Does Corporate Control Transactionsâ€™ Type and Focus really Create Value? Evidence from an Emerging Market

Ari Warokka,Juan Jose Duran Herrera

doi:10.22610/jebs.v3i3.274

Ari Warokka, Juan Jose Duran Herrera

Open Access

https://doi.org/10.22610/jebs.v3i3.274

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Abstract

The failure of corporate-control transactions as strategic-oriented transactions to create significant values for their stockholders has triggered the management to deal with these phenomena by setting the right and best strategies and at the same time, to ensure company's growth in the future. This study tests empirically the implication of corporate-control transaction announcement on companiesâ€™ abnormal returns. Particularly, this study investigates the effect of the announcement of corporate-control transactionsâ€™ type (merger and acquisition, sell-off, joint venture, alliance) and focus (transformative or expansionist). It used the event study of 94 corporate-control transactions, which contains of transactionsâ€™ type and focus of during 1991-2001 periods. By using multivariate regression analysis, the results show that the announcement of corporate-control transactions significant and positively influence the cumulative abnormal return. Meanwhile, the announcement of the corporate-control transactionsâ€™ type and focus does not significantly influence stockholders' benefit. Generally, the characteristic of the independent and control variables in this study due to their implications to cumulative abnormal return are in-line with previous studies. In addition, this study has proven that the characteristic of investors in Indonesia's stock markets are very different with the ones in many other places like Europe or United States. In other words, this reflects the unstable and inefficiency of Indonesia's stock market as an emerging market.

Highlights

The firm that wants to internationalize its business by accessing capital markets is assumed to maximize its shareholders’ wealth
Research about the announcement’s influence of corporate-control transactions’ type and focus to the companies’ abnormal return, that are listed in ISX (Indonesia Stock Exchange), is one of research efforts in topic “information content" of an event to see market reaction, in term of the reaction of the shareholders, investor, investment analyst, and other stock market activists
In order to test whether the information content of the corporate-control transactions announcement will be responded by investor, it needs to do a companies’ abnormal returns test in the period around the announcement

Summary

Introduction

The firm that wants to internationalize its business by accessing capital markets is assumed to maximize its shareholders’ wealth It should choose the best form of acquiring or entering a new market, whether by acquisition, merger, joint venture, or strategic alliance, which are known as corporate control transactions. It is hoped that the firm is going try to find the best option to maximize its shareholders’ value by using the received abnormal return of its firm’s stock as the proxy. This condition, triggers a curiosity about the effect of corporate control transaction to the company’s stock return. Even the research, which is done by Agrawal, Jaffe, and Mandelker (1992), shows that the shareholders of acquiring firms suffer loss by 10% during five years after the acquisition took place

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