Signaling Theory of Acquisition Premium: A Cross-Sectional Analysis from Asia-Pacific

Abstract

The existing studies on mergers and acquisitions ignore the effect of IPO underpricing and government involvement on the valuation and acquisition premium from the target firm’s perspective. We investigate the effect of quality signals on the target’s acquisition premium in mergers and acquisitions deals in the Asia-Pacific over time from 2000 to 2015. We particularly use sell-side government involvement and IPO underpricing as the quality signals of the acquisition premium. Using GEE estimation technique on over 16000 IPO deals of a cross-section of Asia-Pacific countries, our results show that IPO underpricing increases the acquisition premium in the region. However, our country level evidence supports the theory only for Singapore. We find no marginal role of sell-side government involvement to explain acquisition premium in the region; however, our country level analysis shows that acquisition premium increases marginally in the deals only if Australian government involves with the IPO targets. We also find that moderating role of firm size to explain the effect of IPO underpricing on acquisition premium is significantly negative, particularly in China and Singapore; however, the effect of sell-side government involvement increases the acquisition premium in larger firms only in China. Our results show that effect of quality signals on acquisition premium varies across different deal types.The existing studies on mergers and acquisitions ignore the effect of IPO underpricing and government involvement on the valuation and acquisition premium from the target firm’s perspective. We investigate the effect of quality signals on the target’s acquisition premium in mergers and acquisitions deals in the Asia-Pacific over time from 2000 to 2015. We particularly use sell-side government involvement and IPO underpricing as the quality signals of the acquisition premium. Using GEE estimation technique on over 16000 IPO deals of a cross-section of Asia-Pacific countries, our results show that IPO underpricing increases the acquisition premium in the region. However, our country level evidence supports the theory only for Singapore. We find no marginal role of sell-side government involvement to explain acquisition premium in the region; however, our country level analysis shows that acquisition premium increases marginally in the deals only if Australian government involves with the IPO targets. We also find that moderating role of firm size to explain the effect of IPO underpricing on acquisition premium is significantly negative, particularly in China and Singapore; however, the effect of sell-side government involvement increases the acquisition premium in larger firms only in China. Our results show that effect of quality signals on acquisition premium varies across different deal types.