and corporate efficiency may lead to confusion. This study estimates the eco-efficiency of Apple Incorporated's value-chain counterparts in the first stage and creates values and profitability in the second stage of efficiency evaluation. Results obtained from the (i) directional distance function in the two-stage data envelopment analysis (DEA), (ii) additive efficiency decomposition two-stage network DEA model, and (iii) network slacks-based measure model are consistent. That is, Apple counterparts manage more efficient eco-efficiency than profitability efficiency, implying that eco-efficiency is their competitive advantage. We thus also run a regression analysis to examine how the ESG ratings of Apple counterparts explain their eco-efficiency and profitability efficiency. Although the overall ESG rating positively explains the efficiencies, we found that the individual governance rating shows no statistically significant effect. The regression results provide insight for practitioners on the importance of investing in the three aspects of a firm's collective conscientiousness for societal and environmental governance. This paper integrates companies' eco-efficiency and profitability efficiency to resolve the conflict between environmental issues and production efficiency. It also analyzes in depth the effects of ESG and its three individual factors on eco-, profitability, and average efficiencies. The diversity of research methods also provides new ideas for future research related to firm efficiency.     

Financial Consequences in Foreign Subsidiary Manager Performance Evaluations

ABSTRACT

This explorative study contributes to the limited body of knowledge on the financial impacts of using multiple forms of controls in managerial performance evaluations. The study explores (1) how short-term profitability is affected by headquarters' emphasis on financial, nonfinancial and selected behavioral controls in the performance evaluation of overseas subsidiary managers, and (2) whether the effects of such evaluations vary with perceived environmental changes. Documentary and survey data for a sample of multinational companies headquartered in Finland propose that the emphasis of financial controls by top management improves short-term profitability more than an emphasis on nonfinancial or behavioral controls. Simultaneous emphasis of all three types of controls does not significantly increase short-term profitability over an emphasis on financial controls, because the positive effect of behavioral controls is mostly offset by a negative effect of nonfinancial controls. Perceived environmental changes appear to moderate the relationship between the headquarters' emphasis on nonfinancial controls and short-term profitability. These findings imply that in the short-term and regardless of the environmental contingencies analyzed, financial controls are more effective than nonfinancial or behavioral controls in improving profitability, but packages comprising financial and behavioral (action accountability) controls in particular can improve short-term profitability even more.     

The impacts of competition and shadow banking on profitability: Evidence from the Chinese banking industry

This paper contributes to the empirical literature on banking profitability by testing the impacts of competition and shadow banking on bank profitability using a sample of 100 Chinese commercial banks over 2003–2013 with 417 and 395 observations. The current study fills the gaps in the empirical studies by examining the competition in different banking markets (i.e. deposit market, loan market and non-interest income market) in China and further evaluating their impacts on bank profitability. The findings show that the non-interest income market has a higher level of competition compared to the deposit market and loan market. It is further reported that a lower level of competition in deposit market leads to an increase in the profitability of Chinese commercial banks. Finally, the results suggest that shadow banking improves the profitability of Chinese banks.     

Performance following ESOP formations by publicly-held corporations

The study assesses the stock performance of publicly-traded firms following ESOP formations. The results show that ESOPs contributing common stock elicit a more favorable market response than ESOPs contributing convertible preferred stock. This result is consistent with the argument that the convertible preferred contribution reduces the regularity of the repurchase of common shares in the market. Also, ESOPs intended to defend against takeovers elicited no market reaction while other ESOPs elicited a favorable market response. This result supports the hypothesis that ESOPs intended to prevent takeovers may eliminate external market discipline. The study also assesses the long-term performance of firms following ESOP formations to determine whether some hypothesized effects of ESOPs are realized. Results of the analysis suggest that firms experienced favorable long-term valuation effects following the creation of new ESOPs. However, the expansion of existing ESOPs was not as favorable. Differences in the effect can be attributed to the loss of external discipline when an expanded ESOP leads to an increase in proportional ownership. *** DIRECT SUPPORT *** A00HA012 00006     

Impact of Basel III liquidity regulations on U.S. Bank performance in different conditional profitability spectrums

We study the impact of the Basel III liquidity constraints, represented by the liquidity coverage ratio (LCR) and the net stable funding ratio (NSFR), on bank profitability, by employing the simultaneous quantile regression framework with time fixed effects. We find a positive and significant relationship between the LCR and profitability and the NSFR and profitability over most quantiles. However, the small magnitudes of the coefficients on LCR and NSFR across all quantiles of profitability suggest that LCR and NSFR have a minor quantitative impact on bank profitability. We then test and find that the Basel III liquidity constraints have a significantly different impact on banks with very low profits compared to banks who enjoy high profitability, emphasizing the need to use a quantile approach. We plot the coefficients to illustrate the impact of liquidity constraints across different conditional profitability spectrums. Lastly, we find that small banks are more vulnerable to short term liquidity risks (LCR) and big banks are more susceptible to medium to long term liquidity risks (NSFR). This suggests that considerations should be given to tailoring liquidity regulations based on the bank size and the relative bank profitability. The quantitatively small impact of the constraints suggest that Basel III has successfully set liquidity requirements to minimize the impact on bank profitability and the likelihood of an industry-wide liquidity crisis.