Market For Corporate Control Research Articles

Why Do Corporations Merge and Why Should Law Care?

Mergers and acquisitions are extraordinarily prevalent in the United States, generating massive expenditures every year. However, a serious empirical puzzle lies at the heart of all that activity. That empirical phenomenon’s most remarkable feature by far is that even though it is well established in an extensive literature and implies far-reaching policy consequences, American law ignores it entirely. Generations of researchers have failed to find evidence that merger and acquisition activity generates any lasting benefits for the combining firms’ owners or anyone else. No one seriously doubts that efficiencies of scale or technological integration are real or that acquisitions sometimes achieve them. Still, the evidence strongly implies that they are mostly available in small deals among small firms. While the results are no longer very seriously contested, no one has any conclusive explanation for the several puzzles they pose. This paper comprehensively reviews the empirical literature and works through the policy implications for the major bodies of law it affects. The most important insights are two. First, the evidence should undermine the confidence among scholars of corporation law in the regulatory self-sufficiency of market institutions, on which corporation theory depends so heavily. In particular, a major hope for controlling managerial agency cost—one of the theory’s chief preoccupations—remains the hope that the so-called “market for corporate control” governing hostile takeovers will discipline underperforming managers. The evidence discussed here suggests that the market produces no meaningful benefits at all. The second lesson is simpler. The other major legal regime governing mergers and acquisitions—antitrust—should return to the simpler, pro-enforcement presumptions by which it once more effectively limited market concentration. The fear of jeopardizing pro-competitive gains, on which antitrust merger law has been rendered largely inert, is no longer very defensible. The balance between false positive and false negative should be reset.

ГЛОБАЛЬНІ ТЕНДЕНЦІЇ ТА НОВІТНІ СХЕМИ ЗЛИТТІВ І ПОГЛИНАНЬ

The article examines and analyzes the concepts of “merger” and “acquisition”, which are often used as synonyms, but even more often they are used in the phrase “mergers and acquisitions” to denote one phenomenon characteristic of the corporate control market. Mergers and acquisitions are a multiplicity of agreements between economic entities, in which there is a change of owner, the unification of enterprises of further operation under the auspices of the enterprise-initiator of the agreement, or the transfer of a controlling stake of one of the parties to the agreement to another. The reasons for mergers and acquisitions of enterprises are highlighted. The emergence of mergers and acquisitions, which has its roots in the history of the development of US industrial production in the late 19th and early 20th centuries, is explained. The role and importance of competition in this process, as well as its influence on the acceleration and expansion of mergers and acquisitions, are shown. Various theoretical approaches in research by world and domestic scientists on the causes and consequences of mergers and acquisitions of leading companies for the world economy are characterized. However, it should be noted that today there is no consensus in scientific circles regarding the interpretation of this concept. An analysis of the consequences on global processes of mergers and acquisitions during the period of COVID-19 was carried out. These developments have been found to lead to both strategic acquisitions and divestitures, as companies redirect management resources and funds to those parts of the business with the highest growth potential and where they enjoy a distinct competitive advantage. Companies are shown to use mergers and acquisitions to acquire capabilities they do not have (often in technology) to expand existing capabilities and strengthen that advantage. The priorities of the global mergers and acquisitions industries in the post-war period are demonstrated. The most attractive, from the point of view of the implementation of mergers and acquisitions, in the economy of Ukraine for foreign investors have been analyzed. Obstacles to the formation of the attractiveness of the Ukrainian investment market are shown. A number of advantages in financing the modern Ukrainian economy have been studied, despite the really difficult political and economic situation in the country. A number of advantages of financing for modern Ukrainian realities have been studied despite the difficult political and economic situation in the country.

Impact of CEO Overconfidence on M&A Performance in the US: A Content Analysis

Despite the high activity on the market for corporate control, more than 60% of M&As are unsuccessful and contribute to damage to the value of the acquiring company. We still have little evidence on the impact of M&A deals in different countries and industries on shareholer value, as well as the factors that influence this impact. Academic researchers and practitioners continue to seek out the factors that influence M&A performance, but results are still inconclusive, indicating the need for further research into acquisition performance and factors that influence the overall success of M&A deals. This paper examines the impact of CEO overconfidence on the performance of M&A deals in the United States. In contrast to previous studies, we, first of all, use earnings call transcripts in content analysis as the base to measure CEO overconfi-dence; secondly, we apply cluster analysis to identify the factors that force CEOs to structure their speech during earnings calls in a similar manner; and, thirdly, we assess the impact of CEO overconfidence on the performance of high-tech deals. The study is based on a sample of 492 M&A transactions implemented during the post-crisis period, 2009–2019. Using the event study method to assess the performance of M&A deals and regression analysis, we prove that CEO overconfidence has a negative impact on the success of M&As. However, when considering a subsample of deals in which the target com-pany operates in a high-tech industry, we failed to identify a significant impact of overconfidence on M&A performance. As a result of cluster analysis, we identified a cluster of 165 companies with a common structure and similarity of CEO speeches, which are not explained by the companies’ affiliation with similar industries. This suggests that overconfident CEOs tend to use and structure their speeches similarly.

Does the threat of takeover affect default risk?

AbstractWe examine the impact of the threat of takeovers on default risk. Using a sample of 50,189 firm‐year observations for US firms over the period 1990–2015, we find that the threat of takeovers has a negative relation with default risk. We use difference‐in‐difference analysis to address potential endogeneity concerns and propensity score matching to control for self‐selection bias. The results are robust to alternative measures of default risk and exclusion of the dot com and financial crisis periods. Our results also hold after controlling for Governance Index and Entrenchment Index. We identify improvement in performance and earnings quality in response to the threat of takeovers as channels underlying our main result. The effect of the threat of takeovers on default risk is more pronounced for firms with opaque information environment and low institutional ownership. Our findings provide important insights for the market for corporate control as a disciplining mechanism in reducing default risk.

The Market for Corporate Control as a Limit to Short Arbitrage

AbstractWe hypothesize that corporate takeover markets create significant constraints for short sellers. Both short sellers and corporate bidders often target firms with declining economic prospects. Yet, a target firm’s stock price generally increases upon a takeover announcement, resulting in losses for short sellers. Therefore, short sellers should require higher rates of return when the takeover likelihood is higher. Consistent with this prediction, the return predictability of monthly short interest increases with industry-level takeover probability and decreases as takeover defenses are implemented. Our results suggest that efficient takeover markets create trading frictions for short sellers and can therefore inhibit overall market efficiency.

The takeover market’s effect on managerial ownership: evidence from hostile takeover susceptibility

PurposeCapitalizing on a unique measure of takeover susceptibility principally based on the staggered implementation of state laws, this study aims to explore the takeover market’s effect on managerial ownership. The market for corporate control, often known as the takeover market, is an important external governance mechanism, whereas managerial ownership is a vital internal governance instrument. Managerial ownership brings into convergence the interests of shareholders and managers. The originality of this study arises from the usage of state-level anti-takeover legislations as a measure which is beyond the control of firms and plausibly exogenous to firm-specific characteristics.Design/methodology/approachIn addition to the standard regression analysis, this study also executes a variety of robustness checks to minimize endogeneity, i.e. propensity score matching, entropy balancing, instrumental–variable analysis, Lewbel’s (2012) heteroscedastic identification and Oster’s (2019) testing for coefficient stability.FindingsBased on a large sample of US firms, the results show that more hostile takeover threats bring about significantly lower managerial ownership. The results reinforce the prediction of the substitution hypothesis. The disciplinary function of the takeover market reduces agency conflict to the point where managerial ownership is less necessary as a governance mechanism. Specifically, a rise in takeover susceptibility by one standard deviation diminishes managerial ownership by 7.22%.Originality/value`To the best of the authors’ knowledge, this study is the first to shed light on the impact of the takeover market on managerial ownership using a novel measure mainly based on the staggered adoption of state laws, which are plausibly exogenous to individual firms’ characteristics. Consequently, unlike prior research, this study is more likely to indicate a causal effect, rather than merely a correlation.

What compliance commitments tell us about U.S. banks?

AbstractThis paper examines three levels of regulation and compliance imposed by the Federal Reserve, the Securities and Exchange Commission (SEC), and stock exchanges, on risk profile of banking institutions in the United States. SEC‐registered and exchanged‐listed bank holding companies have more concentrated and lower quality loan portfolios; they grow faster through acquisitions and are more likely to execute M&A exit strategy themselves. Also, bank holding companies that commit to higher levels of compliance are better capitalized but have lower return on equity capital. Lower profitability is partially compensated with higher payout ratio, suggesting that regulatory frameworks to some extent ameliorate agency issues.Multi‐tiered regulation of banking institutions yields a separating equilibrium, in which banks choose level of compliance to match their business strategies. Three‐tiered regulatory framework enables market segmentation and matching of capital providers with desired risk profile. Switch to higher levels of compliance is accompanied by risk profile increase without a better risk‐return tradeoff, suggesting managerial agency cost explanation. SEC‐compliant banks are likely to migrate to exchanges or downshift to FDIC disclosure only. Both SEC and exchange‐listed banks are likely to execute growth‐by‐acquisitions but listed bank holding companies are only marginally more likely to default, suggesting more efficient risk‐taking or reliance on government support when market conditions decline. SEC compliance is the most volatile of three disclosure regimes.My study does not conclude that excessive regulation yields negative effects. It does not address assessment of changes in systematic risk and externalities focusing instead on firm‐level effects. Finally, it suggests the need to regulate the market for corporate control, which appears to be one major risk‐taking transmission mechanism in the US private banking market.

Corporate governance reform, and ownership, and control: perspective from Japan

ABSTRACT The direction and extent of corporate governance reforms in any country are determined by its ownership and corporate control structure. Three forms of markets in corporate control could be distinguished. The first is the external market for corporate control, closely associated with the dispersed, outsider-dominated ownership systems of the UK and the US. The second form is the insider market for the purchase and sale of blocks of shares in family-owned firms in Continental Europe and Asia. The third form, which is observed in Japan, is the internal markets in which managers reorganize their ownership structure. Under this framework, this study examines the relationship between corporate governance reforms, and ownership and control in twenty-first century Japan.

Separating Ownership and Information

This paper identifies an upside of the separation of ownership and control, typically the source of inefficiencies in the theory of the firm. Because insiders obtain private information by exercising control, the separation of ownership and control leads to a separation of ownership and information. We show that this separation is necessary for efficient trade in the market for corporate control. The analysis reveals how strategic communication between inside and outside shareholders facilitates takeovers by eliciting external bidders’ private information. Our results call into question mandatory disclosure requirements during takeovers. (JEL D21, D82, G32, G34)

Too much to learn? The (un)intended consequences of RegTech development on mergers and acquisitions

Regulatory and technological (RegTech) developments have been changing the nature of financial markets in recent decades. This paper documents the real effects of RegTech in the market of corporate control. Exploiting the staggered implementation of the EDGAR system from 1993 to 1996 as quasi-exogenous RegTech shocks, we find that RegTech developments reduce firm acquisitiveness, especially for growth firms, solo-bidder deals, and stock-based acquisitions. Our main findings still hold when employing the stack-cohort approach to address concerns regarding biased staggered DiD estimators. In addition, EDGAR implementation discourages informed trading and lowers the acquirers' announcement returns. Overall, our deal-level analyses show how RegTech development matters for firm investment decisions with more granularities. Our paper differs from but complements recent empirical evidence that EDGAR implementation increases the level of overall investment, suggesting that dampened managerial learning induces firms to switch from highly risky and uncertain projects (M&As) to routine projects with less uncertainty (capital expenditures).

News-Induced Target Undervaluation and Acquirer’s Long-Term Orientation in M&A Target Selection

News sentiment alters investors’ perceptions of companies and their stock prices, which can affect managerial decisions. We analyze such influence on firms’ decisions in the context of mergers and acquisitions. We theorize how news sentiment about potential targets may affect target selection and test our hypotheses using a novel instrument based on the disturbance to news coverage due to exogenous events. Our findings show that reduction in positive news sentiment diminishes a potential target’s stock price and increases the probability that it is selected by the acquirer, uncovering potential inefficiencies in the market for corporate control. Further, acquirers with long-term orientation are less sensitive to these news-induced price distortions when selecting their target. We also find that when these distortions encourage myopic acquirers to select an undervalued but suboptimal target from a synergistic point of view, the long-run performance of the acquisition drops.

Trade Secret Protection and Firm Acquisitions: Evidence from the Uniform Trade Secrets Act

Strategic factor markets allow firms to access knowledge and technology, yet their institutional underpinnings and the effect of changes in the institutional framework on firm behavior are poorly understood. We address a change in institutions regarding the strength of trade secret protection, more specifically the staggered implementation of the Uniform Trade Secrets Act (UTSA) in the U.S. We show that stronger trade secret protection increases the likelihood of firms to engage on the market for corporate control, a consequence unintended by the UTSA. We identify two mechanisms. First, the UTSA limits knowledge outflows through employee mobility which makes knowledge-intensive firms more attractive acquisition targets. Second, stronger trade secret protection grants acquiring firms better protection of the acquired knowledge and technology.

Technology Differentiation, Product Market Rivalry and M&A Transactions

Prior work has mostly studied the relation between product market competition and M&A deals. In this paper, we study how competition and differentiation in technology space relates to M&A transactions. Relying on a new text-based method to map each firm’s competitive position in technology space and to measure the differentiation of a firm’s technology portfolio relative to all other firms, we find that firms with unique and differentiated technology are typical targets while firms with less differentiated technology are more likely to become acquirers. Moreover, firms with unique technology are particularly targeted by close competitors in the product market and receive a higher acquisition price, particularly in case of M&As with close product market firms. Our findings illustrate that a unique and differentiated technology portfolio is an important resource traded in the market for corporate control and a key driver of M&A deals, particularly between close competitors in the product market.

Hostile Takeover Law and the Challenges in Market for Corporate Control: A Comparative Analysis between Indonesia and the United Kingdom

The concept of hostile takeover is still unrecognized under Indonesian laws and regulations despite its importance in keeping the corporate board in check and corporate governance better implemented in a company. This article seeks to explore the extent of the current environment and regulation in Indonesia able in accommodating hostile takeover in relation to the market for corporate control in Indonesia by using hostile takeover as a mechanism to measure. A comparative analysis is then conducted with the United Kingdom United Kingdom as a country with an active market for corporate control, specifically with the methods employed to deal with hostile takeover.

Comparative Causality Analysis for Corporate Governance and Financial Performance of Hungary and Indonesia

This study compares Corporate Governance (CG) between Hungary and Indonesia and analyzes the causality between CG and financial performance in both countries. CG proxy is the ownership structure. In the monitoring function, CG will improve the company's performance. The company's performance, on the other hand, can affect the ownership structure as one of the markets for corporate control in the CG mechanism. The causality test will inform whether the monitoring or market for corporate control is implemented as a CG mechanism. This study uses the Granger causality test to analyze the bi-causality between CG and financial performance. The sample consists of companies listed on the Budapest Stock Exchange (BSX) and the Indonesia Stock Exchange (IDX). The results showed that only two pairs of bi-causality relationships (out of six pairs) occurred in the BSE sample companies, and there were three pairs of bi-causality relationships (out of nine pairs) in the IDX sample companies. This research contributes to the relationship between ownership and firm performance based on agency problems from the perspective of the monitoring function and the market for firm control.

Carbon emissions, corporate governance, and staggered boards

AbstractCarbon emissions have been identified as a major cause of global warming and are harmful to the environment. Given the seriousness of climate changes, businesses are encouraged to adopt corporate strategies to improve environmental performance. Staggered boards (or classified boards) are one of the controversial corporate governance devices being employed by corporations that protect managers from the market for corporate control. This paper explores whether staggered boards can be a useful business strategy to improve carbon emissions. Relying on a novel data set in which the presence of a staggered board is identified through advanced machine learning algorithms and textual analysis, we find that staggered boards bring about significantly worse emission performance by 10.67%. Our results corroborate the premise that staggered boards insulate self‐interested managers from market discipline and thus exacerbate agency problems, resulting in more unfavorable outcomes. Further analysis validates the results, that is, propensity score matching, entropy balancing, instrumental‐variable analysis, and generalized method of moments (GMM) dynamic panel data estimation. Importantly, we include firm fixed effects to account for unobserved heterogeneity. Our findings indicate that de‐staggered boards may help improve emission performance.

The Market for Corporate Control and Risk‐taking: Evidence from Global Merger and Acquisition Laws

AbstractWe examine the effect of international regulations governing the market for corporate control (MCC) on firm risk‐taking using the staggered enactment of country‐level merger and acquisition (M&A) laws of 34 countries. Consistent with the theoretical argument of deterrence, we show that the MCC leads to unintended consequences by discouraging value‐relevant corporate risk‐taking. Our investigation of real earnings management suggests that the MCC induces real earnings smoothing and also provides evidence of short‐termism. This reduction in corporate risk‐taking is associated with a decrease in real investments, an increase in cash‐holding, an increase in debt employment, and a propensity to diversify in M&A. Further examination of the heterogeneous effect of the quality of national governance institutions on the relationship between the MCC and risk‐taking shows that the country‐level investor protection and transparency levels positively moderate the effect of the MCC. Our study highlights that there could be complementary roles played by national institutional features and the MCC in encouraging value‐relevant corporate risk‐taking.

Disentangling acquisition premia: Evidence from the global market for corporate control

Our empirical analysis of 403 acquisitions completed globally between 2007 and 2015 uses a holistic approach to explain the key determinants of premia paid by acquirers, addressed by distinct literature streams. Our results show that overconfident, cash-generating acquirers overpay the targets. Higher premia are justified for larger-sized, high-growth targets, non-conglomerate acquisitions, and when the consideration is paid in stock. Acquirers embed expected operating synergies in premia offered to target shareholders. However, while cost-cutting synergies, more reliably achieved in post-merger integration, are easy to disclose and price, revenue enhancement synergies, requiring exceptional managerial capabilities, are of longer-term nature but more uncertain, thus leading acquirers to precautionarily withhold them in premium pricing. Financial synergies, arising from combining weakly or negatively correlated businesses, are not typically priced upfront.

Развитие форм общественного контроля над акционерными обществами

An increase in the number of shareholders which is typical for public joint-stock companies leads to the fact that the direct management of the assets of a joint-stock company is concentrated in the company's top management (top managers) who, not being the owner of its capital, manages it as its own capital. Such inconsistency of the management system in a joint-stock company gives rise to the need to develop external control over it on the part of all other participants in the modern market represented by participants in the stock market, the state, and the public (citizens). The main forms of control on the part of the stock market are the groups of relations regarding the purchase and sale of shares leading both to a change in the composition of shareholders and to a change in the company's management. The most significant part of the relations of the stock market leading to the change of the top management of the company at the will of the market participants relates to the market of corporate control. State control in the sphere of the functioning of joint-stock companies covers not only the regulation and control of their activities but also includes the direct presence of the state as a shareholder of a number of companies important for the country's economy. However, the controlling participation of the state is strongly opposed by those who defend the relationship of private ownership of capital. Civil control over the activities of joint-stock companies is based on the broad development of the media and on the growth of public consciousness in the direction of protecting the environment from the negative impact of capital relations on it. The deep reason for the development of various forms of public control over the activities of joint-stock companies is the transformation of modern society into a society of shareholders, i.e. into a society in which the majority of citizens are not just direct or indirect shareholders who receive their income from share capital but also persons interested in making this capital socially useful.

Do takeover threats influence corporate social responsibility? Evidence from hostile takeover vulnerability

AbstractTheory suggests that the market for corporate control, which constitutes an important external governance mechanism, may substitute for internal governance. Consistent with this notion, using a novel measure of takeover vulnerability primarily based on state legislation, we investigate the effect of the takeover market on corporate social responsibility performance. Using a sample of 9200 firms in the USA, the study finds that an exogenous increase in takeover protection decreases corporate social responsibility, consistent with the managerial myopia theory that managers tend to be myopic when more exposed to hostile takeover threats, making investments that show results in the short run at the expense of long‐term projects. Furthermore, corporate social responsibility is harder to evaluate due to information asymmetry and tends to be discounted in the short run. Additional robustness checks confirm the results, including fixed‐effects and random‐effects regressions, propensity score matching and instrumental‐variable analysis. Our results are unlikely driven by endogeneity.