The financial performance of acquired companies in the Chinese stock market 1

Abstract

This chapter deploys a range of metrics – accounting and stock market – to assess the financial performance of MA especially in China, takeovers have been used by the Chinese government since the mid-1990s as an important policy instrument: to build a market competition mechanism for State-Owned Enterprises (SOEs); to restructure SOEs to save problematic large SOEs from failure; to rejuvenate or privatise small SOEs; and to adjust and optimise industrial structure and enhance development efficiency. The chapter helps assess the effectiveness of such reform strategies in the transition from an emerging economy to a mature market economy. The chapter is unusual relative to much of the global literature in the range of metrics it uses, drawing on and comparing both financial accounts and stock market returns, as well as in analysing the performance of targets after acquisition. Such target data are not usually available. The main analysis examines all 80 acquired publicly listed companies (PLCs) more than 50% of whose ownership changed hands in 2000–2005, an important phase in the Chinese transition. It also includes a limited follow-up analysis of a sample of 15 merger deals in 2006–2015 in the Chinese stock market, with performance data up to 2018. One important finding is that even though on average the stock market prices of both targets and acquirers react positively to takeover announcements in the short-term, takeovers do not seem to be followed by improvements in operating efficiency (in terms of pre-tax profitability) or in the stock market performance of the acquired PLCs in comparison with matched firms in the years after takeover. The results suggest that long-run performance was disappointing in the early phase of the growing Chinese M&A market, and there is tentative evidence that more recent experience has also not been positive.