Abstract
Mergers and acquisitions (M&A) are an essential way for enterprises to achieve sustainable development. As large sums of money are typically involved in M&A transactions, financing is a vital factor in outcomes. This study examines the relation between equity and debt financing of M&A on subsequent performance, and the effect of ownership (state-owned enterprises versus private-owned enterprises) on M&A performance in China. We are motivated to examine the relation between financing methods and M&A performance in China because the differences in ownership, resource availability and policy support by the government for many firms may affect subsequent performance. Using a large sample of Chinese A-share listed companies between 2009 and 2016, we find that equity-financed M&A transactions lead to significantly better performance than debt-financed transactions. Equity-financed M&A transactions of state-owned enterprises (SOEs) perform significantly better as compared to debt-financed M&A, whereas equity-financed M&A transactions of private-owned enterprises (POEs) have little effect on their performance. This study extends our insights into the relation between M&A financing types and firm performance under different ownership types in the context of emerging markets.
Highlights
Mergers and acquisitions (M&A) are an important strategy for enterprises to ensure their sustainable competitive position [1]
We find that equity-financed M&A transactions lead to significantly better performance than debt-financed transactions
We find that the financing (Fin) coefficient is significantly positive at the 1% level, indicating that the post-M&A performance using equity financing is better than that using debt financing, further supporting Hypothesis 1 (H1) and Hypothesis 2 (H2)
Summary
Mergers and acquisitions (M&A) are an important strategy for enterprises to ensure their sustainable competitive position [1]. Different M&A financing methods are related to different M&A capital costs, financial risks, and governance structures, each of which provides signals to the market that can affect the success or failure of the M&A directly, as well as the subsequent performance of acquirers. Based on signaling theory and the free cash flow hypothesis, Martynova and Renneboog (2009) [13] show that debt financing can enhance the market value of acquirers in Europe. Fischer (2017) [14] show that debt-financed M&A underperform relative to equity-financed M&A. These theories explain and support the findings only partially, owing to the unique institutional environment and regulatory requirements in China
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