Cash Acquisitions Research Articles

Managerial Insider Trading and Opportunism

This paper examines whether managers engage in opportunistic insider trading by measuring how their net open market purchases and holdings of own company stock change around acquisitions, seasoned equity offerings and share repurchases after controlling for their share and option holdings and noninformational motives for trading. On average, managers abnormally increase sales and reduce holdings around stock acquisitions and seasoned equity offerings but not around cash acquisitions and share repurchases. However the typical manager does not experience an economically significant change in ownership; more material ownership changes are limited to the subsets of the sample. These results suggest that the evidence for managerial opportunism is modest in magnitude and not pervasive in the sample.

CEO Turnover after Acquisitions: Are Bad Bidders Fired?

ABSTRACTWe examine the relation between bidder returns and the probability of chief executive officer (CEO) turnover in acquiring firms. Using a sample of 714 acquisitions during 1990 to 1998, we find that 47% of CEOs of acquiring firms are replaced within 5 years, including 27% by internal governance, 16% by takeovers, and 4% by bankruptcy. A significant inverse relation exists between bidder returns and the likelihood of CEO turnover. This relation is not associated with governance structure. It also is not significantly different in stock versus cash acquisitions, which appears to be inconsistent with Shleifer and Vishny's theory of “stock market driven” acquisitions.

Acquirers' Abnormal Returns, Audit Firm Size, and the Small Auditor Clientele Effect

I analyze the effect of auditor choice on acquirers' market values around merger announcements and the factors affecting the interaction between auditor size and the market reaction to the merger announcements. Surprisingly, I find that acquirers audited by the largest accounting firms significantly under-perform those audited by smaller firms at merger announcements. The results indicate that the clients of the major firms under-perform the clients of the smaller firms significantly more at merger announcements if the targets are privately-held companies. There is also some indication that the small audit firm effect is more pronounced as the likelihood that the auditors play a prominent advising role in the merger process increases. These effects are significantly stronger in cash acquisitions as opposed to stock swaps and are robust to controlling for the usual factors affecting the market reaction to merger announcements and potential self-selection biases. While the major auditing firms are usually assumed to offer better services than the smaller ones, the study suggests that small audit firms have a comparative advantage in serving their clientele. The study also has implications for the small audit firms' arguments for an exemption of their merger consulting activities from the provision of Section 201 of the Sarbanes-Oxley Act that prohibits auditing firms from providing clients appraisals, valuations and fairness opinions.

Stock Repurchase and Cash Acquisition - A Payout Policy Perspective

We examine a firm's repurchase and acquisition decision in a cash payout framework with a focus on the interaction between corporate finance and governance. A comparison of repurchase and acquisition gives us a unique perspective in a sense that they both deal with the question of how to expend cash in a hierarchy of spending priorities that involve decisions not only about payout policy but also on investment strategies. Ours is the first empirical study to investigate a possible pecking order among a set of cash spending options as recently documented in a field survey of financial executives. We find evidence that both repurchase and acquisition will not be considered until cash requirements of internal investment, dividend payout and debt reduction have been satisfied. Furthermore, repurchase is of secondary importance to acquisition in that the former is usually initiated only after substantial amount of cash are accumulated while the latter can be prompted when strong free cash flow starts to generate. This also points to the observation that repurchase firms are often bigger with more cash, better operating performance and low debt, signs of firms that are in later stages of the life cycle. Our results from the study of repurchase in conjunction with cash acquisitions prove to be particularly enlightening in the context of free cash flow hypothesis (Jensen 1986). We conjecture that managers are prone to wasting free cash on acquisitions when cash flow is strong and it is only when cash stock begins to pile up that they are thinking about paying back extra cash to shareholders. This is a strong version of free cash problem as originally pointed out by Jensen. To mitigate the agency problem as manifested by value destroying acquisitions and facilitate repurchase as a way of giving value back to shareholders, the classic theories that propose more management ownership and advocate greater role of institution monitoring seem to be supported in our empirical exercises. Our event study results buttress the assumption that repurchase is more value enhancing than acquisition in that it may alleviate the agency problem of free cash flow.

Larger Return to Cash Acquisitions: Signaling Effect or Leverage Effect?*

This article investigates the signaling theory and the benefit of debt theory to explain higher returns for bidders offering cash rather than stock, using Standard and Poor’s debt rating reviews and changes. Results imply that cash acquisitions and stock acquisitions have different sources of value creation. Benefit of debt seems to be the main source of value in cash acquisitions, whereas the synergy effect outweighs the leverage effect in stock takeovers. Although stock appears to be used for the most unsuccessful acquisitions, this study does not find convincing evidence that cash is used for good acquisitions.

Stock Repurchases and Cash Acquisitions - A Payout Policy Perspective

Stock Repurchases and Cash Acquisitions - A Payout Policy Perspective

The Economic Consequences of Firms' Voluntary Submission to Greater External Scrutiny

There is a significant positive market reaction to merger announcements by acquiring firms that use lower quality external auditors. One explanation for the positive performance of these firms is that their cost-of-capital is reduced as a result of their voluntary submission to the intense scrutiny inherent in the merger process. For the lower quality audit firms, I find that the cost-of-capital effect dominates the over-valuation signaling effect of a stock-for-stock merger previously documented in the literature. I also find that a cash bid conveys to the market a stronger positive signal for low quality audit clients as opposed to high quality audit clients. Because the choice of a high quality auditor is already associated with favorable private information, clients of high quality audit firms tend to benefit less from the announcement of a cash acquisition. The results are robust to controlling for the usual determinants of acquirers' abnormal returns, both acquirers and targets' sizes, and potential sample selection biases.

Catalytica Energy Systems 2001: Financial highlights

This paper examines whether and how bidders' conservative tone in 10-K filings influences the subsequent mergers and acquisitions (M&A) investment decisions of these US firms from 1996 to 2013. Based on 39,260 firm-year observations, we find, consistent with behavioural consistency theory, that conservative bidders are less likely to engage in M&A deals. Further, those that decide to engage in M&As are likely to acquire public targets and within-industry firms. These bidders are inclined to employ more stock acquisitions than cash acquisitions. Our results also indicate that conservative bidders experience abnormally poor stock returns around the announcements of M&A investments. This provides new insights on the mechanism through which bidders' sentiments influence shareholders' wealth. Overall, these findings highlight the implications of the textual sentiment of corporate disclosure for the forecasting of corporate investment and financing decisions. Our results have practical implications, since they shed light on the value relevance of the information content of major Securities Exchange Commission (SEC)-mandated 10-K filings.

Are Cash Acquisitions Associated with Better Postcombination Operating Performance Than Stock Acquisitions?

Are Cash Acquisitions Associated with Better Postcombination Operating Performance Than Stock Acquisitions?

Does operating performance really improve following corporate acquisitions?

Previous research indicates that operating performance improves following corporate acquisitions relative to industry-median firms. Such performance results are likely to be biased because acquiring firms undertake acquisitions following a period of superior performance and they are generally larger than industry-median firms. Using firms matched on performance and size as a benchmark, I find no evidence that operating performance improves following acquisitions. I also analyze if performance is higher in cash acquisitions as suggested by various studies. The results indicate that cash flows increase significantly following acquisitions that are made with cash, but decline for stock acquisitions.

Are cash acquisitions associated with better postcombination operating performance than stock acquisitions?

This study examines the relation between the change in operating performance of firms which merge and whether the acquiring firm offered cash or stock as the method-of-payment. We examine how operating performance changed for a sample of 413 combinations. The results indicate that the change in performance of the merged firms is significantly larger for cases in which the acquiring company offered cash as compared to stock offers. The results are not sensitive to whether the combination involved a tender offer or a negotiated merger, to offer size, industry relatedness between the bidder's and the target's businesses or bidder leverage.

The Tax Motives for Untaxed Firms: The Case of Real Estate Investment Trusts (REITS) Acquisitions

The distribution requirments of a Real Estate Investment Trust (REIT) (95% of income must be distributed as cash dividends) imposes a heavy tax burden on shareholders at the personal level. REIT management is motivated to be involved in acquisitions, which will reduce dividends and thus personal taxes. This paper develops tax motives for REITs to engage in acquisitions. These motives include a) tax benefits from net operating loss carryforwards and b) effective utilization of excess cash. The results show that the market reaction to merger announcement by REIT bidders acquiring REIT or non-REIT targets is positive and significant, which is consistent with the tax explantion. The percentage decline in dividend yield,percentage increase in depreciation, and the percentage increase in cash flow per share are significant. This confirms that the abnormal return may be due to a tax advantage from acquisitions over the period of the study. Abnormal returns were higher for the period of high tax rates relative to periods of lower tax rates, and REIT bidders benefit more from acquiring REIT targets relative to non-REIT targets. The paper also shows that bidders with outside management are associated with higher abnormal returns relative to self-managed REITs. This evidence is not consistent with the increased efficiency arguments. Finally, cash acquisitions are associated with higher abnormal returns relative to security exchanges.

Jensen, Myers-Majluf, free cash flow and the returns to bidders

Previous research has shown that returns to bidders are significantly negative for stock acquisitions and insignificant although slightly positive for cash acquisitions. Two theories (Jensen and Myers-Majluf) would predict positive returns to bidders in cash acquisitions which use up excess cash flow and slack. This study investigates bidder returns using these theories and the Lang, Stulz, and Walkling proxy for free cash flow. It finds that cash bidders that have low q and sizable free cash flow and that reinvest a high percentage of this free cash flow have significant positive returns as Jensen's theory predicts. It finds no evidence supporting the Myers-Majluf theory. Cash bidders without Lang, Stulz, and Walkling free cash flow have returns that are negative and essentially indistinguishable from those of stock bidders.