Bid Premium Research Articles

Director gender and mergers and acquisitions

Does director gender influence CEO empire building? Does it affect the bid premium paid for target firms? Less overconfident female directors less overestimate merger gains. As a result, firms with female directors are less likely to make acquisitions and if they do, pay lower bid premia. Using acquisition bids by S&P 1500 companies during 1997–2009 we find that each additional female director is associated with 7.6% fewer bids, and each additional female director on a bidder board reduces the bid premium paid by 15.4%. Our findings support the notion that female directors help create shareholder value through their influence on acquisition decisions. We also discuss other possible interpretations of our findings.

The Impact of Privacy Policy on the Auction Market for Online Display Advertising

The advent of online advertising has simultaneously created unprecedented opportunities for advertisers to target consumers and prompted privacy concerns among consumers and regulators. This paper estimates the financial impact of privacy policies on the online display ad industry by applying an empirical model to a proprietary auction dataset. Two challenges complicate the analysis. First, while the advertisers are assumed to publicly observe tracking profiles, the econometrician does not see this data. My model overcomes this challenge by disentangling the unobserved premium paid for certain users from the observed bids. In order to simulate a market in which advertisers can no longer track users, I set the unobserved bid premium’s variance to zero. Second, the data provider uses a novel auction mechanism in which first-price bidders and second-price bidders operate concurrently. I develop new techniques to analyze these hybrid auctions. I consider three privacy policies that vary by the degree of user choice. My results suggest that online publisher revenues drop by 3.9% under an opt-out policy, 34.6% under an opt-in policy, and 38.5% under a tracking ban. Total advertiser surplus drops by 4.6%, 4'39%, and 45.5% respectively.

Identifying the strengths, weaknesses, opportunities and threats to TOT and divestiture business models in China's water market

This study attempts to enhance the understanding of the two emerging public–private partnership (PPP) business models – Transfer-Operate-Transfer (TOT) and divestiture – in the context of Chinese water sector. Foreign investors aiming to enter or expand their share in the market need to select an optimal PPP model between competing ones through a strengths, weaknesses, opportunities, and threats (SWOTs) analysis. For the purpose, we employ the triangulation approach consisting of an opinion survey to measure the level of consensus on each of a total of eleven SWOT factors surrounding TOT and divestiture models, and in-depth case studies on the two-representative TOT and divestiture projects. Our assessments indicate the emergence of a strong consensus between interviewees regarding bid premium, financial burden, and bidding method in TOT and fixed-return provisions, operational management efficiency, majority control, and equity transfer proportion in divestiture. However, it is advised that foreign investors should be flexible in interpreting the factors and respond them at the solution level considering a project-specific environment.

Steady as She Goes: Female Board Representation and Corporate Mergers and Acquisitions Activity

This study contributes to the current discussion on board gender diversity by providing a comprehensive examination of the impact of female board representation on firm-level strategic behavior. Focusing on the domain of mergers and acquisitions (M&A), we build theory based on psychological, social, and cognitive mechanisms to predict that firms with female directors will be associated with more cautious, less aggressive M&A behavior. In particular, we hypothesize and find evidence that firms with female board representation tend to engage in acquisitions that are fewer in number, smaller in size, cash- (vs. equity-)funded, and more diversified. Contrary to our prediction, we find that female board representation is associated with higher bid premiums (i.e., increased overpayment). In supplementary analyses, we find no significant positive or negative impact of female-represented boards on short-term market reaction to acquisitions (cumulative abnormal returns) or long-term firm performance. We demonstrate the robustness of our findings through the use of a difference-in-difference analysis of a sub-sample of firms that experienced exogenous changes in board gender composition as a result of director deaths.

Cross-Border Mergers and Acquisitions amid Political Uncertainty

This paper examines the effects of political uncertainty surrounding national elections on cross-border mergers and acquisitions activity. Using a sample of completed cross-border mergers and acquisitions among 43 countries announced during 1990-2011, I find that the volume of cross-border mergers and acquisitions between two countries significantly declines when there is a forthcoming national election in the target country. This result suggests that political uncertainty regarding future government policy is an important determinant of cross-border acquisition activity. In addition, industry characteristics play a role in explaining the pattern of cross-border mergers and acquisitions amid increasing political uncertainty: firms in industries that are more dependent on the quality of contract enforcement, labor, and government spending are less likely to be acquired during national election years. I further test the valuation effects of policy uncertainty. I find that acquirers offer a lower bid premium when a cross-border deal is announced during the target country’s election year. Further analysis reveals that the acquirer captures a greater fraction of merger gains relative to the targets in such a deal, which indicates that the target’s bargaining position in merger negotiations is weakened during its national election year. Political uncertainty also has an effect on the method of payment in cross-border acquisitions. The likelihood of an all-cash offer is significantly lower in the face of the target country’s election.

Liability Protection, Director Compensation, and Incentives

We examine the effect of liability protection on the compensation of directors and on takeover outcomes. Consistent with the hypothesis that directors require additional compensation if they bear liability, we find that director compensation is higher for firms that provide less liability protection. Examining takeovers, we find evidence that takeovers of firms with protected directors are less likely to succeed. Moreover, firms with protected directors are more likely to accept a lower bid premium, and this finding is consistent with protected directors having reduced incentives to negotiate for the highest possible price during the acquisition. Overall, the results are consistent with the notion that director liability provisions have a significant impact both on director compensation and director duty.

Men are from Mars, Women are from Venus: Director Gender and Mergers and Acquisitions

Does director gender influence CEO empire building? Does it affect the bid premium paid for target firms? Less overconfident female directors less overestimate merger gains. As a result, firms with female directors are less likely to make acquisitions and if they do, pay lower bid premia. Using acquisition bids by S&P 1500 companies during 1997-2009 we find that each additional female director is associated with 7.6 percent fewer bids, and each additional female director on a bidder board reduces the bid premium paid by 15.4 percent. Our findings support the notion that female directors help create shareholder value through their influence on acquisition decisions. We also discuss other possible interpretations of our findings.

Taking stock or cashing in? Shareholder style preferences, premiums and the method of payment

Abstract We develop and test hypotheses on the impact of target shareholders' investment style preferences on the method of payment and premiums in acquisitions. Stock offers (unlike cash offers) allow target shareholders to defer capital gains taxes. This deferral value, however, depends on target shareholders' willingness to retain acquirer stock. The empirical findings support our hypotheses. Bid premiums in stock offers are negatively and jointly related to target shareholder tax liabilities and to variables proxying for target shareholder willingness to hold acquirer stock. Moreover, the difference between predicted cash and stock premiums due to these factors significantly explains the method of payment choice.

Taking Stock or Cashing In? Shareholder Style Preferences, Premiums and the Method of Payment

We develop and test hypotheses on the impact of target shareholders’ investment style preferences on the method of payment and premiums in acquisitions. Stock offers (unlike cash offers) allow target shareholders to defer capital gains taxes. This deferral value, however, depends on target shareholders’ willingness to retain acquirer stock. The empirical findings support our hypotheses. Bid premiums in stock offers are negatively and jointly related to target shareholder tax liabilities and to variables proxying for target shareholder willingness to hold acquirer stock. Moreover, the difference between predicted cash and stock premiums due to these factors signi cantly explains the method of payment choice.

Does Board Gender-Diversity Matter in M&A Activities?

Responding to the social recognition of the importance of corporate gender-diversity, the topic has evoked significant interest in academic literature. This paper contributes to the discussion by focusing on the economic consequences of board-gender diversity in M&A setting. Using sample of 649 acquisitions by U.S. publicly listed companies between 2001 and 2009, we find that that board gender-diversity has no effect on either the size of the bid premium or the strength of the market reaction to M&A announcements, however, it has a positive impact on the long-term performance of the acquirers. This finding is consistent with the literature that suggests that board gender-diversity leads to positive economic outcomes such as more ‘optimal’ compensation structures, higher informativeness of stock prices and enhanced earnings quality.

The dynamics of mergers and acquisitions in oligopolistic industries

This paper embeds an oligopolistic industry structure in a real options framework in which synergy gains of horizontal mergers arise endogenously and vary stochastically over time. We find that (i) mergers are more likely in more concentrated industries; (ii) mergers are more likely in industries that are more exposed to industry-wide shocks; (iii) returns to merger and rival firms arising from restructuring are higher in more concentrated industries; (iv) increased industry competition delays the timing of mergers; (v) in sufficiently concentrated industries, bidder competition induces a bid premium that declines with product market competition; and (vi) mergers are more likely and yield larger returns in industries with higher dispersion in firm size.

Consequences of Riding Takeover Waves: Australian Evidence

AbstractThis paper uses Australian data to analyze takeover bid premiums and long‐term abnormal returns for mergers that occur during wave and non‐wave periods. Findings reveal that bid premiums are slightly lower in wave periods, and bidding firms earn normal post‐takeover returns (relative to a portfolio of firms matched on size and survival) if their bids were made in non‐wave periods. However, bidders who announced their takeover bids during wave periods exhibit significant underperformance. For mergers that took place within waves, there is no difference in bid premiums nor is there a difference in the long‐run returns of bidders involved during the first half and second half of the waves. We find that none of prominent theories of merger waves (managerial, misvaluation, and neoclassical) can fully account for Australian takeover waves and their effects. Instead, our results suggest that Banal‐Estanol et al.'s screening theory of merger activity, by combining the misvaluation and neoclassical theories, may provide a better explanation.

Stock Price Correlation and the Method of Payment in Corporate Acquisitions

We provide novel evidence that the interim risk between a merger deal's announcement and completion is asymmetrically borne by the bidder. While the target can generally accept higher offers during the interim period -- presumably when its value increases -- the legal literature argues that bidders are more constrained in their ability to withdraw. We find that the likelihood of deal renegotiation is higher only when the target's value increases relative to the offer value during the interim period. Furthermore, we find significant effects on the bid premium, break-up fee, and method of payment, all consistent with this asymmetric risk hypothesis.

Men are from Mars, Women are from Venus: Gender and Mergers and Acquisitions

This paper examines the association between female director representation on corporate boards and mergers and acquisitions (M&As). Using acquisition bids initiated by the S&P 1500 firms during 1997-2009, we find that each ten-percent representation of female directors on a corporate board is associated with a reduction in the number of a company’s acquisition bids by 4.7 percent: women are less acquisitive than men. Furthermore, using over 450 acquisition bids for which we have data on bidder and target firm characteristics and their board membership, we find that each ten-percent of female directors on the bidder board is associated with a reduction in the bid premium by 13.3 percent. We argue that these results are what we would expect if, as other researchers have shown, women are less overconfident than men.

CEO Narcissism and the Takeover Process: From Private Initiation to Deal Completion

CEO narcissism affects the M&A process. More narcissistic target CEOs obtain higher bid premiums. Acquirer shareholders react less favorably to a takeover announcement when the target CEO is more narcissistic. Among acquiring CEOs, narcissism is associated with initiating deals and negotiating faster. Higher narcissism in both target and acquirer CEOs is associated with a lower probability of deal completion. Our results highlight also the importance of the target to acquirer CEOs relative level of narcissism. To obtain these results, narcissism is measured by the prevalence of personal pronoun usage in more than 1,700 transcripts of CEO speech.(revised version)

Liability protection, director compensation, and incentives

Abstract We examine the effect of liability protection on the compensation of directors and on takeover outcomes. Consistent with the hypothesis that directors require additional compensation if they bear liability, we find that director compensation is higher for firms that provide less liability protection. Examining takeovers, we find evidence that takeovers of firms with protected directors are less likely to succeed. Moreover, firms with protected directors are more likely to accept a lower bid premium, and this finding is consistent with protected directors having reduced incentives to negotiate for the highest possible price during the acquisition. Overall, the results are consistent with the notion that director liability provisions have a significant impact both on director compensation and director duty.

Negotiations under the threat of an auction

Many takeovers occur after one-on-one negotiations, which suggests a troubling lack of competition. We seek to determine whether acquirers in such friendly deals are truly insulated from competitive pressures. We study two countervailing influences: (1) potential but unobserved latent competition, i.e., the likelihood that rival bidders could appear, and (2) anticipated auction costs when negotiations fail. Using various proxies, we find that latent competition increases the bid premium offered in negotiated deals and that auction costs reduce the premium.

Portfolio Returns of UK M&As: Under Alternate Model Specifications

This study examines the announcement effect of 1443 UK M&AS under both the conventional OLS and the asymmetric GJR-GARCH specification over a window of 1996-2009. Conventional market model as a benchmark to examine the portfolio returns in response to M&A announcement is widely used in financial econometric literature. The asymmetric GJR-GARCH model captures the time-varying volatility more effectively contrary to the traditional OLS method. The findings suggest that the difference of estimation procedure largely influences the results. The GJR-GARCH specification performs better in capturing event induced returns compared to the OLS estimation. The study is supplemented by examining explanatory characteristics of the GJR-GARCH generated portfolio returns employing a cross-sectional analysis. The cross-sectional study indicates a significant association between the deal value, bid premium and relative size with portfolio returns.

Exiting the Public Scene and Becoming Private: The Magnitude of Bid Premiums in the U.S. Restaurant Industry

This article reports the shareholder wealth effects of restaurant firms going private. In addition, this study uncovers firm characteristics that influence the magnitude of the stock bid premiums. This study includes 27 publicly traded restaurant companies that went private between 1995 and 2004. The findings indicate that shareholders of restaurant firms that were taken private enjoyed a highly positive, abnormal return of 26%. Cluster analysis demonstrated that high-premium restaurant firms had higher market-to-book (MB) ratio and cash holdings, lower debt, and market capitalization. A logistic regression model which consisted of cash holdings and debt-to-equity variables successfully classified more than 75% of firms into low and high-premium firms.

Does Style Matter? The Effects of Target Shareholder Preferences on Bid Composition and Premiums

Does Style Matter? The Effects of Target Shareholder Preferences on Bid Composition and Premiums