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The Impact of Merger Bids on the Participating Firms' Security Holders
Abstract
This paper investigates whether merger bids have an impact on the wealth of the participating firms' bondholders and stockholders. Monthly and daily bond and stock returns are calculated relative to the announcement date of a merger bid for a sample of conglomerate mergers. The results show that while the stockholders of target firms gain from a merger bid, no other securityholders either gain or lose. To provide direct evidence on the existence of “diversification effects” and “incentive effects,” we test whether the bondholders' returns are dependent upon the correlation between the returns of the merging firms and whether the size of the bondholders' and stockholders' returns in individual mergers are correlated. The results are consistent with a capital market that efficiently resolves conflicts of interest between stockholders and bondholders.
... Meta-analysis shows that strategic and financial variables are not significant when trying to predict post-acquisition success (King, Dalton, Daily, & Covin, 2004). Some studies have looked at the post M&A performance of the acquired versus the acquirer and have found that the acquirer suffers financially (Chatterjee, 1992;Datta, Pinches, & Narayanan, 1992;King et al., 2004;Moeller, Schlingemann, & Stulz, 2003;Seth, Song, & Pettit, 2002), while the acquired shows improved performance (Asquith & Kim, 1982;Datta et al., 1992;Hansen & Lott Jr, 1996;Malatesta, 1983). ...
... As an example, the IT investment to bring the acquired onboard with the acquiring entity's IT infrastructure or to upgrade the acquired facility's capabilities might be accrued to the acquiring facility. In fact, evidence supports this idea and the results of this study; many researchers have found that the acquirer suffers financially (Chatterjee, 1992;Datta et al., 1992;King et al., 2004;Moeller et al., 2003;Seth et al., 2002) while the acquired experiences improved performance (Asquith & Kim, 1982;Datta et al., 1992;Hansen & Lott Jr, 1996;Malatesta, 1983). ...
This is a quantitative study of archival data that examines Merger and Acquisition
(M&A) activity using currently established healthcare quality and financial performance
metrics. The research seeks to explicate the relationship between M&A activity and
M&A experience in the healthcare industry as it relates to initiatives aimed at improving
the quality and decreasing the cost of healthcare. The Affordable Care Act (ACA)
legislation appears to be contributing to a trend toward M&A consolidation; by
illuminating how this trend potentially impacts healthcare quality and cost reduction
initiatives, this study’s contribution is both useful and practical. The units of analysis are
Medicare reporting hospitals, hospital systems, and related healthcare providers that have
or have not experienced an M&A or multiple M&As.
The study shows a statistically significant improvement in quality each year from
2006–2014, which is reflected in higher scores for the four quality metrics measured.
M&A activity, as measured by acquisition status and acquirer experience, did not appear
to influence these quality metrics, with the exception of the heart failure measure, which
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showed a statistically significant positive influence of acquirer experience across all
specifications.
M&A activity’s possible effects on hospital financial performance was assessed
through operating-cost-to-charge and capital-cost-to-charge ratios (CCRs). The operating
CCR appears to be positively influenced by both acquisition status and acquirer
experience, while the capital CCR was positively influenced only by acquirer experience.
A positive influence is reflected in a decreasing ratio.
Results on quality improvement over time, both before and after the ACA,
suggest that the ACA itself may not be the driver for quality improvement. Similarly,
decreases in OCCR occurred consistently and statistically significantly over time, both
pre- and post-ACA, while CCCR showed statistically significant decreases in 2006–2008,
2013, and 2014. These results appear to support the notion that the trend was ongoing
before the ACA was enacted and gave these measures high-profile exposure.
... Different researches, conducted abroad, supported the conclusion that the returns are positive and statistically significant for target firms' shareholders: Jensen and Ruback (1983) reviewed 13 studies on the abnormal returns around M&A announcements and concluded that the average abnormal returns to target firms' shareholders are of 20% for successful mergers and 30% for successful tender offers. Dodd and Ruback (1977), Asquith and Kim (1982) and Bruner (2002) examined abnormal returns around the time of M&A deal announcement and found that the shareholders of target firms increased their returns as an outcome of the M&A transaction. Ravenscraft and Scherer (1989) investigated the profitability of mergers of US manufacturing corporations from 1957 to 1977 using a regression model to examine how profitability varies with merger intensity and accounting method. ...
... Having reviewed the evidences of returns on acquirers and targets, clear results can be noticed only for target firms' shareholders. Following the observations on distribution of wealth created in M&A transactions by Dodd and Ruback (1977), Asquith and Kim (1982), Jensen and Ruback (1983), and Andrade et al. (2001), it can be concluded that the biggest share of the combined returns from M&A transactions is possessed only by target firms' shareholders allowing no or less proportion of gains for the shareholders of the acquiring firms (Cosh et al., 1989;Chari et al., 2004). On the other hand, Martynova and Renneboog (2005) reviewed 17 prior researches and reported that the results can be equally divided between positive and negative acquirer returns. ...
Whether a planned Mergers and Acquisitions (M&As) transaction will prove beneficial in future or not has been the issue of ongoing debate amongst corporate. The present study, thus, focuses on Indian Telecom Industry to analyse the acquirer firms' performance in creating shareholders value in the post-M&A scenario with respect to utilising capital before the M&A. This research paper studies the shareholders value effects of M&As in the Indian Telecom Industry that took place during the period of 2000-2001 to 2009-2010. Accounting-study methodology has been undertaken to study the shareholders value creation in the long-run post-M&A period. The results of the study show that the acquirer firms, before utilising capital for large-scale M&As as a part of their strategic decision process, do not rationally acknowledge whether the firms are capable of creating or rather protecting the shareholders' value in the post-M&A scenario.
... Different researches, conducted abroad, supported the conclusion that the returns are positive and statistically significant for target firms' shareholders: Jensen and Ruback (1983) reviewed 13 studies on the abnormal returns around M&A announcements and concluded that the average abnormal returns to target firms' shareholders are of 20% for successful mergers and 30% for successful tender offers. Dodd and Ruback (1977), Asquith and Kim (1982) and Bruner (2002) examined abnormal returns around the time of M&A deal announcement and found that the shareholders of target firms increased their returns as an outcome of the M&A transaction. Ravenscraft and Scherer (1989) investigated the profitability of mergers of US manufacturing corporations from 1957 to 1977 using a regression model to examine how profitability varies with merger intensity and accounting method. ...
... Having reviewed the evidences of returns on acquirers and targets, clear results can be noticed only for target firms' shareholders. Following the observations on distribution of wealth created in M&A transactions by Dodd and Ruback (1977), Asquith and Kim (1982), Jensen and Ruback (1983), and Andrade et al. (2001), it can be concluded that the biggest share of the combined returns from M&A transactions is possessed only by target firms' shareholders allowing no or less proportion of gains for the shareholders of the acquiring firms (Cosh et al., 1989;Chari et al., 2004). On the other hand, Martynova and Renneboog (2005) reviewed 17 prior researches and reported that the results can be equally divided between positive and negative acquirer returns. ...
Whether a planned Mergers and Acquisitions (M%As) transaction will prove beneficial in future or not has been the issue of ongoing debate amongst corporate. The present study, thus, focuses on Indian Telecom Industry to analyse the acquirer firms' performance in creating shareholders value in the post-M%A scenario with respect to utilising capital before the M%A. This research paper studies the shareholders value effects of M%As in the Indian Telecom Industry that took place during the period of 2000-2001 to 2009-2010. Accounting-study methodology has been undertaken to study the shareholders value creation in the long-run post-M%A period. The results of the study show that the acquirer firms, before utilising capital for large-scale M%As as a part of their strategic decision process, do not rationally acknowledge whether the firms are capable of creating or rather protecting the shareholders' value in the post-M%A scenario.
... In the matching portfolio model, abnormal bond returns are measured using a procedure that compares portfolios. Early studies mentioning this approach are , Asquith and Kim (1982), and Eger (1983). The first two papers apply the paired-comparison procedure, a special form of the matched portfolio model. ...
... With the paired-comparison procedure just one bond issued by a nonsample company is matched with the bond issued by a sample-company on four observable characteristics. These are (1) bond rating, (2) term to maturity, (3) coupon interest rate, and (4) industry (Asquith and Kim 1982;. provide the theoretical and empirical justification for matching the bonds on these characteristics. ...
The Brexit referendum may result in new border controls and a separation of Great Britain from the EU and Continental Europe. These consequences will impede the import and export of goods and can therefore have a strong effect on the valuation of logistic companies. We employ event study methodology and regression analysis, examining 107 logistic companies from continental EU countries and Great Britain. While the results indicate an overall negative value effect, UK based companies have a significantly poorer performance than logistic companies from Continental Europe. Companies that focus on the road transport as well as diversified firms are less affected.
... Billett and Ryngaert (1997) explain that coinsurance results in a lower takeover premium offer to target shareholders. Other studies (Dennis and McConnell 1986;Asquith and Kim 1982) do not report any significant abnormal returns for debtholders. Billett et al. (2004) show that positive abnormal returns for target debtholders are not correlated with excess returns for the target. ...
The paper provides insights into how debt overhang issues related to transfers of value to creditors can impact target firms’ financial policy after an acquisition. The later are natural events which introduce new prospects of value creation and possibilities of undue transfer of value to the incumbent creditors. We examine changes in leverage at the target firm before and after it is acquired in a sample of US, Canadian, and European firms over the 2000–2016 period. We find that the target’s pre-acquisition financial leverage predicts changes in its leverage after the acquisition, consistent with target firms increasing their leverage after the acquisition to avoid wealth transfer to creditors. Changes in financing structure are implemented shortly after the acquisition. The more long-term indebted the target firm, the more releveraging develops. Our results support the releveraging hypothesis as suggested by the creditors’ holdup mechanism.
... Prior research has established that being acquired is, on average, a value increasing proposition for the stakeholders of a firm (Asquith and Kim 1982;Bradley et al. 1988;Eckbo 1983). However, in practice, it is certainly the case that every firm faces a different opportunity set, and thus stakeholders of a firm may not find it universally beneficial for their firm to become a target. ...
We study the bond price reaction of a merged firms peers, in order to better understand how the market responds to a restructuring. We argue that a merger announcement may signal the possibility of a merger wave to the industry, and in doing so, increase the conditional probability that peer firms might themselves be acquired in the future. However, while peer firm equity holders expect a direct benefit from a potential acquisition—in the form of a price premium—peer firm bond holders can only expect an indirect benefit—in the form of a risk reduction. Consistent with these hypotheses, we show that price reactions are stronger for firms that have a higher unconditional probability of being acquired ex-ante. In addition, we document that, cross-sectionally, the abnormal returns we observe from peer bondholders are concentrated among firms that have the highest expected risk reduction benefit from a potential acquisition. In order to distinguish a potential reduction in risk as the explicit return driver, we show that abnormal bond returns within firm (between different bond issues) are also concentrated among issues that have the highest expected risk reduction benefit.
... As a result, the idea indicates that announcing a bid could alert the market to the existence of previously unknown information about the target. According to Asquith & Kim, (1982), target firm stockholders received considerable positive cumulative abnormal returns from two months before the disclosure to the month of the announcement, while no other securities holders gained or lost. Warfield & Linsmeier, (1992) found from bank research analyzing the information content of earnings components that the information provided by earnings components varies depending on economic conditions and tax incentives. ...
Digitalization is being accelerated by the ongoing COVID-19 crisis, which has the boosted demand for digital services. The Banking industry must adapt to keep up with the digitalization disruption by exploiting Mergers and Acquisitions (M&A) or establishing Financial Technology related to capturing dynamic capabilities. Dynamic capabilities in the banking context can be achieved whenever additional values were shown in the post-M&A process, bringing the financial and operational performance in better condition for the acquiring banks. The purpose of this paper focuses on exploring mergers and acquisitions in the banking industry through the lens of dynamic capabilities. Hence, based on several literatures that has been elaborated, this paper aims to formulate the conceptual model of dynamic capabilities in mergers and acquisitions in the banking industry. The conceptual model demonstrates that the convergence of capability in sensing and seizing opportunities can result in new product development, while the nexus of sensing and transforming capabilities generates cost and operational efficiency in the context of the banking industry. Keywords—Dynamic capabilities; Merger & Acquisition; Banking; Conceptual Model; Financial Technology; Value creation. COVID-19.
... The general conclusion for domestic acquisitions is that shareholders of target firms receive the largest gains from corporate takeovers while the evidence regarding the premium received by acquiring firms' shareholders is inconclusive (i.e. Malatesta, 1983;Dennis and McConnell, 1986;Dodd, 1980;and Asquith and Kim, 1982). respect to industry affiliation, the services industry experiences the highest wealth gains (3.2%), followed by manufacturing (2.01 %) and food (1.23%) industries. ...
This study investigates the wealth effects of foreign direct investments on U.S.firms during the period of 1989-2000. Overall findings indicate that U.S.acquirers experience statistically significant wealth gains of 0.57 percent aroundthe announcement of acquisitions. The wealth effects do vary with location oftarget firms and acquirers' industry affiliation. Acquisitions in Europe yieldsignificant positive wealth gains while acquisitions in AsiaIPacfic, NorthAmerica, and Latin/Central America regions yield negative wealth gains. Thehighest wealth gains to U.S. acquirers occur when they acquire targets inFrance followed by acquisitions in the UK. Canadian acquisitions, on the otherhand, yield negative significant wealth gains. The highest wealth gains are alsoobserved in the services industry followed by acquisitions in the manufacturingand food industries. Acquisitions in mining/extraction, paper products, andcommunications sectors, on the other hand, yield statistically significant negativewealth gains to acquirers.
... Drawbacks related with event studies while measuring effect of consolidation on firm value, first can be of different models. Allen and Sirmans (1987) measured abnormal returns by mean adjusted returns, Dennis and McConnell (1986) used the market adjusted returns, Eckbo (1983) and Dodd & Ruback (1977) used market model and Asquith & Kim (1982) went to CAPM based method. These different models sometimes make comparison of results impossible. ...
... The general opinions on M&A performance range from "Hosanna" to "Crucify"! Target shareholders enjoy significant abnormal returns (Asquith & Kim, 1982;Malatesta, 1983; Datta et al., 1992;Hansen & Lott, 1996;Leeth & Borg, 2000). ...
... If so, then the pecking order theory would predict that highvolatility firms are less likely to rely on outside equity and therefore, should have higher leverage Goyal 2003, 2009). 3 See Asquith and Kim (1982), Dennis and McConnell (1986), and Maquieira et al. (1998). 4 Specifically, for a firm composed of debt and equity, the variance of its asset value,σ 2 , can be decomposed as ...
We exploit cross-sectional variation in the predictable changes in asset volatility following corporate acquisitions to identify the effect of business risk on capital structure. We find that postmerger changes in leverage and cash holdings are strongly predicted by expected asset volatility changes estimated using premerger information. These capital structure adjustments are partly achieved through the choice of payment method. Our findings provide direct evidence for the coinsurance effect of mergers on debt capacity. More broadly, they suggest that firm risk is a first-order determinant of leverage, consistent with the tradeoff theory of capital structure. Our coefficient estimates imply that a one-standard deviation decline in a firm’s asset volatility corresponds to a 7.5-percentage point increase in leverage.
This paper was accepted by Renee Adams, finance.
... See, for example,Asquith (1983) andAsquith and Kim (1982), among others.Asquith, Bruner, and Mullins (1983), however, find that some bidder stocks experience substantial announcement gains which are positively related to the relative size of the targets.8th International Conference on Modern Research in Management, Economics and Accounting October 19 -21, 2018 / Munich -Germany ...
... In the range of low volatility, as the case for investment-grade bonds, any improvement in the asset return volatility does little to lower default probability and hence to improve bond value. 6 Asquith and Kim (1982), Billett et al. (2004), Dennis and McConnell (1986), and Mandelker (1974)find no significant effect for acquirers, but significant positive abnormal returns for the targets. 7 Hite and Warga (1997) studies the bond market reactions surrounding bond credit rating changes. ...
The coinsurance and wealth transfer hypotheses are both used to explain the wealth effect of acquirer and target bondholders during mergers and acquisitions (M&As). Hindered by a paucity of high-quality bond data, to date there is at best only limited and mixed evidence. Using bond transaction data from TRACE, we investigate daily bond market reactions to M&A announcements. Consistent with the wealth transfer hypothesis, we find new evidence that acquiring (target) firm bondholders experience negative (positive) and statistically significant abnormal returns. Moreover, investors of speculative-grade bonds experience more negative (positive) returns for the acquirer (target) than investment grades. In addition, larger deals and cash payment method worsen acquirer bondholders’ losses and reduce target bondholders’ gains. Target (acquirer) bonds experience more positive (negative) returns when the acquirer (target) is a public firm and when the target’s credit rating is below the acquirer’s. Lastly, consistent with a loss (gain) to acquiring (target) firm bondholders in the initial market reactions, acquirer (target) bonds are more likely to have their credit rating downgraded (upgraded) following the announcement of a merger or acquisition.
... Similar to our analysis above of ex ante efficiencies of merging banks, we also tried constructing the thirds of the data by the pre-merger loan/asset ratio. The results (not shown) were that merging banks with weighted average loan/asset ratios in the lowest third of the data had lower average profit efilciencỹ n nonfinancial industries, firms typically increase their leverage after a merger, bringing the risk of bankruptcy back up close to the desirable level afier diversifying the risks (see McConnell 1977, Asquith andKim 1983). Similarly, prior to implementation of formal capital requirements in the early 1980s, acquired banks were ofien found to increase their leverage following mergers (see Benston, Hunter, and Wall 1995 for a summary of these studies). ...
This paper examines the efficiency and price effects of mergers by applying a frontier profit function to data on bank "megamergers." We find that merged banks experience a statistically significant 16 percentage point average increase in profit-efficiency rank relative to other large banks. Most of the improvement is from increasing revenues, including a shift in outputs from securities to loans, a higher-valued product. Improvements were greatest for the banks with the lowest efficiencies prior to merging, who therefore had the greatest capacity for improvement. By comparison, the effects on profits from merger-related changes in prices were found to be very small.
... The study further explains that stockholder returns are closely related to the length of the event window. Asquith and Kim (1982) analyze the impacts of merger offers on debtor and stockholder of the firms' that were a party of the offer. The study calculates monthly and daily returns on bonds and stocks based on the merger offer announcement date. ...
Today information age, countries are in intense competition with each other.
This competition is not only a competition which comes from globalization by removing borders but also spread to an area where new information is provided to enable the development of science and technology, new products and tools based on this information are produced, and projects are systematically created.
In our age, rapid and radical changes don’t leave any choice but to be innovative to countries.
This situation leads to that countries which are trying to achieve superiority in world competition to give more importance to research and development (R & D) activities.
In other words, research and development investments significantly affect the level of development of a country.
The increase in R & D investments has led to countries becoming more competitive with other world countries and this competition is constantly driving countries to seek innovative and technological development.
Such innovative and acquired technological developments are important in terms of increasing prosperity and productivity in the long term, and because of leading to the development of countries.
In order to evaluate the technology use and innovation performance of the countries and to follow the progress in this area, various indices and indicators are calculated with the aid of a number of measurement and sorting procedures
In this study, the situation in the EU countries and Turkey has been assessed over the years according to innovation indicators, which provide a great advantage to compete primarily and have a great importance in terms of both countries and companies.
In the next stage, Turkey and the EU countries were grouped according to their similarities in terms of innovation indicators, and Turkey's position among the EU countries was determined.
At the same time in the study, the performance rankings of the countries were made in the light of the indicators and made the suggestions about which areas should be given priority.
... Paydaşların getirileri üzerindeki ayrımın, olay penceresinin uzunluğu ile yakından alakalı olduğu açıklanmıştır. Asquith & Kim (1982), birleşme tekliflerinin, birleşmeye taraf olan şirketlere borç verenlerin ve şirketlerin paydaşlarının serveti üzerinde bir etkisi olup olmadığını araştırmıştır. Çalışmada, aylık ve günlük, tahvil ve pay senedi getirileri, birleşme teklifinin duyurulma tarihine göre hesaplanmaktadır. ...
... Now, we apply this reasoning to corporate diversification. If a stand-alone company acquires another company, this acquisition will reduce the acquirer's default probability, at least as results about the presence of a coinsurance effect (e.g., Asquith and Kim 1982;Dennis and McConnell 1986;Maquieira et al. 1998;Billett and Mauer 2003;Penas and Unal 2004). ...
This study argues that in corporate diversification there is a bright side (coinsurance effect) and a dark side (diversification discount). While diversification might reduce systematic risk by its impact on the cost of financial distress, it might increase systematic risk because of inefficient cross‐subsidization at the same time. Building on a theoretical model, we analyze mergers and acquisitions in the U.S. over the period 1985 to 2014. We find the coinsurance effect to decrease the cost of capital by 36 bp for the average firm. However, at the same time, we observe a 7bp increase in the cost of capital related to the inefficiency of the firm's internal capital market. Both effects are statistically significant and robust to endogeneity concerns, different empirical specifications, and variable measurement.
... With this hypothesis, Lewellen (1971) argues that one important financial benefit for a merger of 2 firms could come from the coinsurance effect because of the 2 firms' imperfectly correlated revenues. Many empirical studies have been conducted to examine the coinsurance effect on security holders' wealth since the 1970s (e.g., Asquith and Kim (1982), Billett et al. (2004), Eger (1983, and Maquieira, Megginson, and Nail (1998)), and most of them find a significant effect on bondholders' wealth. Meanwhile, there has been a debate regarding whether the coinsurance effect on bondholders' wealth is a wealth Table 1 provides univariate tests of the difference in corporate payouts between conglomerates (multisegment firms) and pure plays (single-segment firms). ...
We examine how organizational form affects corporate payouts. Conglomerates pay out more than pure plays in both cash dividends and total payouts (cash dividends plus share repurchases). Furthermore, their payouts are more sensitive to cash flows compared to pure-play firms. The sensitivity of payouts to cash flow increases as the cross-segment correlation in a conglomerate decreases. Corporate payouts increase after mergers and acquisitions (M&As), especially among M&As in which acquirers and targets are less correlated. These results suggest that the coinsurance among different divisions of a conglomerate allows them to pay out more cash flow to their shareholders than pure-play firms.
... The effect of M&As on acquiring bondholders' announcement abnormal returns is mixed according to the literature. Kim and McConnell (1977) and Asquith and Kim (1982) find that the acquirer bonds' abnormal returns are insignificant. Eger (1983) and Maquieira, Megginson, and Nail (1998) document positive announcement abnormal returns. ...
I empirically investigate the relation between CEO inside debt holdings and mergers and acquisitions (M&As) and find evidence consistent with the agency theory’s prediction of a negative relation between CEO inside debt holdings and corporate risk taking. Further analysis shows that CEO inside debt holdings are positively correlated with M&A announcement abnormal bond returns and long-term operating performance, but negatively correlated with M&A announcement abnormal stock returns. Finally, I find evidence that acquirers restructure the post-merger composition of CEO compensation that mirrors their capital structure in order to alleviate incentives for wealth transfer from shareholders to bondholders or vice versa.
... Dodd and Ruback (1977) concluded that, in the twelve months before the bid, the shareholders of the acquiring companies earned positive and significant abnormal returns. Asquith and Kim (1982) affirm that the acquiring companies earned negative and insignificant abnormal returns during the announcement period, in conglomerated bids. Agrawal et al. (1992) analyzed the abnormal performance of the stocks, mainly in mergers. ...
The comprehension of terms such as Takeover Bids is essential to understand the functioning of business combinations. This paper aims to analyze the impact of the preliminary announcement on the abnormal returns of the companies involved in takeover bids in the Portuguese stock market. This study used the methodologies of Ball and Brown (1968) and Beaver (1968). 100 Operations were identified between 2000 and 2014. The results of the 12 analyzed bids confirm that the target companies show positive abnormal returns, whilst the acquiring companies show negative abnormal returns and inferior in amplitude. They also confirm that, globally, the companies react strongly to the announcement and that they acquire higher abnormal earnings in the periods closest to the preliminary announcement.
... The empirical results for the bidders vary considerably as well; however, the fundamental difference compared to targets is the sign of the abnormal returns. In particular, abnormal returns fluctuate from -3 percent ( Andrade et al., 2001;Asquith, 1983;Banerjee and Owers, 1992;Dodd, 1980;Eger, 1983;Franks, Harris, and Titman, 1991;Walker, 2000) to 2 percent (Asquith and Kim, 1982;Dennis and McConnell, 1986;Eckbo, 1985;Fuller et al., 2002;Leeth and Borg, 2000) in the United States, and from 1.4 percent to 1.6 percent in the United Kingdom (Conn, Cosh, Guest, and Alan, 2005;Faccio and Masulis, 2005;Sudarsanam and Mahate, 2003;Raj and Forsyth, 2002), while the same pattern exists in other geographic areas as well. Indeed, the vast majority of empirical studies present negative or statistically insignificant abnormal returns, demonstrating loss of wealth to the shareholders of bidders. ...
A preference for cross-border mergers and acquisitions (M&As) over greenfield investments as the dominant mode of foreign direct investment (FDI) has been observed over the past two decades. Table 10.1 (see page TK) indicates that the sum of cross-border M&As had been well over 50 percent of total FDI in developed economies. On the other hand, the sum of cross-border M&As had been up to 50 percent of the total FDI in developing economies. Although from 2008 onwards the annual value of greenfield FDI surpassed the respective of cross-border M&As, world FDI stock is still dominated by the later (UNCTAD, 2011: 11). This preference for M&As is in part from asymmetric information regarding the value of cross-border M&As and greenfield projects. Financial markets are able to provide efficient mechanisms to set the value of cross-border M&A targets, but there is no such mechanism to assess the value of greenfield investments.
This study examines the contribution of credit default swaps (CDS) to price discovery in the run-up period preceding an acquisition announcement. We find that the CDS market plays a significant role in price formation before cross-border acquisitions, especially when target firms are from emerging economies. Further, the information flow from the CDS to the equity market is more pronounced when the bidder has a higher risk of default and the target nation has greater information asymmetry, weaker governance, and lower creditor protections. Our results are consistent with preferential use of the CDS market by informed traders ahead of negative credit news to hedge increased default risk or speculatively front-run widening credit spreads.
Michel ALBOUY Professeur des universités, IAE Grenoble Résumé L'objectif de la présente recherche est d'étudier théoriquement et empiriquement le comportement des dirigeants de la société acquéreuse l'année qui précède l'opération de fusion-acquisition. Pour ce faire on a testé l'existence de la gestion des résultats à travers une étude du cas clinique à savoir le cas Sagem-Snecma. L'étude empirique testée par le modèle du Beneish (1999) montre que la société Sagem, société acquéreuse, manipule ces résultats l'année qui précède l'opération de fusion. Ce qui confirme nos conclusions théoriques.
L'objectif de la présente recherche est d'étudier théoriquement et empiriquement le comportement des dirigeants de la société acquéreuse l'année qui précède l'opération de fusion-acquisition. Pour ce faire on a testé l'existence de la gestion des résultats à travers une étude du cas clinique à savoir le cas Sagem-Snecma. L'étude empirique testée par le modèle du Beneish (1999) montre que la société Sagem, société acquéreuse, manipule ces résultats l'année qui précède l'opération de fusion. Ce qui confirme nos conclusions théoriques.
This study explores the influence of chief executive officer (CEO) overconfidence on acquirer bondholder wealth in mergers from 1994 to 2019. We find that CEO overconfidence benefits acquirer bondholders. Overconfident CEOs are likely to choose targets with lower return correlations rather than targets with lower risk than acquirers. We further show there is a positive wealth effect during announcement periods as well as firm risk reduction and a positive long-run bond market reaction subsequent to merger completion when overconfident acquirers merge with targets that are less correlated. Overall, the coinsurance effect dominates the liquidity effect on overconfident acquirer bondholder wealth during a merger.
We exploit a quasi-natural experiment (the adoption of state anti-recharacterization laws) to study the effect of strengthened creditor rights on corporate mergers and acquisitions. We find that, following the passage of anti-recharacterization laws, firms decrease overall acquisition activities. This effect is stronger for firms with worse agency problems. Announcement returns to shareholders are larger and post-merger operating cash flows are better for acquirers with weaker governance. Furthermore, returns to bondholders of these firms are also higher, indicating no wealth transfers. Taken together, our evidence suggests that ex-ante strengthened creditor rights can discipline firm managers to reduce value-destroying acquisitions and conduct higher quality deals.
Finance and management literature has witnessed numerous contributions analysing the market reaction to M&A deals and how this is affected by acquirer-, target- and deal-specific factors. However, if, on the one hand, the literature seems to agree that, generally, an M&A announcement has a negative impact on acquirer’s stock performance, scholars do not reach unanimous conclusions regarding the impact of individual variables on the acquirer’s performance. In response, the aim of this study is to demonstrate the potential of a configurational approach, in understanding M&A deals and their impact on acquirer’s stock performance. In this respect, a specific configuration of features was identified that, in contrast with the common belief of negative impact on acquirer’s stock returns associated with M&A announcements, registers a positive performance. This suggests that the focus of the literature should not be on one single factor, rather on evaluating holistically an M&A transaction, and this represents the main contribution of this study.
M&A prediction is a growing interest in the field of business studies. However, prevailing M&A prediction techniques are still widely based from the analyses of financial variables through quantitative approaches. This has led M&A scholars’ attention to call for the contribution of non-financial studies coupled with the opportunity for qualitative approaches to supplement new methodological insights. Accordingly, this study delved to explore the potential of qualitative data to describe M&A target firms and develop an M&A completion prediction model that is based on categorical patterns found among American and European owned firms’ letters to shareholders ranked in fortune/global/fast 500. This study postulates that analyzing M&A targets’ letters to shareholders could provide relevant categories to describe the attractiveness of firms as M&A targets that are also indicative to the prediction of the completion of the offered deals. This study employed a mixed methodology using content analysis and decision tree analysis. The results of the study had led to provide four interesting category observations that described M&A target firms’ letters to shareholders, which showed less sensitivity to ownership and border-related offers. Further, the study developed an M&A completion prediction model with 67% predictive accuracy. This study provides implications for firms’ management on the posturing contents featured in firm’s letters to shareholders could expose to signal their firms as M&A targets and to readers as such as stock traders and corporate investors to look into the posturing contents of firms’ letters to shareholders, so as to identify potential M&A targets.
This paper examines the impact of cross-border acquisition announcements on the U.S. bidders’ credit risk. On average, we find a significant increase in bidders’ rating-adjusted credit default swap (CDS) spreads around an acquisition announcement in an emerging market (EM), but no marked change if the target firm is from a developed market. The EM result is driven primarily by majority but not full control transactions, and by risky acquirers. We also find evidence of wealth transfer from acquirers’ bondholders to shareholders in EM acquisitions, which is stronger when transactions result in majority but not full control of the target or when acquirers are rated sub-investment grade. We attribute the rise in U.S. bidders’ credit risk around announcements of majority but not full control EM acquisitions to the weaker legal environment and creditor protection in the target nation relative to those in the U.S.
We shed light on the drivers and consequences of turnover in human resources for the U.K. football industry. We employ an event study using daily panel data of player transfers for a group of listed U.K. football clubs. Our results suggest asymmetric wealth effects: the acquisition of players is associated with negative abnormal club stock returns while player sales have an opposite effect. According to our findings, shareholders perceive that football managers overpay to acquire human resources. Our discussion draws possible links to the corporate finance literature which deals with the purchase and sale of firms and assets.
This book examines the effectiveness of corporate takeovers. Particularly, it identifies the extent to which the interests of shareholders and employees can be complementarily protected when a takeover is made. The dominant ideologies of corporate takeovers include synergistic gains and managerial disciplinary role. The UK Takeover Code is a regulatory response to the role of managers of target companies only. Also, the regulatory framework for takeovers in the United States is largely focused on target companies. Identifying the limitations of these regulatory framework, the book demonstrates that managements can influence the role of takeovers, thereby undermining its synergistic and disciplinary values.
The relevance of institutional control over the important role of managements is identified. Addressing the challenges of managerial influence over takeover functions is argued to be capable of promoting a complementary benefit to shareholder and employee interests, thereby challenging the shareholder and stakeholder primacy debate in corporate law, particularly in relation to takeovers.
This book will be essential reading for scholars and students interested in the market for corporate control, corporate law and company law.
We develop a general equilibrium model of asset prices in which benefits of technological innovation are distributed asymmetrically. Financial market participants do not capture all economic gains from innovation even when they own shares in innovating firms. Such gains accrue partly to the innovators, who cannot sell claims on proceeds from their future ideas. We show how the resulting inequality among agents can give rise to a high risk premium on the aggregate stock market, return comovement and average return differences among firms, and the failure of traditional representative agent asset pricing models to account for cross-sectional differences in risk premia.
Certaines informations laissent à penser que les clients réagissent négativement aux opérations de fusions et acquisitions. Or les chercheurs en marketing se sont peu intéressés aux effets produits par ces opérations sur la satisfaction des clients. Par ailleurs, la performance des fusions et acquisitions reste l’objet de controverses et suscitent un débat dans le monde académique. Ce travail cherche donc à comprendre si la satisfaction des clients joue le rôle de médiateur de la relation entre une fusion et acquisition et la performance d’une entreprise. Pour se faire, nous analysons 1959 opérations de fusions et acquisitions réalisées par 133 entreprises sur la période allant de 1994 à 2014. Les données sont collectées à partir des bases de données marketing (ACSI), comptables/financières et boursières (Thomson One Banker, Datastream et Fama-French Data Library). Les résultats montrent que les opérations de fusions-acquisitions réalisées par les entreprises expérimentées en matière de fusions-acquisitions permettent d’améliorer le niveau de satisfaction des clients. Les fusions-acquisitions influencent la performance des entreprises parce qu’elles impactent le niveau de satisfaction des clients, qui constitue l’un des principaux déterminants du résultat d’exploitation et de la valeur boursière d’une entreprise. En somme, la satisfaction des clients permet bien de mieux expliquer l’impact des fusions et acquisitions sur la valeur de l’entreprise.
Banks who can influence clients' governance may steer those clients into mergers to reduce the banks' own risk. Empirical evidence based on Japan's mergers and acquisitions (M&As) during the country's 1990s banking crisis indicates that acquirers with stronger bank ties made acquisitions that they would not have normally made. These acquirers lost more shareholder value via mergers than acquirers with weaker bank ties. The banks' risk was reduced, while the banks' shareholders gained significant excess returns from their borrowers' mergers. This paper offers implications for corporate governance of firms with strong bank ties and advances the existing knowledge on business groups.
Logistic service providers are facing significant challenges in recent years due to intensified competition and ever-increasing customer expectations for cohesive high-standard services at low cost. To cope with these developments many companies aim for external growth to realize operational efficiencies and exploit productive opportunities of new markets and diversified services. Accordingly, 2015 has even become the most active year for mergers and acquisitions in logistic service industry. However, studies examining the post-merger performance effect and its determinants are scarce. Consequently, this paper takes up this issue by analysing a sample of 826 transaction announcements taken place between 1996 and 2015 and their performance effect in terms of short- and long-term abnormal shareholder returns. The results reveal, that although overall transactions exhibit significant positive abnormal returns, post-merger performance for the acquiring companies differs considerably according to the logistic services offered. In the short-term trucking, railway, 3PL and air cargo companies experience significant positive abnormal returns of about 0.6%–2.6%, while sea freight carriers realize only marginal effects and CEP companies do even not show any significant reaction. In the long-term, railway and 3PL companies realize a significant abnormal return of about 20%–24%, while trucking, sea freight and air cargo carriers do not exhibit significant returns and CEP companies do even experience significant losses of about −17%. Overall, diversifying transactions of established full-service providers outperform focus-increasing transactions of specialized operators.
Logistic service providers are facing significant challenges in recent years due to intensified competition and ever-increasing customer expectations for cohesive high-standard services at low cost. To cope with these developments many companies aim for external growth to realize operational efficiencies and exploit productive opportunities of new markets and diversified services. Accordingly, 2015 has even become the most active year for mergers and acquisitions in logistic service industry. However, studies examining the post-merger performance effect and its determinants are scarce. Consequently, this paper takes up this issue by analysing a sample of 826 transaction announcements taken place between 1996 and 2015 and their performance effect in terms of short- and long-term abnormal shareholder returns. The results reveal, that although overall transactions exhibit significant positive abnormal returns, post-merger performance for the acquiring companies differs considerably according to the logistic services offered. In the short-term trucking, railway, 3PL and air cargo companies experience significant positive abnormal returns of about 0.6%–2.6%, while sea freight carriers realize only marginal effects and CEP companies do even not show any significant reaction. In the long-term, railway and 3PL companies realize a significant abnormal return of about 20%–24%, while trucking, sea freight and air cargo carriers do not exhibit significant returns and CEP companies do even experience significant losses of about −17%. Overall, diversifying transactions of established full-service providers outperform focus-increasing transactions of specialized operators.
The RBI policy of mergers and acquisitions (M&As
) in post-reform period became a strategy for banks’ further restructuring
. A major perspective of the RBI banking policy is to encourage competition
, consolidate and restructure the system for financial stability
. Mergers and acquisitions have emerged as one of the common methods of consolidation
, restructuring and strengthening of banks. There are several theoretical justifications to analyse the mergers and acquisition activities, namely change in management, change in control, substantial acquisition, consolidation of the firms, and merger or buyout of subsidiaries for size and efficiency
. Thus the objective here is to examine whether the performance
of banks has increased after mergers. The null hypothesis that there is no significant improvement after merger is accepted in the majority of the merged cases with few exceptions. Therefore, the strategy of mergers and acquisitions to consolidate the banks for efficiency reason is doubtful. The future banking policy must take note of this empirical reality and long-drawn experience of past 2 decades.
Merger activity amplifies the conflict of interest between a bidder's different classes of security holders. This study examines how equity returns and credit default swap spreads are affected by acquisition-driven changes in firm leverage. We develop an improved proxy for predicted leverage changes which includes transaction financing and find it has a positive relationship with both equity returns and credit spreads. Using data for North American firms that made acquisition announcements between 2008 and 2014, we find that in leverage increasing mergers, bidding firm shareholders gain while bondholders lose. While these results are consistent with the wealth transfer literature we show that it is caused by the change in leverage, not the form of payment or its signaling effect as is commonly documented.
The phenomenon of global warming as changes in the business environment has impacted on the strategic planning processes of Mexican companies in the creation of objectives and methodologies in various fields and sectors, highlighting the importance of adapting to the needs and the limitations that may arise with climate change in the various markets we are focused.
I empirically investigate the relation between CEO inside debt holdings and mergers and acquisitions (M&As) and find evidence consistent with the agency theory’s prediction of a negative relation between CEO inside debt holdings and corporate risk taking. Further analysis shows that CEO inside debt holdings are positively correlated with M&A announcement abnormal bond returns and long-term operating performance, but negatively correlated with M&A announcement abnormal stock returns. Finally, I find evidence that acquirers restructure the post-merger composition of CEO compensation that mirrors their capital structure in order to alleviate incentives for wealth transfer from shareholders to bondholders or vice versa.
Managers of contemporary publicly held organisations typically are not the owners. Rather, a specialisation of responsibilities has evolved whereby managers coordinate activities within the firm and position it appropriately in its competitive environment; the owners of the firm bear financial risk in the hope of retaining the difference between the firm’s productive cash-flows and the outflows of its promised payments (Fama and Jensen 1983a, 1983b). As the firm’s owners would suffer tremendous financial losses if the firm failed, they tend to diversify their holdings across a variety of firms as a hedge against such a possibility. As a result, the individual owner has little interest in conducting, or even closely monitoring, the day-to-day activities in all of the firms in which he or she has a financial interest (Fama 1980). The owners hire boards of directors who, in turn, hire managers to perform these duties.
Auf Grund der oben beschriebenen Zielsetzung einer M&A-Transaktion wird in dieser Arbeit die Methode der Ereignisstudie verwendet, um den Erfolg von M&A in der Logistikindustrie zu bewerten. Dieses Kapitel beschreibt die Methodik der Ereignisstudie und ist wie folgt aufgebaut: Kapitel 3.1 gibt eine Übersicht der Ereignisstudie und geht auf die Ermittlung der abnormalen Rendite (AR) als zentrale Messgröße des Transaktionserfolgs ein. Im weiteren Verlauf wird in Kapitel 3.2 die Methodik zur Berechnung der abnormalen Renditen festgelegt, bevor in Kapitel 3.3 erklärt wird, wie sie aggregiert und anschließend (Kapitel 3.4) auf statistische Signifikanz getestet sowie auf Determinanten des Transaktionserfolgs untersucht werden. In Kapitel 3.5 wird dann zum Abschluss Kritik an dem Forschungsansatz geübt und die auf Grund der Kritik notwendigen methodischen Anpassungen für die hier vorliegende Untersuchung dargestellt.
We analyze the Volcker Rule’s announcement effects on U.S. bank holding companies. In line with the rule and the banks’ public compliance announcements, we find that those banks that are affected by the Volcker Rule already reduced their trading books relative to their total assets 2.34% more than other banks. However, the announcement of the rule did not reduce the banks’ overall risk taking. To keep their risk targets, the affected banks raised the riskiness of their asset returns. We also find some evidence that the affected banks raised their trading risk and decreased the hedging of their banking business.
Data, as supplemental material, are available at https://doi.org/10.1287/mnsc.2016.2583.
This paper was accepted by Gustavo Manso, finance.
Cette thèse propose une étude empirique sur la performance opérationnelle et boursière des acquisitions par offre publique d’achat et d’échange (OPA/E) en France entre la période 1998-2003. Cette thèse est structurée en trois parties : la première partie présente une revue de littérature de fusions-acquisitions. Les motifs de fusions-acquisitions (Chapitre 1) et les conséquences de fusions-acquisitions (chapitre 2). La deuxième partie est consacrée à la formulation des hypothèses (chapitre 3) ainsi à la sélection de l’échantillon et à la définition de la méthodologie (chapitre 4). Dans la troisième partie, nous présentons et discutons des résultats basés sur l’analyse de deux types de performance : la performance boursière à court et à long terme (Chapitre 5) et la performance opérationnelle à long terme (chapitre 6).
L’échantillon de l’étude couvre la période 1998-2003 et comporte 48 OPA/E. La performance boursière à l’annonce d’acquisition est mesurée à la fois pour les entreprises acquéreuses et les entreprises cibles. A long terme, la performance des entreprises acquéreuses est appréciée par la méthode de l’étude d’événement et par le flux de trésorerie d’exploitation. Les résultats de cette recherche confirment la création de valeur pour les actionnaires de l’entreprise cible et une dégradation de valeur à court et à long terme des entreprises acquéreuses. Les résultats montrent aussi une amélioration de la performance opérationnelle post-acquisition des entreprises acquéreuses. Nous avons démontré que cette amélioration provient d’une part de la baisse de nombre d’employés et d’autre part de l’augmentation de la rotation des actifs. Egalement, nous avons observé un impact significatif de certains facteurs sur la rentabilité anormale à l’annonce d’acquisition et sur la performance opérationnelle à long terme des entreprises acquéreuses.
Mots-clés: OPA, OPE, Performance opérationnelle, performance boursière, facteurs explicatifs, efficience des marchés.
The report argues that aid volatility is an important source of volatility for the poorest countries. Following a method already applied by the Agence Française de Développement, the report argues that loans to LICs should incorporate a floating grace period, which the country could draw upon when hit by a shock. The definition of a shock should include aid uncertainty, along with others such as commodity shocks and natural disasters. The idea is calibrated to a key IMF policy instrument towards Low-Income Countries, the Poverty-Reducing and Growth Facility (PRGF).
Le rapport montre que l’aide aux pays pauvres contribue à accroître la volatilité de ces pays. Suivant une méthode déjà élaborée par l’Agence Française de Développement, l’article propose d’accorder des crédits aux pays pauvres, qui incorporent un droit de grâce flexible, utilisable par le pays, lorsqu’il est confronté à un choc négatif, quelle qu’en soit la cause : choc d’aide, de prix des matières premières ou catastrophe naturelle. Il montre comment l’instrument utilisé par le FMI à destination des pays pauvres, le PRGF, pourrait être modifié pour ce faire.
In this paper we draw on recent progress in the theory of (1) property rights, (2) agency, and (3) finance to develop a theory of ownership structure for the firm.1 In addition to tying together elements of the theory of each of these three areas, our analysis casts new light on and has implications for a variety of issues in the professional and popular literature, such as the definition of the firm, the “separation of ownership and control,” the “social responsibility” of business, the definition of a “corporate objective function,” the determination of an optimal capital structure, the specification of the content of credit agreements, the theory of organizations, and the supply side of the completeness-of-markets problem.
Event studies focus on the impact of particular types of firm-specific events on the prices of the affected firms' securities. In this paper, observed stock return data are employed to examine various methodologies which are used 111 event studies to measure security price performance. Abnormal performance is Introduced into this data. We find that a simple methodology based on the market model performs well under a wide variety of conditions. In some situations, even simpler methods which do not explicitly adjust for marketwide factors or for risk perform no worse than the market model. We also show how misuse of any of the methodologies can result in false inferences about the presence of abnormal performance.
This paper provides evidence on the daily market reaction to the announcement and subsequent acceptance or rejection of merger proposals. There is a swift and large positive market reaction to the first public announcement of the merger proposal. Subsequently, there is a positive reaction to the approval of completed proposals and a negative reaction to cancelled proposals. Where proposals are vetoed by incumbent target management, there is a negative market reaction to the veto, but this does not eliminate the earlier positive reaction to the first announcement. In these proposals there is a permanent revaluation of the target shares. This is in contrast to cancelled proposals that incumbent managements do not veto, where the target stock price falls back, on average, to the preproposal level.
This paper examines the effects of a common stock repurchase on the values of the repurchasing firm's common stock, debt and preferred stock, and attempts to identify the dominant factors underlying the observed value changes. The evidence indicates that significant increases in firm values occur within one day of a stock repurchase announcement. These value changes appear to be due principally to an information signal from the repurchasing firm. Common stockholders are the beneficiaries of virtually all of the value increments, but no class of securities examined declines in value as a result of the repurchase.
This paper integrates elements from the theory of agency, the theory of property rights and the theory of finance to develop a theory of the ownership structure of the firm. We define the concept of agency costs, show its relationship to the ‘separation and control’ issue, investigate the nature of the agency costs generated by the existence of debt and outside equity, demonstrate who bears these costs and why, and investigate the Pareto optimality of their existence. We also provide a new definition of the firm, and show how our analysis of the factors influencing the creation and issuance of debt and equity claims is a special case of the supply side of the completeness of markets problem.The directors of such [joint-stock] companies, however, being the managers rather of other people's money than of their own, it cannot well be expected, that they should watch over it with the same anxious vigilance with which the partners in a private copartnery frequently watch over their own. Like the stewards of a rich man, they are apt to consider attention to small matters as not for their master's honour, and very easily give themselves a dispensation from having it. Negligence and profusion, therefore, must always prevail, more or less, in the management of the affairs of such a company.Adam Smith, The Wealth of Nations, 1776, Cannan Edition(Modern Library, New York, 1937) p. 700.
In this paper a combined capital asset pricing model and option pricing model is considered and then applied to the derivation of equity's value and its systematic risk. In the first section we develop the two models and present some newly found properties of the option pricing model. The second section is concerned with the effects of these properties on the securityholders of firms with less than perfect ‘me first’ rules. We show how unanticipated changes in firm capital and asset structures can differentially affect the firm's debt and equity. In the final section of the paper we consider a number of theoretical and empirical implications of the joint model. These include investment policy as well as the causes and effects of non-stationarity in the systematic risk of levered equity and risky debt.
This study investigates the effect of merger bids on stock returns. Abnormal stock returns are examined throughout the entire merger process for both successful and unsuccessful merger bids. The evidence shows that increases in the probability of merger benefit the stockholders of target firms, and that decreases in the probability of merger harm the stockholders of both target and bidding firms. There is also evidence that the stock market forecasts probable merger targets in advance of any merger announcement, and because of this, previous studies have underestimated the market's reaction to merger bids.
This article re-examines the magnitude of stockholder gains from merger. To measure stockholder gains we employ four alternative two-factor market-industry models in combination with a matched non-merging control group. The four two-factor models are based on either the capital asset pricing model or Black's (1972) zero-beta model combined with two alternative industry factors. The four models are shown to produce generally consistent results. However, the results from a two-factor model are sometimes different from the results of a simpler one-factor model. Also, the introduction of a third factor, the non-merging control group, is shown to have a substantial impact on performance measurement.
The paper studies both the initial and aftermarket performance (measured by risk-adjusted returns) on newly issued common stocks which were offered to the public during the 1960s. The results confirm that average initial performance is positive (11.4 percent), while the distribution of returns is skewed so that the subscriber of a single random new issue offering has about an equal chance for gain or loss. The results are generally consistent with aftermarket efficiency. Positive initial performance along with aftermarket efficiency indicate that new issue offerings are underpriced. The paper provides insights into this underpricing mystery, but does not solve it.
This study examines the market for acquisitions and the impact of mergers on the returns to the stockholders of the constituent firms. While employing the two-factor market model as recently developed and applied by Black-Jensen-Scholes and Fama-MacBeth, this study also considers changes in risk in analyzing the impact of mergers on stock prices. The results of the study are consistent with the hypothesis that the market for acquisitions is perfectly competitive and with the hypothesis that information regarding mergers is efficiently incorporated in the stock prices. Stockholders of acquiring firms seem to earn normal returns from mergers as from other investment-production activities with commensurate risk levels. Stockholders of acquired firms earn abnormal returns of approximately 14%, on the average, in the seven months preceding the merger.
Thesis (Ph. D.)--University of Chicago, Dept. of Economics, August 1980. Includes bibliographical references (leaves 96-97).
In Section I of the present paper, it is shown that Proposition I (relationship between income streams) and the irrelevancy of firm-investment diversification hold in the multiperiod case, with risky (as well as riskless) debt and with no assumption regarding which income-stream parameters (e.g. mean an variance) are used by investors in selecting portfolios. That is, no particular valuation equation is assumed. Proposition I is derived first , given homogeneous investor expectations, and then is extended to the case of heterogeneous expectations by adding a further assumption. In Section II, corporate taxes are introduced. Proposition I does not hold in this case. However, a similar proposition is derived and found to imply that diversification should not be a consideration for firm-investment policy even with corporate taxes. In establishing the results of Section I and II, it is assumed that capital markets are competitive with zero transaction costs and that, therefore, "arbitrage" can be performed in the market. In Section III, the arbitrage assumption is briefly examined.
Introduction, 624. — Economic disturbances and valuation discrepancies, 626. — Pursuit of monopoly and economies of scale
as determinants of merger, 629. — Statistical tests, 631. — Security prices and valuation discrepancies, 637.
This study examines the impact of approximately pure capital structure change announcements on security prices (specifically on common stock, straight preferred stock, convertible preferred stock, straight debt and convertible debt). Statistically significant price adjustments in firms’ common stock, preferred stock and debt related to these announcements are documented and alternative causes for these price changes are examined. The evidence is consistent with both corporate, tax and wealth redistribution effects. There is also evidence that firms make decisions which do not maximize stockholder wealth. In addition, a new approach to testing the significance of public announcements on security returns is presented.
The Environmental Stewardship Scheme provides payments to farmers for the provision of environmental services based on agricultural foregone income. This creates a potential incentive compatibility problem which, combined with an information asymmetry on farm land heterogeneity, could lead to adverse selection of farmers into the scheme. However, the Higher Level Scheme (HLS) design includes some features that potentially reduce adverse selection. This paper studies the adverse selection problem of the HLS using a principal agent framework at the regional level. It is found that, at the regional level, the enrolment of more land from lower payment regions for a given budget constraint has led to a greater overall contracted area (and thus potential environmental benefit) which has had the effect of reducing the adverse selection problem. In addition, for landscape regions with the same payment rate (i.e. of the same agricultural value), differential weighting of the public demand for environmental goods and services provided by agriculture (measured by weighting an environmental benefit function by the distance to main cities) appears to be reflected into the regulator’s allocation of contracts, thereby also reducing the adverse selection problem.
Foundations of Finance Basic Books, 1976. 8. and J. D. MacBethRisk, Return and Equilibrium: Empirical Tests
- E F Fama
E. F. Fama. Foundations of Finance. New York: Basic Books, 1976.
8.
and J. D. MacBeth. "Risk, Return and Equilibrium: Empirical Tests." Journal of Political
Economy 71 (May/June 1973), 607-36.
Common Stock Repurchases: An Analysis of Returns to Bondholders and Stockholders
- Dann
Merger Bids Market Uncertainty and Stockholder Returns.” Harvard University Working paper
- P Asquith
A Two-Event Study of Merger Bids Market Uncertainty and Stockholder Returns.” Ph.D. Dissertation:Graduate School of Business University of Chicago
- P Asquith