Target Abnormal Returns Research Articles

Does democracy shape international merger activity?

Democracy matters for international merger activity. Using a sample of 101,834 cross-border deals announced between 1985 and 2018, we show that merger flows predominantly involve acquirers from more democratic countries than their targets. This result is primarily driven by a “pull” factor: firms in countries with weaker democratic institutions attract more cross-border deals. We find evidence of bonding as the key mechanism behind this effect. The democracy effect is stronger when target countries have weaker corporate governance standards. Furthermore, target abnormal returns around deal announcements increase with the difference in democracy between acquirer and target countries. Importantly, differences in investor protection or economic development do not directly explain the democracy effect. Combined, our findings imply that democracy is a fundamental, yet previously overlooked, determinant of cross-border mergers.

Deal Initiation in Mergers and Acquisitions

We investigate the effects of target initiation in M&As. We find target-initiated deals are common and that important motives for these deals are target economic weakness, financial constraints, and negative economy-wide shocks. We determine that average takeover premia, target abnormal returns around merger announcements, and deal value to EBITDA multiples are significantly lower in target-initiated deals. This gap is not explained by weak target financial conditions. Adjusting for self-selection, we conclude that target managers’ private information is a major driver of lower premia in target-initiated deals. This gap widens as information asymmetry between merger partners rises.

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.

Deal Initiation in Mergers and Acquisitions

We investigate the effects of the deal initiator in mergers and acquisitions. We find target-initiated deals are common and that important motives for target-initiated deals are target economic weakness, financial constraints and negative economy-wide shocks. We document that average takeover premia, target abnormal returns around merger announcements and deal value to EBITDA multiples are significantly lower in target-initiated deals. This gap is not explained by weak target financial condition. Adjusting for self-selection, we conclude that target managers’ private information is a major driver of lower premia in target-initiated deals and this gap widens as information asymmetry between merger partners rises.

Mergers and Value Creation in a Post-Liberalized Environment: The Case of India

The purpose of this paper is to examine domestic merger and acquisitions in the Indian market following the economic liberalizations in 1995. We find that in in Indian mergers both parties gain with acquirers showing higher abnormal returns and targets showing lower abnormal returns relative to their counterparts in the U.S. Contrary to our expectation that the takeover market in India has become more competitive since 1995, we find little evidence that acquirers’ abnormal returns have declined or target abnormal returns have increased over time. In addition, we find evidence that large group affiliated firms have higher announcement returns, and this directly translates into lower target returns. Further, targets belonging to groups can exploit their affiliation and achieve higher abnormal returns.

Public versus private takeovers of Australian stock exchange listed targets

In this study we investigate the association between bidding firm listing status and the abnormal returns and characteristics of target firms, in the context of Australian takeovers. Similar to the US, target abnormal returns are significantly lower in private bids. However, this difference is only significant when comparing public bidders with private non-operating bidders suggesting the results are driven by a lack of operating synergy available to non-operating bidders rather than public bidder agency problems. We also study how target firm characteristics differ between public and private bidders. The results indicate that different private bidders have alternative motivations for making an acquisition. Private equity targets have a less independent board than targets of public bidders and are more undervalued. In comparison, targets of private bidders without existing business activities are smaller, have higher management ownership, lower growth and lower cash flows than targets of public bidders.

Do private equity consortiums facilitate collusion in takeover bidding?

We address whether the joint bidding by private equity consortiums facilitates collusion in the takeover market. We employ a sample of 870 takeovers of publicly traded targets in the 2003 to 2007 period, the time period which is the focus of investigation by the Justice Department and the source of cases for class action lawsuits. A unique aspect of our analysis is that we determine the identification of private equity bidders from actual merger documents rather than rely on sources such as Securities Data Corp and that we analyze both prominent private equity bidders as well as smaller private equity firms. Our analysis finds competitive reasons for consortium formation based on scale, risk and bidder expertise. We also find that both single private equity bidders and private equity consortiums are associated with significantly greater levels of takeover competition than other types of bidders. While we find some evidence that target abnormal returns are lower in private equity consortium deals for narrow windows around the initial takeover-related announcement date, we find that these results do not hold for longer event windows that better account for the differences in the takeover process across types of bidders. Analysis that controls for the endogenous selection of consortium formation also fails to find any negative effect of consortiums on either takeover competition or target returns. We also do not find any negative effects of consortiums formed by prominent private equity firms. We interpret the evidence to be inconsistent with a collusive explanation for consortium formation in the 2003 to 2007 period and to be consistent with competitive reasons for consortium formation.

The Sharing of Economic Benefits between Acquirers and Targets

We examine the creation and subsequent loss of expected economic benefits in mergers and acquisitions. By studying failed bids along with successful ones and analyzing acquirer and target abnormal returns using a new approach, we document two important findings. First, on the announcement of a failed acquisition, the combined value of the acquirer and target on average falls. Further, both the target and acquirer on average suffer significant negative abnormal returns from offer termination. Second, we find that acquirers share in a significant portion of the economic benefits of a successful merger or acquisition. Specifically, we find there is a significantly positive relationship between acquirer and target returns utilizing a longer-term 60-day announcement window and at the termination announcement indicating an expected sharing of synergistic benefits. Further, examining subsequent stock performance over a 100-day window once the outcome is known, failed cash bidders significantly underperform successful cash bidders by approximately 11% and failed acquirers using stock bids underperform successful stock acquirers by a further 9.4 to 11.6%. These findings indicate sizeable expected acquirer economic benefits for both offer types.

Managerial overconfidence and corporate takeovers

PurposeThe purpose of this paper is to model the announcement returns of merging firms based on managerial overconfidence about merger synergy.Design/methodology/approachThe paper applies continuous‐time real options techniques and game theoretic concepts. Managerial overconfidence and strategic interaction between the bidder and the target are incorporated into the model.FindingsThis model implies that: abnormal returns to bidding shareholders will be negative with a high degree of managerial overconfidence; combined returns to shareholders are usually positive; and both the bidder's and the target's abnormal returns are related to industry characteristics, the degree of managerial overconfidence, and the way merger synergies are divided.Originality/valueThis paper, for the first time, reconciles theoretically the following stylized facts: combined returns to shareholders are usually positive; and returns to the acquirer are, on average, not positive. In addition, the model generates new predictions relating these returns to industry characteristics and the degree of managerial overconfidence.

M&A market in transition economies: Evidence from Romania

This study sheds light on a new facet of the financial architecture of transition economies by focusing on the original experience of the Romanian acquisition market. Our findings do not corroborate those provided by the extensive acquisition literature: on average, the target abnormal returns are not statistically different from zero. The shareholders' short-term reaction carries information about the economic perspectives of target companies, as well as the effectiveness of the legal protection before and after this specific firm episode.

Further analysis of mergers and shareholder wealth effects in European banking

Although bank mergers have been a topic of ongoing research in the USA, particularly in view of reforms instituted by the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994, the evidence on shareholder wealth effects in European bank mergers is thin. A key question is whether the changes in the banking industry are applicable worldwide or reflect segmentation at the regional level. In this paper results are provided from a larger and more recent sample than previous studies. In contrast to previous findings, findings here are more consistent with those of US bank mergers, leading to the conclusion that there is less geographical heterogeneity in the industry than previous studies indicated. In particular, low target abnormal returns are found, which, it is believed, stem from the fact that acquirers are not willing to pay high premiums in a competitive environment in which profitability levels are eroding. It was found that abnormal returns are higher in bank-to-bank rather than cross-pro...

Abnormal Returns in the Acquisition Market: The Case of Bank Holding Companies, 1990-1993

Recent evidence suggests that announcements of bank holding company acquisitions result in wealth transfers from the bidding to target shareholders. Empirically, this is demonstrated through findings of negative average abnormal returns to bank holding company acquirers and positive average abnormal returns to targets on announcement. Using a sample of acquisitions from the early 1990s—a period marked by the removal of significant geographic entry barriers—this paper reexamines the issue by applying a general statistical model to the event study framework to more precisely measure abnormal returns. In particular, we model returns according to the GARCH process to control for time-varying volatility. With respect to the unconditional distributions of acquirer and target abnormal returns, our findings are consistent with prior research. Further investigation into the conditional distribution of acquirer returns finds that, on announcement, interstate acquisitions using the purchase method of accounting actually increased shareholder wealth for acquirers (on average) by 1.44%. However, over a longer event horizon, the most important determinants of acquirer abnormal returns appear to be the relative size of the transaction and the method of accounting.

The Effects of the Method of Payment and the Type of Offer on Target Returns in Mergers and Tender Offers

AbstractThis paper re‐examines the effects of the method of payment and type of offer on target abnormal returns around the takeover announcement, controlling for the target firm's institutional ownership. Previous studies suggest the difference in announcement‐period target returns between cash offers and stock exchange offers can be explained by the difference in capital gains tax liabilities of the target shareholders and/or the difference in the information effect of the method of payment. The empirical results indicate no relation between bid premiums (or target abnormal returns) and institutional ownership of the target firm in cash offers and a systematic difference in target returns between mergers and tender offers even after controlling for the method of payment. These results are inconsistent with both the tax hypothesis and the information effect hypothesis. The evidence suggests the likelihood of future competition might be higher in tender offers than in mergers.

Capital structure, asset structure and equity takeover premiums in cash tender offers

A model of the equity takeover premium is developed that demonstrates a direct link between the percentage premium paid to target shareholders and the target firm's capital structure and asset structure. We test the model using a sample of 145 cash tender offers and find that target abnormal returns increase with the target's liability to equity ratio and decrease with the target's financial asset to equity ratio. The addition of these variables dramatically improves the explanatory power of regressions explaining percentage takeover premiums paid to target shareholders.

Target abnormal returns associated with acquisition announcements: Payment, acquisition form, and managerial resistance

Abnormal returns earned by target firms at the time of initial acquisition announcements are related to form of payment, degree of resistance, and type of offer. Results indicate that interdependence among these characteristics is important. Previous research suggests that tender-offer targets earn higher abnormal returns than merger targets. After controlling for payment method and degree of resistance, however, the difference in abnormal returns between tender offers and mergers is insignificant. Resisted offers are associated with insignificantly higher returns than unresisted offers. Abnormal returns associated with cash offers are significantly higher than those associated with stock offers.