Stock-financed Acquisitions Research Articles

Does continuous disclosure affect the market reaction to mergers and acquisitions announcements?

We examine the association between the degree of continuous disclosure by bidders and the market reaction to the announcement of 3512 mergers and acquisitions (M&As) by Australian bidders during the period 2000–2017. Using four proxies for continuous disclosure (total number of disclosures, total number of sensitive disclosures, total number of pages, and total number of sensitive pages), we find a positive association between the market reaction to M&A announcements and the level of continuous disclosure made by bidders. These findings imply that investors, when assessing M&A deals, find bidders' disclosures to be informative and value relevant. Further analyses reveal that this positive association is more pronounced for private target acquisitions, stock-financed acquisitions, and unrelated acquisitions.

Overlapping insiders and the method of payment in acquisitions: New tests and evidence on adverse selection

Exploiting a unique setting of overlapping insiders between acquirers and targets in India, we examine how information asymmetry between the transacting parties influences the returns to acquiring firms' shareholders, as well as the method of payment. Using a novel dataset, we find that cash-financed deals generate greater (no significantly different) value for acquiring firms’ shareholders than stock-financed ones when insiders are non-overlapping (overlapping) between acquiring and target firms. Further, stock-financed deals with overlapping insiders outperform those without them. These results indicate that the adverse selection effect of stock issues in stock-financed acquisitions with asymmetric information between the transacting parties is the key reason behind the underperformance of stock-financed deals. We also find that acquisitions with overlapping insiders on both sides of the deal have a significantly higher incidence of financing with stock than those with non-overlapping insiders. However, the positive effect of overlapping insiders on the propensity of acquisition financing with stock becomes weaker when acquiring and target firms are in the same industry. These results suggest that the effect of a particular channel of information asymmetry reduction on the payment method is greatest in the absence of other channels. Our results are robust to several checks.

An exploratory study of US acquirers’ market performance: pre- versus post-Sarbanes–Oxley act of 2002

PurposeMotivated by the findings of Bhabra and Hossain (2017) that highlight an improvement in US market performance in the post-Sarbanes–Oxley (SOX) period, this paper aims to investigate how this change varies with the methods of payment used for the deals.Design/methodology/approachDeductive in nature and using an event study approach, this paper uses a sample of 675 deals between 1999 and 2006 to test three research hypotheses in a pre-post setting.FindingsResults show that at the aggregate level, there is a significant improvement in the market performance of US acquirers around the announcement day in the aftermath of the passage of SOX 2002. Considered separately, both US stock acquirers and cash acquirers did not experience any significant improvement in market performance in the post-Sarbanes–Oxley period. These results are robust to controlling for governance, firm and deal variables, as well as industry and year fixed effects.Research limitations/implicationsExploratory in nature, the results are to be interpreted in light of the sample size and the period under investigation.Practical implicationsThe results provide evidence for regulators and legislators on the contribution of SOX 2002 to curbing managerial misconduct. Significant improvement in the market performance also signals more confidence in managerial decisions and a reduction in agency problems. The insignificant change in stock acquirers’ market performance can be an indication that policymakers should exert more efforts to improve shareholders' confidence in the quality of disclosure.Originality/valueThis investigation provides unique insights on whether SOX has been effective in mitigating mispricing concerns associated with stock-financed acquisitions and whether it was effective in moderating the governance mechanism associated with cash-financed acquisitions.

The impact of securities regulation on the information environment around stock-financed acquisitions

We investigate the effects of securities regulation, enacted by the European Union (EU) (namely, the Transparency Directive – TPD) to improve the quality of financial reporting and disclosure, on the information environment around stock-financed acquisition announcements. EU directives comprised in the Financial Services Action Plan aim to improve the information quality that flows to investors, which may help reduce the adverse selection discount when stock is used as the method of payment in Mergers and Acquisitions (M&As). We use a difference-in-differences methodology and document a significant increase in announcement returns of stock-paid acquisitions by European acquirers after the change in regulation. We also find that this result accrues essentially to companies with better firm-specific information quality and companies domiciled in EU countries with better institutional quality and shareholder protection. Our results highlight how the impact of the same regulation may differ depending on country and firm-level attributes associated with the information environment.

The effect of managers on M&As

In this paper, we document diverse levels of managerial ability and firm performance in the cross section of acquiring firms. Acquirers with strong managerial ability realize higher announcement-period abnormal returns and experience better post-merger firm performance than their low-ability counterparts. Our results are robust to endogeneity concerns and show that the observed variation in acquirer abnormal returns is attributed to the heterogeneity of managerial ability fixed effects across acquirers. Managerial ability adds value to acquirers, especially in stock-financed acquisitions, implying that the method of payment is not driving the negative stock-financed valuation effect documented in previous literature. Moreover, we find that target firms with strongly ingrained growth potential and low levels of financial constraint and bankruptcy risk are highly favored by skilled acquiring managers.

Investor Inattention to All-Cash Acquisition Announcements: A Joint Day-Time Analysis in the Spanish Market

Prior studies suggest that investors have limited attention, which determines the speed with which information is incorporated into share prices and, in turn, affects the efficiency of the markets. Unlike other corporate events, the information contained in an acquisition announcement is generally less standard and more complicated to process. Therefore, investor inattention is less likely around this event. In this study we test the existence of investor inattention for a sample of all-cash acquisition announcements of listed and unlisted target firms released by listed Spanish firms from 1998 to 2018. Cash acquisitions allow us to control for the strategic behavior of overvalued companies engaged in stock-financed acquisitions. We perform a joint analysis of day of the week and time of trade from both a univariate and a multivariate perspective, after controlling for several factors that are related to the market reaction to acquisition announcements. Consistent with the notion that investors are less attentive to Friday announcements, we find a significant lower market reaction to acquisition announcements released during market trading hours both in terms of price and trading volume.

The effect of government involvement and payment method on merger and acquisition performance: the case of China

This paper applies a sample of 842 to investigate the effect of government involvement and payment methods on merger and acquisition of Chinese listed firms for the period 1993-2015. The study employs market model as benchmark to estimate expected returns for several event windows. We find that Chinese acquirer shareholders experience higher returns from the acquisitions in firms with no government involvements than those where government is involved. Our study demonstrates that stock-financed acquisitions maximise the wealth gains of shareholders than cash-backed acquisitions. Our finding further shows that using cash to finance government backed acquisitions yields extra wealth for investors on the announcement date whilst the market experience higher abnormal returns when stocks are used to finance the acquisition of privately held targets. The result of this paper has significant policy implications for both M&A financing decisions and government involvements in merger deals.

The effect of government involvement and payment method on merger and acquisition performance: the case of China

This paper applies a sample of 842 to investigate the effect of government involvement and payment methods on merger and acquisition of Chinese listed firms for the period 1993-2015. The study employs market model as benchmark to estimate expected returns for several event windows. We find that Chinese acquirer shareholders experience higher returns from the acquisitions in firms with no government involvements than those where government is involved. Our study demonstrates that stock-financed acquisitions maximise the wealth gains of shareholders than cash-backed acquisitions. Our finding further shows that using cash to finance government backed acquisitions yields extra wealth for investors on the announcement date whilst the market experience higher abnormal returns when stocks are used to finance the acquisition of privately held targets. The result of this paper has significant policy implications for both M&A financing decisions and government involvements in merger deals.

Does Short-Selling Potential Influence Mergers and Acquisitions Payment Choice?

Announcements of stock-financed mergers and acquisitions (M&As) may attract short selling of bidder shares by merger arbitrageurs. We hypothesize that bidders with higher short-selling potential include a higher proportion of cash in their M&A payments to reduce price pressure resulting from arbitrage short sales. Consistent with this prediction, we find a positive impact of the ex-ante net lending supply of bidder shares on the percentage of cash in public target payments. We corroborate this result in a placebo analysis and several robustness tests. Our paper adds to a growing literature analyzing the interplay between corporate and investor behavior.

Bidder earnings forecasts in mergers and acquisitions

This study finds that pro-forma earnings forecasts by bidding firms during acquisitions are associated with a higher likelihood of deal completion, expedited deal closing, and with a lower acquisition premium − but only in stock-financed acquisitions. Analysts also respond to these forecasts by revising their forecasts for the bidder upward. However, the benefits of forecast disclosure only accrue to bidders with a strong forecasting reputation prior to the acquisition. Explaining why not all bidders forecast, we document a higher likelihood of post-merger litigation and CEO turnover for bidders with a weak forecasting reputation and for those that underperform post-merger.

Earnings management, audit adjustments, and the financing of corporate acquisitions: Evidence from China

Acquirers are motivated to overstate earnings prior to stock-financed acquisitions. We hypothesize that audits help to detect and correct such overstatements. We test this using a difference-in-differences design, which compares audit adjustments to earnings for stock-financed and cash-financed acquirers before versus after the acquisitions. Consistent with our hypothesis, we find larger downward adjustments in the audits immediately before stock-financed acquisitions. Further analysis of regulatory sanctions suggests the downward adjustments are in fact warranted, rather than auditors being overly conservative. Moreover, modifications in audit reports suggest that downward adjustments do not correct all of the reporting irregularities in audited financial statements.

The valuation effects of investor attention in stock-financed acquisitions

Limited investor attention allows overvalued companies to engage in stock-financed acquisitions of listed target firms without experiencing significant reductions in their existing valuations. Our robust findings show that overvalued stock-paying acquirers that are subject to limited investor attention do not experience significant announcement period wealth losses. However, the overvaluation of these acquirers is corrected in the post-announcement period. On the contrary, the overvalued acquirers that receive high investor attention and use stock as the payment method in their listed-target acquisitions experience negative announcement period abnormal returns. The widely documented evidence that stock-financed acquisitions are associated with significant announcement period wealth losses is primarily driven by deals in which the acquirers are subject to high investor attention.

Why Do Serial Acquirers Switch Methods of Payment?

Serial acquirers conduct the vast majority of acquisitions in the U.S. Serial acquirers appear to strategically shift between methods of payment based on changes in their own characteristics, using overvalued stock in stock-financed acquisitions during short windows of opportunity. Acquirer overvaluation increases the speed to the next acquisition and the propensity to pay with stock. The market reacts positively to the initial stock-financed acquisitions by overvalued acquirers. As the overvaluation of stock acquirers declines while they complete more deals, they accelerate the speed to the next acquisition. Acquirers that pay with overvalued stock experience negative excess returns when the acquisition spree goes on too long.

Stock-financed M&As of newly listed firms

Newly listed firms are increasingly active in mergers and acquisitions (M&As). The “stock as currency” motivation explains why firms engage in stock-financed acquisitions after their Initial Public Offering (IPO). We extend its implications by focusing on the role played by stock liquidity, which entails potential benefits not only for prospective acquirers, but also for targets. We find that 16.3 % of the population of 3433 firms going public in Europe from 1995 to 2009 become acquirers within 3 years of the IPO, while 16.8 % are targeted. Firms with more liquid stocks are more likely to acquire and complete a larger number of stock-financed acquisitions. More liquid firms are also more likely to be acquired, and at higher valuations. Our firm-level findings, supported by time-series regressions, imply that firms should time their IPO based on liquidity considerations to facilitate subsequent M&A activity as either acquirer or target.

Information content of directors' trading around acquisitions

This paper investigates the patterns of directors' trades and returns around takeover announcements. We find that the pre-announcement net value (the difference between buy value and sell value) of directors' trading is positively related to acquirers' announcement period abnormal returns. This relation is stronger for private target acquisitions and for stock-financed acquisitions, when the information asymmetry between directors and outside investors is more pronounced. However, this relation does not hold for better governed and highly monitored acquirers. Our findings indicate opportunistic trading by directors prior to takeovers and highlight a significant role that corporate governance mechanism plays in restraining these opportunistic behaviors.

Information Content of Directorss Trading Around Acquisition

This paper investigates the patterns of directors’ trades and returns around takeover announcements. We find that the pre-announcement net value (the difference between buy value and sell value) of directors’ trading is positively related to acquirers’ announcement period abnormal returns. This relation is stronger for private targets acquisitions and for stock-financed acquisitions, when the information asymmetry between directors and outside investors is more pronounced. However, this relation does not hold for better governed and highly monitored acquirers. Our findings indicate opportunistic trading by directors prior to takeovers and highlight a significant role that corporate governance mechanism plays in restraining these opportunistic behaviors.

Do Stock-Financed Acquisitions Destroy Value? New Methods and Evidence

We contribute to the debate on whether stock-financed acquisitions destroy value for shareholders. A stock-financed acquisition is a joint takeover/equity-issue event. Using seasoned equity offering announcement returns, we estimate through linear prediction and propensity-score matching the share price drop that stock acquirers experience due to the financing choice. Net of this effect, stock-financed acquisitions are not value destructive, and the method of payment generally has no further explanatory power in the cross-section of acquirer returns. Our evidence is largely inconsistent with the agency costs of overvalued equity hypothesis.

Dodging Repatriation Tax - Evidence from Domestic and Foreign M&As

U.S. multinational corporations (MNCs) pay taxes upon repatriation of foreign earnings. This paper investigates whether MNCs facing higher repatriation tax costs are more likely to engage in tax avoidance strategies involving domestic acquisitions. We find that MNCs with higher levels of repatriation tax costs are more likely to engage in both domestic and foreign acquisitions. Furthermore, the positive association between repatriation tax costs and the likelihood of domestic acquisitions is driven by stock-financed acquisitions, and strong corporate governance strengthens this positive relationship. Our findings suggest that domestic acquisitions are a prevalent way for MNCs to access cash trapped overseas.

Stock-Financed M&As of Newly Listed Firms

Newly listed firms are more and more active in Mergers and Acquisitions (M&As). The ‘stock as currency’ motivation explains why firms use publicly traded stocks as acquisition currency after their Initial Public Offering (IPO). We extend its implications by focusing on the role played by stock liquidity, which entails potential benefits not only for prospective acquirers, but also for targets. We find that 16.3% of the population of 3,433 IPOs during 1995-2009 in the stock exchanges of the four largest European economies become acquirers within three years of the IPO, while 16.8% are targeted. Firms with more liquid stocks are more likely to become acquirers and, if so, complete a larger number of stock-financed acquisitions. At the same time, more liquid firms are also more likely to be acquired, and at higher valuations. Our firm-level findings, supported by time-series regressions, imply that firms should time their IPO decisions based on liquidity considerations in order to facilitate their subsequent M&A activity not only as acquirer, but also as target.

Operating Performance Following Corporate Acquisitions: Does the Organisational Form of the Target Matter?

We compare long-run operating performances between acquirers of private targets and acquirers of public targets using samples of Australian acquisitions for the period 2000-2010. The acquirers of private targets realise statistically significant positive abnormal returns during the announcement period of completed acquisitions while acquirers of public targets earn normal returns. However, the operating performance of the former group during the post-acquisition period is not significantly different from that of the latter group. The stock-financed acquisitions are not associated with significant performance improvements irrespective of whether this method of payment is used to finance acquisitions of private or public targets. However, there is evidence to suggest that cash-financed acquisitions of public targets are associated with significant performance improvements while no such performance improvements were evident for cash-financed acquisitions of private targets. The concentrated ownership created through acquisitions of private targets is associated with significant improvement in the long-run operating performance for acquirers. Acquisitions of private targets are also associated with significant performance improvements if they are undertaken by experienced acquirers.