Acquisition Returns Research Articles

Individual effects and complementarities-in-performance: the long-run impacts of CSR on an acquirer’s performance in cross-border mergers

PurposeThe purpose of this paper is to investigate the relative effects of individual environmental, social and governance pillars on the performance of international mergers. We examine whether performance complementarity exists among the environmental, social and governance pillars.Design/methodology/approachWe draw on a global set of cross-border merger data covering 2002 to 2018 and employ pooled least squares (PLS) and instrumental variable (IV) approaches to gain novel and robust insights into the short- and long-term effects of the relationships among the three CSR pillars on acquisition returns. To study the examined interrelationships across three pillars, we rely on theories related to super-modular optimization and games.FindingsWe find positive and significant effects of the environmental pillar and the social pillar on changes in ROA and Tobin’s Q of acquirers during the three years following acquisitions. Furthermore, the governance pillar only impacts short-run ROA change. We found complementarities among the three pillars of CSR to attain performance synergy. The effects of CSR on post-merger performance are more profound in the long run.Originality/valueWe analyze the relative importance of CSR individual pillars (i.e. the environmental, social and governance pillars) and the nature of the relationship among them. This research question remained unexplored in the previous literature. Our analysis sheds light on prevailing concerns regarding the mutual relations among the different pillars of CSR; e.g. previous literature argued that the governance component is different from the social and environmental pillars.

Asset versus equity acquisitions by financial institutions

AbstractWe examine the impact of asset versus equity acquisitions in generating firm value for financial institutions. We find that acquirers experience statistically and economically significantly higher cumulative abnormal returns in asset acquisitions compared to equity acquisitions. We analyze the announcement‐period returns and find that investors' reaction to asset acquisitions by financial institutions is met more favorably than are equity acquisitions. When employing the difference‐in‐differences approach, we find that asset acquisitions entail improved operating performance.

Industry tournament incentives and acquisition performance

This paper examines the effect of industry tournament incentives on acquisition performance. Using the pay gap between a firm's CEO and the highest-paid CEO in the same industry as the measure of industry tournament incentives, we find that deals led by CEOs with higher industry tournament incentives experience higher abnormal announcement returns. This positive relation between industry tournament incentives and acquisition returns is more pronounced when CEOs have greater mobility and probability of winning the tournament prize. Our findings highlight those tournament incentives induced by the external labor market play important roles in corporate acquisitions.

EXPRESS: A Suite of Metrics to Understand Return on Investments in Customers

When making customer investments under resource constraints, approaches based upon next period accounting profit fail to consider the long-term. As we show, marketers’ suggested solutions often omit retention spend from the customer investment, understating the required committed marketing spend. Unfortunately, the logical outcome is a focus on the wrong (high retention cost) customers. Marketers may even try to acquire customers as long-term investments, then refuse to invest in their retention. We develop a suite of metrics to consider investments in customers, including customer return on investment (CROI), acquisition return on investment (AROI), retention return on investment (RROI), and option return on investment (OROI). Using the suite can help marketers calculate meaningful ROIs, even when they cannot clearly differentiate between acquisition and retention marketing spend. Our key contributions show how to assess the value of customer investments and treat customer acquisition as gaining an option to spend on retention. We outline the connection between the metrics, detail when each are appropriate, and show how to apply the suite of metrics to a variety of simulated datasets.

Government Ownership and Managers’ Role: Effect to Acquisition Return Among High-Technology Companies

This study investigates the effect of high-technology (high-tech) company acquisitions and GLIC ownership on shareholders’ value creation. Study samples for empirical analyses were carried out using the market-model event-study and multivariate analysis on studies published between 2011 and 2018. The findings indicate that; (i) The CAR for high-tech acquiring firms for the three-day event window (–1,1), five-day event window (–2, +2) and 11-day event window led to significant positive returns, with at least at 10% level, signifying that investors have a favourable reaction towards short-term high-tech acquisitions; (ii) The relationship between the GLICs’ Institutional Blockholders (BPSVGLIC) and executive director (FRACEXEC) was found to affect the abnormal returns significantly negatively at a minimum 5% significance level. These results provide two practical implications; firstly, investors gain abnormal returns from their investment in high-tech acquiring companies, and secondly, firms with greater ownership stakes in GLICs could experience value destruction.

Portfolio Construction based on AMZN, JPM, CSCO, GM and TSLA

Contemporarily, the sudden and rapid spread of the Newcastle pneumonia outbreak around the world caused stock markets in various countries to experience dramatic volatility in the early stages of the outbreak. The outbreak was an extreme stress test for global capital markets. On this occasion, investors change the risk strategy with high volatility to stable portfolio. On this basis, this paper will select relevant data of five listed companies in the United States in the last seven years through python, covering the period before and after the outbreak of New Canopy pneumonia. The aim of the study is to try to establish an optimal portfolio through CAPM model and asset allocation theory in order to maximize the acquisition return under investment risk diversification, facilitate investors to carry out practical exercises, further analyze the experimental results and discuss the limitations. Overall, these results shed light on guiding further exploration of portfolio construction under pandemic.

Target Company Cross-Border Effects in Acquisitions into the UK

We analyse the abnormal returns to target shareholders in cross-border and domestic acquisitions of UK companies. The cross-border effect during the bid month is small (0.84%), although cross-border targets gain significantly more than domestic targets during the months surrounding the bid. We find no evidence for the level of abnormal returns in cross-border acquisitions to be associated with market access or exchange rate effects, and only limited support for an international diversification effect. However, the cross-border effect appears to be associated with significant payment effects, and there is no significant residual cross-border effect once various bid characteristics are controlled for.

When are busy boards beneficial?

Whether busy boards contribute positively to firm value is inconclusive. I examine whether the effectiveness of busy boards varies with firms’ demands for specific board functions: advising and monitoring. I find that the positive effects of busy boards on advising quality, including corporate innovation and acquisition returns, are enhanced when firms have higher advising needs. I also show that the negative effects of busy boards on monitoring quality, including forced CEO turnover-performance sensitivity and income-increasing earnings management, are mitigated when firms have lower monitoring needs. Taken together, firm value results suggest that the positive effect through improved advising is more likely to outweigh the mitigated negative effect through monitoring when firms have higher advising needs but lower monitoring needs.

Country-level determinants, takeover locations, and the gains to target firms

This study enhances the understanding of imperfect factor markets by examining the impact of country-level factors on takeover location decisions and the gains to target firms. The focus of this study is on eight East and Southeast Asian countries, where there have been significant changes regarding corporate governance structures and practices following the 1997-1998 Asian financial crisis. The results suggest that the likelihood that a completed deal is a cross-border acquisition rather than a domestic acquisition is higher for target countries with lower government quality, weaker investor protection, stronger restrictions on capital mobility, lower corporate tax rates, and more depreciated currencies. Further, the study documents that target firm shareholders experience positive and significant abnormal returns in both cross-border and domestic acquisitions around the announcement date; but cross-border target firms gain significantly higher returns than domestic target firms.

Face‐to‐face interactions and the returns to acquisitions: Evidence from smartphone geolocational data

AbstractResearch SummaryWe examine the effect of face‐to‐face interactions between acquirers and targets before the acquisition announcements on acquisition returns. We argue that frequent interactions increase the target management's trust in the acquirer and benefit the acquirer by mitigating competition in the bidding process. For a sample of U.S. domestic acquisitions, we use smartphone geolocational data to measure the movement of people between merging companies in the months before the announcement. We find that with more frequent interactions, acquirers earn higher stock market returns at the announcement and targets receive fewer later bids from other bidders. Moreover, more frequent interactions are associated with lower returns to public targets vis‐à‐vis their acquirers. The effect of interactions is weaker when shareholder‐manager agency problems in the target are less severe.Managerial SummaryPrevious research shows that while acquisitions can create synergistic gains, the presence of potentially competing bidders forces acquirers to pay a high price for their targets, which makes acquisitions generally unprofitable for acquirers. We provide evidence suggesting that frequent social interactions between the acquirer's and the target's management in the pre‐acquisition phase increase the target management's trust in the acquirer, making it more willing to cede control to the acquirer and less eager to seek alternative bidders. By mitigating competition in the bidding process, social interactions make acquisitions more profitable for acquirers vis‐à‐vis targets. Social interactions are less effective when the target's management owns a larger share of the target or is better monitored by shareholders (e.g., in companies with concentrated ownership or private companies).

Does carbon risk matter for corporate acquisition decisions?

In this study, we examine whether carbon risk matters in acquisitions. Using a firm's carbon emissions to proxy for carbon risk, we examine whether an acquirer's level of carbon emissions is related to the decision to engage in acquisitions and achieve subsequent acquisition returns. The results show that firms with higher emissions have an increased likelihood of acquiring foreign targets while, at the same time, having a decreased likelihood of acquiring domestic targets. Acquirers with large carbon footprints seek out targets in foreign countries that have low gross domestic product (GDP) or weak environmental, regulatory, or governance standards. We also examine the relationship between carbon emissions and announcement returns. We find that cross-border acquisition announcement returns are higher when acquirers with high carbon emissions acquire targets in countries with fewer regulations or weaker environmental standards. Focusing on the interplay of corporate social responsibility (CSR) and carbon emissions, we find that investors censure acquirers that promote CSR while also having high carbon emissions, thus resulting in worse abnormal returns. This is particularly the case if the target country is wealthy or has stronger country governance or strong environmental protection. Our findings add insight on the channels through which a focus on reducing carbon risk can add value for shareholders.

Directors’ Perceptions of Board Effectiveness and Internal Operations

We contribute to the growing literature on the effectiveness of corporate boards by examining the effect of two insights that have been largely unexplored in prior studies that use public data. First, since boards’ responsibilities are wide-ranging, more holistic performance measures may better capture the full range of their duties than specific public actions and outcomes (e.g., disclosure of risk management processes, financial restatements, acquisition returns, CEO turnover). And second, because corporate boards share many characteristics of other types of teams, their effectiveness is likely to be influenced by their internal operations. To examine the performance effects of these insights, we use data from 577 directors of U.S. public firms that responded to a survey we conducted in 2015–2016 and qualitative data from interviews of 75 directors. Our study establishes a strong relation between director perceptions of board performance effectiveness and internal board operations. Further, by highlighting the critical role of internal operations, identifying areas of relative strength and weakness in boards’ effectiveness in various activities, and probing director perceptions of their primary responsibilities, we are able to offer concrete suggestions for future research on board effectiveness. This paper was accepted by Shiva Rajgopal, accounting.

Does Resolution of Trade Policy Uncertainty Affect Shareholder Returns in Mergers and Acquisitions?

Does Resolution of Trade Policy Uncertainty Affect Shareholder Returns in Mergers and Acquisitions?

Does CEO overconfidence matter for shareholders wealth Evidence from the UK takeover market

This study examines how CEO overconfidence affects shareholders' wealth (e.g., stock returns) in mergers and acquisitions (M&As). The main measure adopted to link CEO overconfidence is based on whether a CEO holds stock options until the year before the expiration date. Using a sample of M&As in the UK, we document that acquiring firms' stock returns are negatively affected around the announcement date if their CEOs are characterised by overconfidence. The results hold after addressing omitted variable concerns and using a propensity score matching (PSM) analysis. The findings are also robust to the implementation of the alternative measure of managerial overconfidence, such as media portrayal of CEOs. This study offers an important implication for firms to mitigate CEO overconfidence in order to protect the interests of shareholders.

Grabbing hand or helping hand? Ownership interventions and acquirers returns; the role of provincial idiosyncrasies

AbstractFirm's performance is not only influenced by sound decisions but also by institutional processes. This study argues that the effect of government intervention on acquisition returns is partly dependent on institutional factors such as provincial marketization and the legal environment. This study employs ownership and merger and acquisition regulations issued by the Chinese government 2003–2018 to measure government intervention and also employs both the OLS and the random effects technique. The result shows a positive relationship between ownership intervention and acquisition returns. Next, the study finds that variances in regional marketization and the legal environment strengthen this relationship such that acquirers in high marketization regions and acquirers in a robust legal environment earn higher returns than acquirers in a low marketization region and acquirers in a weaker legal environment. The results imply that acquisition returns are not even across all locations in a transitional economy. Ongoing policies should aim at bridging the variances in different locations as it impacts acquirers' returns.

An Analysis of Gains to US Acquiring REIT Shareholders in Domestic and Cross-Border Mergers before and after the Subprime Mortgage Crisis

This paper examines the abnormal returns of acquiring real estate investment trusts (REITs) around the announcement of acquisitions before and after the subprime mortgage crisis. Based on 182 domestic and cross-border US REIT acquisition announcements from 2005 to 2010, the acquiring trusts experienced a 0.73% abnormal return, on average. When the sample was divided into pre-crisis, crisis, and after-crisis subsamples, the acquiring trusts enjoyed the largest abnormal returns (1.86%) for domestic acquisitions during the crisis period. Before the crisis, when the acquisition was cross-border, the target was private, or the transaction was cash-financed, the acquiring trust experienced larger abnormal returns. During the crisis period, the acquiring trust gained larger abnormal returns when the transaction value was larger. After the crisis period, the acquiring trust achieved less abnormal returns in cross-border mergers. For both pre- and after-crisis periods, the shareholders of the acquirer enjoyed larger abnormal returns when the mergers were cash-financed, regardless of whether the target was public or privately held. Neither the blockholder monitoring nor the signaling hypothesis can explain such value gains. The structural changes in the acquirer’s abnormal returns are possibly due to the increased risk aversion of the market participants following the crisis.

The Effect of Shareholder Voting Requirements on Method of Payment and Performance Outcomes in Acquisitions

We examine the initial implementation of a shareholder voting rule to identify the associated costs and benefits of shareholder approval in particular acquisitions. We find firms alter the structure of their acquisitions to avoid shareholder voting. Additional analysis suggests firms use seasoned equity offerings as a mechanism to avoid shareholder voting. We examine the performance of acquisitions following the enactment of the shareholder voting rule and find no evidence of higher short- or long-run market returns for acquisitions requiring a stockholder vote. This suggests shareholder voting adds additional costs, but no discernable benefits, to acquiring firm shareholders.

Is It the Investment Bank or the Investment Banker? A Study of the Role of Investment Banker Human Capital in Acquisitions

Using a novel data set that links individual investment bankers to the acquisition deals they advise on, we find that individual investment bankers with greater deal experience are associated with higher acquisition returns and post-acquisition operating performance, particularly for acquirers in complex and more opaque industries. The advisory fee on acquisitions is also positively associated with the investment banking team’s experience. Finally, when more experienced investment bankers switch to a new bank, acquirers are more likely to move with them. Overall, our results suggest that the human capital of individual investment bankers is valuable to acquirers.

Proximity to urban centers in mergers and acquisitions

PurposeThe purpose of this paper is to examine the impact firm proximity to financial centers has on announcement returns and time to deal completion for mergers and acquisitions.Design/methodology/approachUsing a data set of merger and acquisition activity from 1986 to 2014, target and acquiring firms are classified as rural or urban based on their geographic proximity to major financial centers. The impact of this proximity on short-term acquisition announcement returns and on the amount of time required to complete the transaction are tested.FindingsMarkets react more favorably to the acquisition of firms headquartered in a rural area, likely due to increased information advantage on the part of the acquiring firm. Furthermore, the acquisition of a rural firm requires greater time to completion.Practical implicationsAcquiring firms may be able to use information asymmetry to their advantage when acquiring firms located in a more rural setting with higher levels of information asymmetry. However, this requires the acquiring firm to generate an informational advantage and will also require a greater time commitment on average to complete the deal.Originality/valueWhile prior literature has demonstrated that the distance between target and acquirer can affect acquisition returns and time to deal completion, this study adds to the literature by demonstrating that the geographic location of the target firm relative to major financial hubs can have a unique effect on mergers and acquisitions as well.

Extracting Top-k Company Acquisition Relations From the Web

Company acquisition relation reflects a company's development intent and competitive strategies, which is an important type of enterprise competitive intelligence. In the traditional environment, the acquisition of competitive intelligence mainly relies on newspapers, internal reports, and so on, but the rapid development of the Web introduces a new way to extract company acquisition relation. In this paper, the authors study the problem of extracting company acquisition relation from huge amounts of Web pages, and propose a novel algorithm for company acquisition relation extraction. The authors' algorithm considers the tense feature of Web content and classification technology of semantic strength when extracting company acquisition relation from Web pages. It first determines the tense of each sentence in a Web page, which is then applied in sentences classification so as to evaluate the semantic strength of the candidate sentences in describing company acquisition relation. After that, the authors rank the candidate acquisition relations and return the top-k company acquisition relation. They run experiments on 6144 pages crawled through Google, and measure the performance of their algorithm under different metrics. The experimental results show that the algorithm is effective in determining the tense of sentences as well as the company acquisition relation.