Bidder Returns Research Articles

Pricing media sentiment: Evidence from global mergers and acquisitions

In this study, we examine the association between bidders' media sentiment and the acquisition performance of 5196 domestic mergers and acquisitions across 40 countries from 2000 to 2018. Our results show a causal and positive relationship between media sentiment and the bidders' announcement returns. This supports the investor attention theory, suggesting that investors perceive bidders' media sentiment as informative and value-relevant. Using a dozen major terrorist attacks worldwide as exogenous shocks to business news, we establish a more credible causal link from media sentiment to market reactions. Our results are more pronounced for firms in a higher information asymmetry environment. Additionally, our study finds that higher levels of voice and accountability within a country mitigate the positive impact of media sentiment on bidder returns. We conduct additional robustness tests to further validate these findings and to address possible endogeneity concerns.

The real effects of corruption on M&A flows: Evidence from China's anti-corruption campaign

We exploit the public enforcement of the anti-corruption campaign across China to identify a causal role of political corruption in corporate takeover flows through a difference-in-differences (DID) analysis. We find that a reduction in corruption increases cross-region takeover activities by 40% and that deal volume more than doubles. Further analyses reveal that treatment effects are more evident for non-SOEs, politically unconnected acquirers, and acquirers that are less corrupt ex ante. We also show that the impact of the anti-corruption campaign is more pronounced in segmented cities where corruption practices are more entrenched. The reduction in corruption leads to higher bidder returns, improves post-acquisition performance, and markedly strengthens local economic development. The evidence indicates that the anti-corruption campaign was effective in attracting inbound corporate investments and supporting economic growth.

Earnings Growth and Acquisition Returns: Do Investors Gamble in the Takeover Market?

AbstractWe document a strong positive initial market reaction to merger announcements from bidders with either large earnings growth or significant earnings decline, relative to those with neutral earnings change, reflecting a U-shaped pattern between bidders’ earnings growth and announcement returns. However, the higher initial returns for bidders with earnings decline subsequently reverse, whereas the higher returns for bidders with high growth do not. We further show that the return patterns are driven by a tendency for retail investors to gamble that merger and acquisition deals initiated by poorly performing bidders will generate high synergies.

Pre-deal differences in corporate social responsibility and acquisition performance

Drawing on the portability theory, we examine how the pre-deal gap in corporate social responsibility (CSR) between the bidder and target affects announcement returns in the international takeover market. We find that the higher the bidder's CSR scores relative to the target's, the higher is the synergy captured by combined cumulative abnormal returns of bidders and targets. It supports our hypothesis that synergistic gains are higher when the ex-ante bidder-target CSR gap is positive. The results also show that the synergy effect of CSR is not shared between bidder and target firms; thereby, bidders earn abnormal returns while targets lose. We further document that the acquirers with higher CSR practices before the acquisition are more likely to engage in related and non-cash-financed deals, and capital markets reward these acquisition choices. Finally, the results show that a positive CSR gap reduces the takeover premium and the time taken to complete the deal. Overall, the results suggest a positive valuation for the shareholders of the combined firm resulting from the portability of higher CSR practices from bidders to targets. Our results are subject to a battery of robustness tests, including alternative measures of combined returns and CSR, and tests for endogeneity.

The value of intangible capital transfer in mergers

We find that the value is created for acquirer shareholders in the mergers involving intangible capital transfer from targets to bidders; such value creation is positive and significant in the transfer of off-balance-sheet intangible capital and organizational capital as opposed to that of knowledge capital. Because the combined returns for bidders and targets are increasing in intangible capital transfer (while those of targets remain unaffected), we believe that the market perceives such transfers potentially create synergy. The market reaction to intangible capital transfer is positive and significant for bidders facing high-product market competition, in non-diversifying deals, and for high-tech combinations.

CAPM-Based Company (Mis)valuations

Abstract There is a discrepancy between CAPM-implied and realized returns. Using the CAPM in capital budgeting—as recommended in textbooks—should thus have real effects. For instance, low beta projects should be valued more by CAPM users than by the market. We test this hypothesis using M&A data and show that bids for low-beta private targets entail lower bidder returns. We provide further support by testing several ancillary predictions. Our analyses suggest that using the CAPM when valuing targets leads to valuation errors (relative to the market’s view) corresponding on average to 12% to 33% of the deal values.

The Real Effects of Corruption on Corporate Takeover Activity: Evidence From China’s Anti-Corruption Campaign

This paper examines how political corruption affects M&A activities. By exploiting the public enforcement of the anti-corruption campaign across different regions in China, we find in a difference-in-difference (DID) setting that the reduction in corruption increases cross-region takeover activities by 40% and deal volume more than doubles. Further analysis reveals that the reduction in market entry barriers and the decreased potential for political rent extraction are two plausible economic channels behind these real effects on corporate investments. Reduction in corruption also leads to higher bidder returns and improves post-acquisition performance. Furthermore, such a campaign significantly strengthens local economic development (higher GDP per capita growth, higher general government revenue per capita, and lower unemployment rate).

Done Deal! Advisor impact on Pricing, Premia, Returns, and Deal Completion in M&A

We study the role of financial advisors in M&A for different advisor engagement constellations. We observe positive effects of both target and acquirer advisors on deal completion and prices. The unexpected positive price effect of acquirer advisors is further supported by evidence for higher premia and lower announcement bidder returns. We establish causality of pricing effects using matching and instrumental-variable approaches, making use of the impact of Lehman’s collapse on former Lehman clients. We explain our findings in terms of governance: advisors’ and executives’ incentives form a potential source of value destruction.

The impact of exchange rate movements on mergers and acquisitions FDI

This paper investigates the effect of exchange rate movements on return outcomes associated with mergers and acquisitions FDI. We examine this relationship for cross-border mergers and acquisitions undertaken in 2001-2010 by 591 U.S. firms using both real and nominal bilateral exchange rates. The analysis of abnormal returns reveals no consistent relationship between the real exchange rate movements and bidder returns. However, we do find a statistically significant positive impact of exchange rate volatility on bidder returns. In addition, we find support for a significant relationship between bidder’s overseas experience with bidder returns and deal size with bidder returns.

M&As in Africa – effects of law and governance

Purpose The cultural and legal differences between foreign acquirers and African target firms can be substantial. There is also a large variation in cultures and legal systems within Africa. However, there is limited research on merger and acquisition (M&A) performance by foreign firms in Africa. The purpose of this paper is to fill this gap by exploring the “spillover by law” hypothesis (Martynova and Renneboog, 2008) that focuses on the influence of the external environment on the governance and performance of foreign M&As in Africa. Design/methodology/approach The data set covers 415 M&A transactions by foreign firms in Africa during the period of 1999–2016. Dynamic data covering the country’s legal, cultural and political environment are collected from the World Bank, the Heritage Foundation and Transparency International. Findings The authors find that the legal environment significantly affects the returns of bidders on African firms. For complete acquisitions, bidder returns are significantly higher when the bidder’s country has higher shareholder protection and higher creditor protection compared with the target firm’s country. The results show that the effects are significant when there is a full control change (including a change in the target firm’s nationality) but not in the case of partial control transfers. The results are consistent with the “spillover by law” hypothesis. Originality/value The authors contribute to the literature on cross-border M&As by separately studying the valuation effects of full, majority and minority changes in control; by being the first study of the legal spillover effects in Africa; and by being the most extensive study of the legal determinants of the valuations of non-African acquirers of African firms.

The Intangibles Song in Takeover Announcements: Good Tempo, Hollow Tune

Mergers and acquisitions are often motivated by the intention of creating value from intangible assets. We develop a novel word list of and apply it to takeover announcements. Deals presented with more intangibles complete more quickly. However, the value of these deals to the acquirer is questionable: One standard deviation more in talk results in 0.45 percentage points lower abnormal announcement returns of bidders. Agency problems explain little of these results. Instead, payment mode choices and insider trades suggest that talk reflects managerial overoptimism. Overall, takeover announcements can provide important information regarding the quality of deals.

Sorting, Selection, and Announcement Returns in Takeover Markets

We present a competitive model of takeovers that explains two robust features of the data: target premia and size-dependent bidder returns. Takeovers are driven by complementarity between two factors, non-tradeable and a tradeable project. Firms are heterogeneous in both dimensions. After characterizing a condition under which positive assortative matching (PAM) of skill and projects occurs, we show that announcement returns identify stock market investorsipre-deal information about the firms. The two robust features are consistent with PAM if stock market investors know (i) only skill of firms or (ii) only stand-alone values of firms, before the deal announcements.

Emerging Market Bidder Returns and the Choice of Payment Method in Mergers and Acquisitions: Evidence from India

Consistent with other evidence on short-run effects of mergers and acquisitions (M&A) announcements on acquiring firm’s shareholder wealth in emerging markets, our study reveals that M&A deals in India, irrespective of the payment method, are not value destroying. Cash deals and stock deals create shareholder wealth on deal announcements. We offer ‘pseudo-cash deal hypothesis’ to explain this phenomenon. We also observe that bigger the relative size of the deal, greater is the abnormal return on deal announcements. We observe that acquirers with high promoter holdings are highly reluctant to offer stock when they acquire a majority stake. However, bigger deals, deals for listed target firms, and deals in the information technology sector, command stock offers. JEL Classification: G34, G14

Winning by Losing: Evidence on the Long-run Effects of Mergers

We propose a novel approach to measuring returns to mergers. In a new data set of close bidding contests we use losers' post-merger performance to construct the counterfactual performance of winners had they not won the contest. Stock returns of winners and losers closely track each other over the 36 months before the merger, corroborating our approach to identification. Bidders are also very similar in terms of Tobins Q, profitability and other accounting measures. Over the three years after the merger, however, losers outperform winners by 24 percent. Commonly used methodologies such as announcement returns fail to identify acquirors' underperformance.

Returns of merger and acquisition activities in the gaming industry

The gaming industry experienced numerous merger and acquisition (M&A) activities in the 1990s. This study examines the cumulative abnormal returns (CARs) for gaming target and bidding firms around the announcement of mergers and acquisitions (M&As) from 1985 to 2004. The results showed that both targets and bidders had significant positive returns. The study finds that gaming targets enjoy significant positive returns consistent with the literature. Gaming industry bidders earn significant, positive returns. The literature on bidder returns shows mixed results; some were positive, some were negative but many are not significantly different from zero. The positive bidder returns in the gaming industry found here are possibly caused by the high entry barriers to the gaming industry such as acquiring gaming licenses, familiarity of gaming regulations, and experience. It is generally much more difficult for a non-gaming bidder than a gaming bidder to acquire gaming industry targets. As a result, there is usually much less competition in gaming industry M&As than for other industries. This is likely a major cause of the higher returns for gaming bidders than found for bidders in most other industries.

Reverse Termination Fees in M&A: Design, Signals, and Bidder Returns

Reverse termination fees (RTFs) are required payments by bidders when they “walk away” from a merger or acquisition, and vary significantly in size and design. In a large sample of manually collected U.S. deal contracts involving publicly traded bidders and targets, we examine the relationship between announcement returns and different types of RTFs, including those with features theorized by others to reflect inefficient design, and also RTFs that we theorize may send a negative value signal from managers seeking to “eat” rather than “be eaten” in consolidating industries. We find inefficient RTFs correlate with lower bidder returns, even in a subsample where disclosure of RTF terms lags deal announcements by more than two days. We also find inclusion of certain RTFs in consolidating industries reveals private information to the market, resulting in negative abnormal returns. Our results are robust to alternative event windows and control groups, and carry over to combined bidder and target abnormal returns, inconsistent with inefficient RTFs reflecting transfers from buyers to targets. Finally, we find an insignificant relationship between the probability of deal completion and inefficient RTFs, and a negative significant relationship between the probability of deal completion and negative signal RTFs, consistent with the fact that deals with such RTFs are adopted in consolidating industries where both deal competition and antitrust issues are higher than in other deal settings.

Anticipation and Timing in Takeover Waves

This paper examines the hypothesis that, during merger waves, a bidder's actions are informative for other bidders and the market. I develop a real options model to explore the interplay between acquisition timing and the market reaction to these events in the context of merger waves. The model predicts a pattern of declining announcement returns along the merger wave and novel forms of contagion returns. I take these contagion predictions to the data in a sample of U.S. industries that underwent regulatory changes in the 1990s. Consistent with the model's predictions, I find that the dispersion in bidders' post-acquisition performance declines along the merger wave and that the start of a merger wave is associated with an increase (decrease) in the conditional correlation of bidders' stock returns and the stock returns of other bidders (a broad stock index). These theoretical and empirical results suggest that a rich set of channels of contagion returns and deal anticipation are at play during merger waves.

Information Revelation in Merger Waves

This paper examines the hypothesis that, during merger waves, a bidder’s actions provide information for other bidders and the market. I develop a real options model to explore the interplay between acquisition timing and the market reaction to these events. The model predicts a pattern of declining announcement returns along the merger wave and various forms of contagion returns. Consistent with the model’s predictions, in a sample of U.S. mergers, I find that the dispersion in bidders’ post-acquisition performance declines along the merger wave and that the start of a merger wave is associated with an increase in the conditional correlation of a bidder’s stock returns and the stock returns of other bidders.

Cross-border arbitrage and acquirers’ returns in the Eurozone crisis

Using a sample of 1263 European acquisitions over 2004–2012, we show that the performance of cross-border acquisitions is significantly affected by the Eurozone and the euro debt crisis. First, due to financial market integration and the elimination of exchange rate risk, intra-Eurozone acquisitions do not earn any abnormal returns for bidders. Second, as a result of the euro debt crisis and the temporary misvaluation among European countries, acquisitions earn positive abnormal returns only for non-Eurozone companies acquiring Eurozone targets. These abnormal returns are driven by the depreciation of the euro and the use of low-cost capital available to overvalued acquirers.

Returns to acquirers of listed and unlisted targets: an empirical study of Australian bidders

PurposeThis paper aims to evaluate the robustness of the listing effect in Australia, that is whether acquisitions of private firms create more value to the bidding firm’s shareholders than acquisitions of publicly listed firms.Design/methodology/approachThe authors analyze the market reaction to the announcement of takeover bids initiated by Australian public firms on private and public targets over the period 1990-2011. The analysis controls for a wide range of bidder, deal and target country characteristics that are likely to correlate with the target’s listing status and acquirer abnormal returns. The authors also use a selection model to address the endogenous choice of the target’s listing status.FindingsThe results indicate that bidders experience significantly higher abnormal returns of about 1.7 per cent in the 11-day event window when the target is a private firm. The authors show that this result is broad-based and persistent. It does not appear to depend on whether the target is small or large; whether it is related or unrelated to the bidder’s industry; whether it is in the resources sector; and whether the transaction is domestic or cross-border. They find some evidence that bidder returns might be stronger for larger acquisitions, for unrelated targets, and in poor market conditions such as in the wake of the recent global financial crisis.Research limitations/implicationsThe research would benefit from the inclusion of the bidding firm’s ownership and governance characteristics.Practical implicationsThe results support the view that market frictions contribute to make private firms attractive targets.Originality/valueThe analysis confirms the pervasiveness of the listing effect in a market characterized by a lesser degree of competition, higher search costs and the significance of the natural resources sector.