Abstract
Using a panel of Chinese listed firms over the period 1998–2015, we examine the extent to which liquidity impacts firms' acquisition decisions, method of payment choice, and performance following mergers. We observe that cash-rich firms are more likely to attempt acquisitions, especially if they are subject to tunneling. Next, we find that bidders with higher growth opportunities are less likely to use cash payments in acquisitions. This effect is stronger for financially constrained bidders, who face greater opportunity costs of holding cash. Our last set of results highlights the under-performance of cash acquisitions in both the short and long term.
Highlights
China’s Mergers and Acquisition (M&A) transactions, including domestic consolidation, as well as outward and inward takeovers, have significantly increased in recent years
We find that acquiring firms typically show better performance than non-bidders in terms of sales growth, stock return (Return), investment expenditure (CAPEX), price-earnings ratio (PE), Tobin’s Q (Tobin), and cash flow (CF)
Financial constraints and method of payment In order to test our Hypothesis II, we investigate whether the opportunity costs of cash holdings, as measured by the sensitivity of cash payment decisions to growth opportunities (Tobin’s Q), is higher for firms that face higher financial constraints
Summary
China’s Mergers and Acquisition (M&A) transactions, including domestic consolidation, as well as outward and inward takeovers, have significantly increased in recent years (see Table 1). We investigate the extent to which takeovers in China are driven by free cash flow and/or expropriation motives This will enable us to assess whether it is agency costs between managers and owners that can explain mergers, as proposed in the West (Jensen 1986; Hanson 1992; Smith & Kim 1994; Harford 1999; Oler 2008), or if, instead, in emerging economies such as China, where weak corporate governance coexists with high ownership concentration, it is the agency conflict between majority and minority shareholders, which is responsible for M&As. Second, we investigate the extent to which opportunity costs of holding cash and financing constraints can explain the novel finding that cash bidders in the China context perform worse than stock bidders, which goes in sharp contrast to the existing evidence from western countries.
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