Essays on corporate takeovers

Abstract

The objective of this thesis is to examine the consequences of corporate takeovers on three distinct markets; namely, the equity market, the bonds market, and the options market. Corporate takeovers are some of the most significant corporate transactions that firms undertake in any given year, both in terms of size and strategic importance. As a consequence of their economic significance, takeovers have the potential to influence all corporate stakeholders. The existing literature on corporate takeovers, however, predominantly concentrates on the consequences for equity holders. This thesis expands this analysis to both the bonds market and the options market, on top of examining what effect cultural factors have on the equity markets response to takeovers. In addition to filling this gap in the literature, the thesis also deals with the question of the role of culture in corporate takeovers. The thesis consists of three distinct essays, with each essay concentrating on the link between corporate takeovers and a specific market. In essay 1, the link between religion-induced social norms and acquiring firm shareholder wealth is considered. Consistent with academic consensus across the sociology and religion studies fields, the prevalent religion of a geographic region is used as a proxy of attitudes towards change and diversity. Social identity theory postulates that both employees and top managers will be influenced by the prevailing attitudes, which can have significant economic consequences. The empirical analysis reveals that, indeed, acquirers located in more progressive regions where attitudes towards change are more positive tend to pursue takeovers which generate greater synergies and create more wealth for their shareholders. The observation that religion induced social norms influence synergy creation and wealth consequences for acquiring firm shareholders is significant, as it suggests that approaches beyond pure rational wealth maximization influence corporate decision making. The second essay considers the link between acquiring firm cash holdings and post takeover announcement bond returns. Examining this link in the context of corporate takeovers is significant, as it overcomes potential endogeneity problems stemming from reverse causality, but also sheds some light on the factors which affect bondholder response to takeovers. The essay considers the link between cash reserves and bondholder post-announcement returns, and whether shareholder power enhances the bond markets views of takeovers or not. The empirical analysis reveals that cash rich acquirers are viewed more negatively by acquirers than cash strapped acquirers. Furthermore, the negative effect that large cash reserves have on bondholder response to takeovers is exacerbated when shareholder oversight is weak. Consistent with the extant literature, these results are interpreted as showing that bondholders, like shareholders, are skeptical of the business decisions made by cash rich firms. Finally, the third essay considers whether the options market is an attractive trading venue for privately informed investors prior to takeover announcements, and whether the threat of a SEC investigation discourages trading in the options market. Corporate takeovers are an ideal setting to study the trading behavior of informed investors due to the inherently large information asymmetry between privately and publically informed investors, and due to the exceptionally large profits that these events offer. The options market is unique, in that it offers much higher potential profits but also a much higher probability of detection – anti-insider trading laws are therefore expected to be considerably more effective. The empirical analysis reveals that informed investors find the options market attractive prior to takeovers. Nevertheless, when the SEC is more likely to detect the informed trading activity, informed traders migrate to the equity market.