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The Method of Payment in Corporate Acquisitions, Investment Opportunities, and Management Ownership
Abstract
This article examines the motives underlying the payment method in corporate acquisitions. The findings support the notion that the higher the acquirer's growth opportunities, the more likely the acquirer is to use stock to finance an acquisition. Acquirer managerial ownership is not related to the probability of stock financing over small and large ranges of ownership but is negatively related over a middle range. In addition, the likelihood of stock financing increases with higher preacquisition market and acquiring firm stock returns. It decreases with an acquirer's higher cash availability, higher institutional shareholdings and blockholdings, and in tender offers. Copyright 1996 by American Finance Association.
... Conversely, principal-principal (PP) conflicts occur when major shareholders use their control to extract private benefits at the expense of minority shareholders. While the literature [1][2][3] suggests that concentrated ownership can mitigate PA conflicts, it may exacerbate PP conflicts. As ownership concentration increases, the largest shareholder is also likely to gain private benefits through control, even if it dilutes minority shareholder wealth [2,4]. ...
... Family members or controlling shareholders, who often serve as principals in PA and PP conflicts, prioritize maintaining control over their firms [1,3]. Mergers and acquisitions, especially those that involve stock payments, can alter a firm's ownership structure. ...
... For example, a major shareholder who highly values control might ignore a good investment opportunity if they realize it could alter the company's governance structure. While concentrated ownership can mitigate principal-agent (PA) conflicts [19], it exacerbates principal-principal (PP) conflicts [1,3]. Consequently, the net effect on shareholder value remains unclear. ...
This study examines the dynamics of owner behavior, agency costs, and M&A outcomes in the Korean market, aiming to explore how ownership concentration influences conflicts among principal groups and impacts M&A performance. Using empirical data from Korean M&A transactions, we analyze the effects of ownership concentration and cash payment preferences on firm value. Our findings indicate that while ownership concentration can reduce owner–manager conflicts, it heightens principal–principal conflicts, especially with moderate ownership, weak governance, or financial distress. Control-focused owners prefer cash payments, which can lower acquiring firm announcement returns under high ownership concentrations. Effective governance is crucial for fostering responsible decision-making and sustainable practices in M&As. This research underscores the importance of balanced ownership structures and robust governance mechanisms in mitigating agency conflicts and promoting sustainable M&A performance.
... According to DePamphilis (2010) finalising the payment method in M&A has been identified as one of the most critical decisions making stages in the process of M&A deals. Many past studies have focused on the factors of payment methods of M&A and proved various hypotheses like information asymmetry hypothesis, ownership hypothesis, free cash flow hypothesis, size hypothesis, taxation hypothesis, financial constraint hypothesis, Investment opportunity hypothesis, Industry relatedness hypothesis respectively (Hansen, 1987;Martin, 1996;Faccio & Masulis, 2005). ...
... Companies' ownership structure influences the decision of payment methods in M&A (Martin, 1996). Yook et al. (1999) proved that there is a direct relationship between the degree of equity ownership with top managers in acquirer firms and the methods of payment in M&A. ...
... The study of Grullon et al. (1997) focused on the M&A deals in the banking sector and found that acquirer firm possibly prefers stock or combination of cash and stock as a payment method in M&A in case of a target firm comparatively large than the acquirer firm. But, Ghosh and Ruland (1998) agreed with Martin (1996) study and mentioned through a logit model that, the relative size of the target doesn"t have many differences according to the different payment methods. Martin (1996) detected that the relative size of the target does not affect significantly to the method of payment used in the acquisition. ...
... Travlos and Waegelein (1992) find that if the firm uses a cash offer for the merger deal, it will experience long-term performance plans and significantly higher abnormal returns surrounding the announcement. Martin (1996) finds a positive relation between stock financing for a merger deal with higher acquirers' growth opportunities. Davidson and Cheng (1997) find that uncertainty about the target cannot be reduced by using cash as a payment method and the market does not consider cash as means of acquiring a firm's growth. ...
... For example, Berkovitch and Narayanan (1990) find that if the target is acquired with equity financing, the stockholders of both acquiring and target firms experience higher returns. Martin (1996) finds a positive relation between stock financing for a merger deal with higher acquirers' growth opportunities. ...
This study examines the relation between a firm’s labor intensity and its operating performance. Using a large sample of US public firms from the period 2001 to 2018, we find that firms with a higher level of labor intensity are less likely to engage in mergers & acquisitions (M&As) activities. Our main finding suggests that a firm’s operating performance, proxied by return on assets and return on equity, decreases with a higher level of labor intensity. Further analysis shows that if labor-intensive firms engage in M&As, they are less likely to use cash and stock as payment methods and consider the target’s legal forms of business orientation. The negative relation between labor intensity and firm performance is aggravated (attenuated) by the firm’s advertising intensity (stock payment method and private target of potential M&A characteristics). Finally, labor productivity is also negatively associated with labor intensity.
... On the other hand, it has been argued that acquirers use stock as a strategy to share the risk arising from the acquisition with target shareholders for several reasons: (i) the high level of information asymmetry that persists between acquirers and targets in the acquisition process (Hansen, 1987;Travlos, 1987;Martin, 1996); (ii) the possibility that acquirers may make valuation errors in the presence of information asymmetry and the belief that they could share the risk arising from possible overpayment with equity investors of the target if stock is used (Hansen, 1987;Martin, 1996); and finally, (iii) the use of overvalued stock to purchase potential targets at an attractive price. 5 Given the opportunity and incentive for managers to exploit information disparity between investors and insiders, and the managerial propensity to time new equity issues, competition in the takeover market can motivate hubris-affected opportunistic managers of bidding firms to use overvalued equity to acquire potential targets at attractive prices, while sharing risk of possible overpayment with target shareholders. ...
... On the other hand, it has been argued that acquirers use stock as a strategy to share the risk arising from the acquisition with target shareholders for several reasons: (i) the high level of information asymmetry that persists between acquirers and targets in the acquisition process (Hansen, 1987;Travlos, 1987;Martin, 1996); (ii) the possibility that acquirers may make valuation errors in the presence of information asymmetry and the belief that they could share the risk arising from possible overpayment with equity investors of the target if stock is used (Hansen, 1987;Martin, 1996); and finally, (iii) the use of overvalued stock to purchase potential targets at an attractive price. 5 Given the opportunity and incentive for managers to exploit information disparity between investors and insiders, and the managerial propensity to time new equity issues, competition in the takeover market can motivate hubris-affected opportunistic managers of bidding firms to use overvalued equity to acquire potential targets at attractive prices, while sharing risk of possible overpayment with target shareholders. ...
We investigate the influence of gender diversity on the acquisition choices of bidding firms and find that firms with greater gender diversity are more likely to acquire nonlisted targets, use cash as the method of payment, and purchase firms in similar industries. Results show that these preferences are significantly influenced by female directors' financial expertise, target industry experience, mergers and acquisitions (M&A) experience, academic and professional qualifications, and networks. The percentage of female directors on boards is positively correlated with the market response to the announcement of acquisition choices preferred by female directors. Furthermore, bidders improve efficiency and accumulate long‐term value gains through the contributions made by their female directors to these acquisition choices.
... La variable seleccionada para medir las oportunidades de inversión empresarial de la empresa es el índice q de Tobin (MARTIN, 1996), que mide la cantidad y calidad de todas las oportunidades de inversión empresarial presentes y futuras. Nuestro análisis concluye que los POA con valor positivo y sin ejercer afectan de forma negativa al índice q de Tobin de la empresa. ...
... Así pues, vemos cómo la teoría de costes de agencia predice una relación negativa entre el conjunto de oportunidades de inversión y los pagos de dividendos efectuados por la empresa. La variable utilizada para medir el conjunto de oportunidades de inversión empresarial de la empresa es el índice q de Tobin (MARTIN, 1996). Tal y como hemos señalado previamente, utilizaremos la aproximación de CHUNG y PRUITT (1994), que calcula el índice de q de Tobin como el valor en el mercado de las acciones ordinarias, más el valor contable de la deuda, más el valor liquidativo de las acciones preferentes, todo dividido entre el total de activos de la empresa. ...
Este trabajo ha sido seleccionado y ha obtenido el 1.er Premio Estudios Financieros 2004 en la modalidad de Recursos Humanos. En el presente trabajo revisaremos los Planes de Opciones sobre Acciones para Ejecutivos (POA), en base a las conclusiones empíricas obtenidas durante décadas de investigación en el área del comportamiento de los individuos en condiciones de riesgo e incertidumbre, y comprobaremos cómo el actual diseño de los POA entregados a los equipos directivos de la mayor parte de empresas puede explicar algunas de las evidencias empíricas observadas durante los últimos años, como son por ejemplo las significativas reducciones en los pagos de dividendos de las empresas americanas observadas durante los últimos años. Concretamente, en el presente trabajo analizaremos los POA en el marco del modelo de comportamiento del directivo denominado Behavioral Agency Model (BAM), desarrollado por Wiseman y Gómez-Mejía (1998). En base a este modelo veremos cómo, de hecho, la gran mayoría de los POA en uso en la actualidad pueden incentivar al Chief Executive Officer (CEO) a reducir significativamente la búsqueda de nuevas oportunidades de inversión y crecimiento para la empresa, con el único objetivo de proteger el valor contenido en dichos POA. Asimismo, en base a los supuestos del BAM, dado que el consejero delegado está más comprometido en la protección del actual valor de sus POA más que en aumentar dicho valor, el BAM predice que los directivos tenderán a reducir los pagos de dividendos de la empresa, de nuevo, con el único objetivo de proteger así el valor contenido en sus POA.
... We hypothesize that the legal enforcement of contracts decreases the cost of debt financing in M&A transactions. In the presence of different seniority classes of creditors, we add a new dimension to the M&A literature on acquirers' payment method and firms' ownership structure (Amihud et al., 1990;Bharadwaj and Shivdasani, 2003;Martin, 1996;Schlingemann, 2004;Yook, 2003). We instead focus on the financing resource, in terms of debt securities, of acquirers. ...
... We control for a number of target-and acquirer-level fundamentals: firm age (AGE) (Hotchkiss et al., 2021), target firm-level financial indices of total assets (Total asset) (Balcaen et al., 2012;Travlos, 1987), profitability (Profitability) and capital structure (Leverage) (Acharya et al., 2011); acquirer firm-level financials of total assets (acq_Total_asset), profitability (acq_Profitability) and capital structure (acq_Leverage) (Balcaen et al., 2012;Yook, 2003). We control for security-and deal-level characteristics of Security amount (Bharadwaj and Shivdasani, 2003;Martin, 1996) and M&A size (Alexandridis et al., 2013). We also control for Transaction type because a cash merger, stock merger, tender offer, acquisition of minority stake, acquisition of majority stake, LBO may affect the deal valuation differently (Maquieira et al., 1998;Yook, 2003). ...
We examine whether the debt enforcement affects the cost of debt securities in M&A transactions in 28 countries. Strong enforcement lowers the yield of securities. We show that legal enforcement affects the offering yield through the priority rule for creditors, which means senior debt creditors are paid in full first. The offering yield is higher for a security when a higher proportion of subordinated debts is used in an M&A transaction. However, strong enforcement improves a lender's chance of being paid back even for subordinated debt, so the offering yield is lower for subordinated debt in countries with better enforcement.
... We assume that ESG-aware acquirers attach low risks to the improvement of their target, being confident in their capability to make operational enhancements. Paying cash further allows them to prevent control right dilution after the acquisition (Faccio and Masulis, 2005;Martin, 1996) and to implement more drastic changes in the target firm's management. ...
Environmental, social and governance (ESG) expectations from stakeholders affect firm decisions. We investigate ESG acquisitions with a focus on how a pre-deal ESG gap influences how acquirers' structure ESG deals strategically and their outcomes in terms of combined ESG performance post-acquisition. Drawing on relative capabilities and signaling research, with an international sample of 340 ESG deals, we find that acquirers with a higher ESG score relative to the target (i.e., low-ESG acquisitions) are more likely to target smaller firms, use cash as method of payment, and complete deals faster. We also show that low-ESG deals lead to an average increase in the combined entity's ESG performance in the three years after the acquisition, thus indicating ESG corrective acquisitions as an opportunity for ESG capabilities transfer and improvement. However, effects are influenced by an acquirer's embeddedness in the European institutional context where ESG stakeholder expectations are more developed.
... The prior literature shows that payment method choice in M&A deals is associated with three managerial concerns: speed, risk, and performance. First, in the preacquisition stage, relative to an equity swap arrangement that involves a long period of negotiating a share exchange price, a cash payment is more straightforward and takes less time to settle (Amihud, et al., 1990;Martin, 1996;Ghosh and Ruland, 1998;Faccio and Masulis, 2005). Second, in the acquisition stage, cash enables more rapid deal completion by lowering the risk of competitive bids, lowering aggressive takeover defenses, and lowering the likelihood of bid rejection by target management (Fishman, 1989;Faccio and Masulis, 2005). ...
We examine the organizational impact of CEO initial contract duration on corporate acquisitions. We argue that CEOs with shorter initial contract durations are more likely to experience time pressure. Consequently, they are more likely to manage time by engaging in corporate mergers and acquisitions (M&As) to achieve quick growth. In addition, these CEOs are more likely to engage in straightforward deals, acquiring targets that are private, divested, related, small, and using cash payment, because these types of transactions are quicker to complete, carry less risk, and generally come with good performance prospects. Using a sample of firms that underwent new CEO appointments between 1990 and 2017 and detailed employment contract data collected from SEC filings, we find strong support for our hypotheses. In addition, we apply UK corporate governance reform to CEO contract duration as an exogenous shock to show causal evidence of such relations. This study contributes to the literature on CEO contracts, corporate acquisitions, time management and strategic leadership.
Supplemental Material: The online appendix is available at https://doi.org/10.1287/orsc.2022.16493 .
... Prior literature shows a higher return around announcements for acquirers who make acquisitions using cash as a mode of payment rather than using stock offers (e.g., Travlos, 1987;Fishman, 1989;Brown and Ryngaert, 1991;Martin, 1996;Fuller et al., 2002). We test whether the positive relationship between the presence of an independent chairperson and acquirer M&A announcement return could be the result of the mode of payment choice, i.e., cash vs. stock. ...
Effective board monitoring prevents entrenched managers from undertaking acquisitions that are detrimental to shareholders. It also facilitates a smooth transition during the post-acquisition phase. We examine how the presence of an independent chairperson on acquirer’s board affects M&A outcomes. Controlling for many firm, board, and CEO attributes, we find that acquirers with independent board chairpersons earn significantly higher CAR around M&A announcements. The positive effects of independent board chairpersons are more pronounced in acquirers with high monitoring needs. The boards led by independent chairpersons primarily add value by selecting targets with high synergetic gains, avoiding overpaying for targets, and facilitating a smooth transition in the post-acquisition phase.
... Considering that firms pursuing industry-related M&As face fewer challenges as opposed to those pursuing unrelated ones (Yang, 2015), we included the dummy variable Relatedness, which showed whether the acquiring and target firms shared SIC codes; a value of 1 was assigned if they did, and a value of 0 otherwise. To control how payment method affects acquisition completion (e.g., Martin, 1996), we used the dummy variable Cash, which was coded as 1 if the M&A deal under study was marked as 100% of cash in the Thomson database, and 0 otherwise. In terms of firm-specific factors, similar to Deal size, we measured Acqr size by the log value of the asset value of acquiring firm to control for its impact (e.g., Li et al., 2017). ...
This paper draws upon institutional theory to incorporate the multi-level influences of institutional environment (i.e., knowledge distance at the country level, industry attractiveness at the industry level, and government involvement at the firm level) in order to examine the determinants that affect acquisition completion. Based on a sample of 797 outward M&As in the high-tech industry initiated by Chinese firms from 1991 to 2018, we found that the likelihood of completing an acquisition increases when the knowledge distance between China and the host country decreases and in the presence of a high attractiveness of the Chinese high-tech industry involved. In addition, we found that government involvement in the acquiring firms has different influences from that in the target ones on the likelihood of acquisition completion. Specifically, we only found that the likelihood of acquisition completion decreases in the presence of government involvement in the target firm. The influence of government involvement in the acquiring firms on acquisition completion was not significant. The implications of this study of high-tech M&As enacted by firms from emerging markets are thus discussed.
... Additionally, prior research shows that family firms are less likely to have cash difficulties (Anderson & Reeb, 2003;James, 1999;Villalonga & Amit, 2006;Anderson et al., 2003). Thus, we expect that the use of stocks (as opposed to cash) to pay for M&A deals is a less preferable choice to family firms due to concerns over ownership structure (Amihud et al., 1990;Martin, 1996;Faccio & Masulis, 2005). ...
Purpose – This paper examines the effect of family ownership on the payment method of mergers and acquisitions (M&A) deals. It also investigates the market reaction around the announcement of these M&A deals.
Design/methodology/approach – Archival data of M&A deals of a sample of Taiwanese listed firms during 2008-2018 are collected and examined using probit, event study and OLS models. We address the endogeneity concern using the two-stage least squares (2SLS) statistical technique and Heckman’s two-step estimation method.
Findings – We find that family firms are more likely to use cash as an exchange medium in M&A deals to avoid the problem of diluting control rights. We further find that family firms receive a positive market reaction around the announcement of M&A deals relative to non-family counterparts. Our empirical results support the notion that family ownership is a value-creation structure.
Practical implications – Our findings provide additional evidence-based insights into the debate about family ownership with the aim of informing policy and offering practical recommendations to expand the US-based literature.
Originality/value – To the best of our knowledge, this is the first study to provide empirical evidence on the impact of family ownership on payment method choice in M&A activities in Taiwan. It also provides novel evidence that family firms experience value gains when taking M&A investment decisions relative to non-family firms.
Paper type: Research paper
... This is consistent with the view that the parties involved may realize that their knowledge is limited regarding such informationally challenging deals and that stock prices convey information that is relevant to optimizing capital allocation. Prior studies suggest that a higher information asymmetry leads to greater valuation uncertainty, which increases the potential risks of overpaying for a "lemon" in M&As (see, e.g., Hansen, 1987;Luypaert & Van Caneghem, 2017;Martin, 1996;Officer et al., 2009). If information asymmetry hinders the bidder's ability to value foreign targets accurately and if top-tier advisors recognize the importance of market signals in mitigating such asymmetry, we would expect the effect of top-tier financial advisors on the stock information learning process to be more pronounced for informationally challenging deals. ...
We provide evidence that the presence of top-tier advisors increases managers' propensity to withdraw from cross-border mergers and acquisitions (CBAs) with poor market returns around the announcement. This effect is stronger for private target acquisitions, in which information asymmetry is expected to be more pronounced, and smaller bidders, who are likely to lack the expertise required to process information themselves. This suggests that managers assisted by reputable investment banks consider negative market feedback in informationally challenging deals. Our results are robust to several endogeneity tests. We provide novel inferences about the informative role of stock markets in shaping advisory roles in respect of M&As.
... Other factors on the choice of merger payment method include investment opportunities(Martin 1996;Jung, Kim, and Stulz 1996), managerial control(Faccio and Masulis 2005), borrow cost(Karampatsas, Petmezas, and Travlos 2014), bidding competition(Fishman 1989), business cycle(Choe, Masulis, and Nanda 1993), stock market development(Subrahmanyam and Titman 1999), and tax effect(Brown and Ryngaert 1991). ...
Developed upon the assortative matching theory and recent studies that merging firms are matched on diverse firm characteristics and policies, this paper examines whether they also match in stock price informativeness. Our study shows that assortative matching between the acquirer and target firms’ stock price informativeness increases the probability of deal initiation. It also increases the likelihood that an M&A transaction is paid with stock and constructed as a negotiated merger. Finally, matched stock price informativeness increases merger wealth effect. This paper expands the application of the assortative matching theory in M&A literature from the perspective that stock price firm-specific information reflects firm fundamentals and policies.
... On the other hand, in transactions where the acquirer is sceptical about the exact value of the assets of the target company, stocks are preferred to finance. Such transactions as stock have a contingent pricing effect and enable the acquirer to share the risk of overvaluation or misevaluation with the target shareholders in the post-acquisition period (Hansen, 1987;Martin, 1996). Further it is noted that in cross-border scenarios, deal sizes are larger in comparison to domestic acquisitions and most of the acquisition have been funded by debts. ...
Foreign Direct Investments are the major drivers for a developing economy. One of the preferred methods of FDI is Mergers and Acquisitions that enable foreign firms to expand their markets, take advantage of technological innovation and economies of scale to increase shareholder value. Since the economic liberalization in 1991, India has seen a host of cross-border acquisitions. Though it is a common belief that changes in the stock prices of acquirer and target firms provide accurate insights on the potential wealth creation, this can be misleading with respect to Indian and other emerging markets where the capital markets are still under developed. This leads to the necessity of identifying and understanding various other factors that can make M&A activity successful in the perspective of better value creation in the future times.
... Table 6 reports the probit analysis regarding the likelihood of an all-cash payment and the tobit analysis on the proportion of cash used in the acquisition deal. We include stock return and market-to-book to control for the potential effects of overvaluation and growth options on the method of payment (Martin 1996;Shleifer and Vishny 2003). Sales, FCF/AT, and the relative deal size of the acquirer control for the cash availability of the acquirer. ...
The prevalence of zero-leverage firms is a puzzle in corporate finance. We analyze the acquisition behavior of zero-leverage firms and offer a new venue to the studies on zero-leverage puzzle and the interdependence of capital structures and investment decisions. The prior literature suggests three explanations regarding the zero-leverage puzzle: limited access to the debt market, managerial preference, and financial flexibility. While non-persistent zero-leverage firms show similar behavior as moderately leveraged firms, persistent zero-leverage firms are conservative in their acquisition behaviors. These firms are less likely to make acquisitions, acquire smaller targets, and are more likely to acquire zero-leverage targets than are moderately leveraged firms. Meanwhile, both persistent and non-persistent zero-leverage firms are not financially constrained, since they are likely to use cash in their offers, and they increase leverage post-acquisition. Overall, our evidence on persistent zero-leverage firms supports the managerial preference hypothesis, while the evidence on non-persistent zero-leverage firms is consistent with the financial flexibility hypothesis. Therefore, studies on corporate investment strategy should be aware of persistent firms’ unique behavior of debt and investment conservatism that differentiates these firms from other under-leveraged firms and non-persistent zero-leverage firms.
... Indeed, the market interprets a cash offer as good news about the true value of the acquiring firm (Travlos, 1987). Martin (1996) explains this by the fact that cash financing warns other stock market players that there are significant potential gains with significant returns. Linn and Switzer (2001) also note that the return of merged companies is higher during cash-financed transactions. ...
As part of localization strategies, mergers and acquisitions occur to be a good means of rapid development for companies wishing to set up outside their country of origin. These strategies arouse the substantial interest of business leaders and continue to be the subject of research conducted mainly in developed markets.
... Corporate finance decisions (financing, investment and dividend) have an impact on company value. Financing (leverage) has an effect (effect) on Firm value, (Martin (1996), Nash et al. (2003), Berger et al. (1997), Raviv (1990,1991), and Khaled and Nazneen (2017) Investment decisions have an impact on firm value, (Fama (1978), Fama and Miller (1972), Tobin (1969), Grazzi et al. (2016), Kaplan and Zingales (1997), Ye and Yuan (2008). Dividend decisions have an impact on solid firm value, Bhattacharya (1979), John and Williams (1985), Miller and Rock (1985), (Walter (1956), Friend and Puckett (1964), Asquith and Mullins (1983), Baskin (1989). ...
This study aims to reveal whether intellectual capital performance is able to mediate the effect of profitability, leverage,
company size, and age of the company on intellectual capital disclosure. This study used a sample of banking companies in
Indonesia. Furthermore, research data was processed by using a path analysis approach through the WarpPLS tool. Based
on the data analysis, it was found that the profitability and age of the company directly and indirectly affected the intellectual
capital performance and intellectual capital disclosure. This means that the intellectual capital performance can increase the
effect of profitability and age of the company on intellectual capital disclosure. On the other hand, leverage and company size
were not able to show an effect on intellectual capital performance and intellectual capital disclosure either directly or indirectly,
therefore the intellectual capital performance was not able to be a mediating variable between leverage and company size on
intellectual capital disclosure. So the results of this study suggest banking companies to optimize intellectual capital information
in annual financial statements and other financial statements so that the public as a reader can make it as material in decision
making.
... Our examination of special items categories (see Appendix 1) suggests these items are generally either currently deductible for tax purposes or represent a book-tax timing 21 Goodwill deductibility is a complex situation depending on the structure of the acquisition. Generally, stock-for-stock (cash for asset) acquisitions result in nondeductible (deductible and amortized over 15 years) goodwill, though there are exceptions and also mixed consideration transactions (e.g., Henning and Shaw 2000;Ayers et al. 2000;2004;Martin 1996;Erickson 1998;Oler 2008). Khalil et al. (2021, Appendix B) explain the timing issues for taxable acquisitions, and their study examines a strategy for deducting impairments of goodwill. ...
The use of assumed tax rates to adjust special items (e.g., restructuring charges, asset writedowns, etc.) is common in empirical accounting research as these items are reported pre-tax and are often used in research designs that include after-tax earnings. This study explores the potential empirical consequences of assuming an incorrect tax rate in adjusting special items. We focus on special items given their prevelance in the literature as well as the wide variation in tax rate assumptions from these studies. Our investigation shows that the tax rate assumed can be critical to the interpretation of results. Importantly, our evidence suggests extreme tax rate assumptions, in particular the highest statutory rate, are especially problematic and yield dramatically biased estimates. Our review of the tax consequences of special items suggests that, in almost all circumstances, the marginal tax rate is the theoretically correct rate to apply to these items when adjusting for tax. Consistent with this view, our empirical evidence, with a limited exception, suggests that marginal tax rates represent the best estimate of the true tax rate. By providing empirical evidence on the potential empirical consequences of these varied tax rate assumptions, we offer a guide for future researchers on the importance of this critical design choice.
... Cremers et al. (2009) and Bates et al. (2008) find a significant relation between Q and takeover targets but Palepu (1986) and Ambrose and Megginson (1992) uncover no link. Also see the work on Tobin's Q and takeovers of Lang et al. (1991), Servas (1991), Martin (1996), and Jovanovic and Rousseau (2002). 11 Target shareholders choose to be taken over by overvalued firms because either target managers want to cash out from their current holdings (Shleifer and Vishny, 2003) or asymmetrical information sets between bidders and targets (Rhodes- Kropf and Viswanathan, 2004). ...
This paper examines the effect of acquirer likelihood on future stock returns. In sharp contrast to prior findings, acquirer likelihood is a strong and negative predictor of cross-sectional future returns after controlling for target likelihood. If takeover exposure represents a risk premium, the effect on stock valuation should only present in either likelihood measure (acquirer or target likelihood). This evidence casts doubt on the rational risk explanation, but is consistent with a relative mispricing story. Investors take positions accordingly to explore profits from takeovers. Profits from trading strategy based on takeover probability are concentrated in stocks with high misvaluation characteristics, including small size, value, high momentum, high investment, and low turnover firms, as well as both high and low issuance (or accrual) firms.
... Self-interested managers could use their overvalued stocks to build business empires through acquisitions. Managers also use stocks as the method of payment in acquisitions when they suspect that information asymmetry may be present, leading to valuation errors, and when they believe they could share the risk of possible overpayment to the target firm with its equity investors (Hansen, 1987;Martin, 1996). During periods of EPU, managers could be more motivated to use their overvalued stocks to finance empire building acquisitions as they tend to build cash cushions during these uncertain periods (e.g., Julio & Yook, 2012). ...
We investigate the influence of economic policy uncertainty on the market valuation of acquisitions undertaken by Australian firms, finding a negative association between economic policy uncertainty and abnormal returns earned by acquirers. In general, with greater economic policy uncertainty, acquirers pay higher premiums, execute transactions more quickly and are less likely to complete deals. With respect to acquisition choices, acquirers prefer to purchase public targets versus private targets, use stock swaps versus cash in financing deals and are less likely to make cross-border acquisitions. Deals completed at a time of heightened economic policy uncertainty are found to contribute to acquirers’ significant underperformance in the long run. Our main findings are robust after addressing issues related to sample selection bias and selection based on observable firm characteristics. Our findings support the notion that economic policy uncertainty adversely affects acquisition outcomes in Australia.
We find evidence that venture capital (VC)‐backed targets receive more stock as the method of payment in mergers and acquisitions than non‐VC‐backed targets do, even after controlling for self‐selection bias, differences of characteristics between transactions of VC‐backed and non‐VC‐backed targets and VC information bridge‐building. VC‐backed targets prefer stock of acquirers that are small, young, risky or invest intensively. In addition, we document that the ratio of stock is larger when the targets are financed by reputable VCs, a syndicate of VCs or VCs with low fund maturity. Overall, our findings suggest that VCs strategically hold shares of the acquirers that meet their investment preferences.
Chief financial officers (CFOs) have become increasingly involved in strategic decisions. The literature has emphasized the potential benefits of this development, delineating CFOs as impartial advisors who ensure economically conscious decisions. Our study, however, suggests that the career concerns of CFOs create signaling incentives that detrimentally influence the outcomes of strategic decisions. Based on the merger and acquisition (M&A) decisions of S&P 500 firms between 2005 and 2018, our results show that CFOs with higher signaling incentives (i.e., at earlier and later career stages) are associated with lower M&A returns, higher M&A premiums, greater M&A activity, and riskier M&A features (e.g., large, diversified, or cross-border deals). This association is stronger when chief executive officers are more likely to delegate decision authority to CFOs, whereas it is weaker when CFOs have a higher reputation, strong long-term incentives, and when there is strong external monitoring. Our results further indicate that the labor market highly values the M&A experience of CFOs and only lightly punishes CFOs involved in value-destroying M&As.
Recent studies suggest that greater exposure to the market for corporate control matters for managers and shareholders since it affects firms’ ex‐post risk of experiencing a stock price crash. The findings though question the direction of the effect. In contrast, in this study, we are the first to examine the effects of firms’ ex‐ante risk of experiencing a stock price crash, a likely antecedent of which is managers’ concealment of news on aspects of the market for corporate control. We find that higher crash risk leads to greater takeover target likelihood. This relationship, which is robust to duly circumventing reverse causality, depends to a significant extent on inferior managerial quality and greater managerial discretion around financial accruals, affording richer insight into the notion that correction of managerial behaviour is a stimulus for the market for corporate control, but one that depends on the likely extent of managers’ concealment of news. We also concurrently find that actual takeover targets with higher crash risk generate a lower bid premium and receive more payment with stock. Overall, our findings strongly suggest that decision‐making in the market for corporate control is at least partially explained by incentives linked to opportunistic prices and takeovers of lemons.
Corporate culture constitutes a key success factor in mergers and acquisitions (M&A). We examine the role of acquirer-target cultural differences in US domestic M&A deals. We train a topic model on how employees describe corporate culture in free-response texts of crowdsourced employer reviews to estimate cultural differences between the acquirer-target pairs. We find a negative linear relationship between cultural differences and deal announcement returns. However, adding a squared term of our main variable of interest to our model reveals a U-shaped relationship between cultural differences and announcement returns that is stronger in magnitude and statistical significance than the single term alone. Our results reconcile two competing hypotheses on the role of cultural differences in M&A.
The impact of climate risk on the payment method in cross-border M&A remains largely unknown in the literature. Using a large sample of UK outbound cross-border M&A deals in 73 target countries from 2008 to 2020, we find that a UK acquirer is more likely to employ an all-cash offer to signal its confidence in a target's value if the target country faces a higher level of climate risk. This finding is consistent with the confidence signalling theory. Our results also suggest that acquirers are less likely to target vulnerable industries if target countries' climate risk is high. In addition, we document that the presence of geopolitical risk would weaken the association between payment method and climate risk. Our findings are robust to the use of an instrumental variable approach and alternative measures of climate risk.
We study whether the meteoric rise of boutique advisors in mergers and acquisitions (M&As) is justified by their buy‐side performance. We find that acquiring firms represented by boutique advisors generate superior short‐ and long‐run abnormal returns over those employing full‐service advisors. This effect is mainly prominent in private deals, interindustry mergers, and deals involving inexperienced acquirers, where valuation uncertainty tends to be higher. Overall, our results reflect that acquirer shareholders benefit from boutique investment banks' high level of industry expertise and independent advice, supporting the rising demand for their financial advisory services.
This study examines how variation in government borrowing affects corporate acquisition activity around the world. Using a large sample of firms and deals from 50 countries between 1991 and 2017, the paper finds that government debt issuance is strongly negatively associated with acquisition activity at the firm and aggregate levels. An instrumental variable approach corroborates these findings, thus supporting their causal interpretation. In response to increases in government borrowing, firms appear to make more value-enhancing deals. These effects are stronger for cash-financed deals and for financially stronger firms. Collectively, these findings suggest that rising government debt leads to ‘real crowding out’ by affecting firms’ ability to make large investments.
In 2012, China implemented a green credit policy (GCP) that restricts bank credits to heavily polluting firms. Using a difference‐in‐differences research design, we find that polluting firms increased their cash reserves by 9.5% after the GCP's issuance relative to non‐polluting firms. We also document that the GCP significantly reduces firms' access to bank finance but increases the value of cash. Cross‐sectional analysis shows that the increase in cash holdings is more significant for firms with greater financial constraints, firms with more investment opportunities, and high‐tech companies. Overall, our findings are consistent with a constraint explanation: when external financing is restricted, firms retain more cash to meet future investment needs.
Mergers and Acquisitions are the major sources of Foreign Direct Investment and one of the effective strategies for organisational expansion and restructuring. In India, Cross border Acquisitions have increased the inward flow of foreign investments significantly and will continue to remain one of the preferred ways for attracting international investments. One major area of research in Acquisitions is characterizing and predicting the quality of targets firms. This paper reviews the pre-acquisition characteristics of a firm that aid in predicting the apt takeover candidates while pursuing inbound deals. This work attempts to reveal the differences in pre-acquisition characteristics during cross-border and domestic takeovers that makes the deal either profitable or loss making. It also highlights the necessity for a different model for the Indian market when compared to the developed economies due to the structural differences in the Indian economy. The conjecture derived from the review is that firms from other nations favor those Indian firms that characterize good network connectivity, channel and voluminous assets suiting their long termstrategy to explore markets and brands. The research in Merger & Acquisitions occurring in Indian Market is still in infant stage, providing more opportunities to explore and study in various perspectives.
The method of payment choice in merger and acquisition (M&A) transactions has been the subject of much research in the finance literature. But significant changes in the economic environment of acquirers in the U.S. call into question whether known stylized facts are still valid and motivate us to undertake new empirical analyses. Using a large sample of M&A transactions spanning the last two decades, we investigate the financial constraints versus ownership dilution tradeoff that potentially drives negotiations about the method of payment (i.e., stock or cash), controlling for an extensive list of other potential determinants. The main takeaway from our analyses is that financial constraints are a dominant factor motivating acquirers to include stock (at least partially) in the method of payment package in M&A transactions in the recent period.
We study the effects of financing sources and financial constraints in mergers and acquisitions. We explicitly distinguish between methods of payment and financing used in takeovers and find that financial constraints have a strong influence on choices of both payment and financing methods. Financially constrained firms are less likely to pay for acquisitions in cash. Greater financial constraints are associated with greater use of equity financing, followed by internal funds, with debt as the least preferred financing alternative. Consistent with agency theory, more constrained bidders experience higher takeover announcement returns. However, we find financing sources to have little impact on abnormal returns.
This paper presents a model of the medium of exchange in takeovers in which managerial incentives influence the choice of an offer by a bidder manager. We consider a framework where the offer is proposed to the target depending on the bidder manager's private information on synergy and private benefits. We identify the case where the choice of the medium of exchange in the offer reveals whether the proposed merger is intended to create a synergy or to pursue empire building. We demonstrate that the perception of the bidder manager with a high appetite for increasing firm size raises the proportion of cash in the offer. Moreover, an increase in the cash flow rights held by the bidder manager leads to a reduction in the proportion of cash in the offer.
Payment method choice in takeovers is mainly driven by both asymmetric information between the acquirer and the target and the acquirer's financial capability. In this paper, we examine whether increased transparency and better access to finance induced by environmental, social and governance (ESG) performance are associated with the strategic choice of payment method in takeovers. More specifically, we investigate how the acquirer's and the target's ESG coverage and different levels of ESG performance affect the probability of cash offers in a sample of 836 US takeovers from 1992 to 2014. In examining the target, our results suggest that ESG coverage is positively associated with the probability of cash offers, whereas we find a negative relationship for ESG concerns and no effect for ESG strengths. Upon examining the acquirer, ESG coverage and ESG concerns both increase the probability of cash offers; however, we do not find results supporting our prediction regarding the acquirer's ESG strengths. We infer that ESG coverage and level affect strategic considerations in the choice of the payment method in takeovers because they not only reduce information asymmetry, but also enhance financing capability.
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 mitigate stock price declines resulting from arbitrage short sales. Consistent with this hypothesis, we find that the ex ante net lending supply of bidder shares has a positive impact on the percentage of cash in public target payments. Further tests, including a placebo analysis of public-to-private deals and an analysis of expected price pressure proxies, corroborate the impact of anticipated arbitrage-related price pressure on payment choice.
We study how the customer concentration of targets impacts the occurrence and structure of mergers and acquisitions (M&A). We hypothesize and find that acquirers respond to customer concentration-related risk by placing fewer bids for targets with greater customer concentration and by using more stock payment in their offers. These relations vary predictably with major customer-related uncertainty. Our findings extend the literature by documenting an important risk factor in M&A and by quantifying economic consequences of customer concentration.
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Share pledging by controlling shareholders is accompanied with a risk of control transfer when stock price decline triggers a margin call. This situation motivates controlling shareholders and firms to initiate value-enhancing activities to manage the pledging quagmire. Using a sample of Chinese listed firms, we find that firms with pledging controlling shareholders are more likely to implement mergers and acquisitions (M&As) than other firms. Their M&As also perform better, regardless of whether using short- or long-term stock returns or operating income as the performance measure. Furthermore, the positive effect of share pledging on M&As is more pronounced in non-state-owned enterprises, firms with individual controlling shareholders (especially families), firms with better governance, and firms with higher financial capabilities. Additional analyses on deal types also show that firms with pledging controlling shareholders are more likely to engage in diversified, non-affiliated, and cash-financed acquisitions. These results consistently suggest that M&As may effectively eliminate firms' pledging risks and that share pledging mitigates shareholders' conflict of interest regarding M&A decisions.
We examine explanations for corporate financing-, dividend-, and compensation-policy choices. We document robust empirical relations among corporate policy decisions and various firm characteristics. Our evidence suggests contracting theories are more important in explaining cross-sectional variation in observed financial, dividend, and compensation policies than either tax-based or signaling theories.
"August 1990." Includes bibliographical references (p. 31-32). Supported by the Division of Research, Graduate School of Business Administration. Paul Asquith, Robert F. Bruner, David W. Mullins, Jr.
In a model of takeovers under asymmetric information, we identify a separating equilibrium in which the value of the bidder
firm is revealed by the mix of cash and securities used as payment for the target. The model predicts that the revealed bidder
value is monotonically increasing and convex in the fraction of the total offer that consists of cash. We examine the model
restrictions using data from Canada, where mixed offers are both relatively frequent and free of the confounding tax-related
options characterizing mixed offers in the United States. We find that the average announcement-month bidder abnormal return
in mixed offers is large and significant. However, maximum likelihood estimates of parameters in both linear and nonlinear
cross-sectional regressions fail to support the model predictions.
From the reviews of the First Edition."An interesting, useful, and well-written book on logistic regression models . . . Hosmer and Lemeshow have used very little mathematics, have presented difficult concepts heuristically and through illustrative examples, and have included references."—Choice"Well written, clearly organized, and comprehensive . . . the authors carefully walk the reader through the estimation of interpretation of coefficients from a wide variety of logistic regression models . . . their careful explication of the quantitative re-expression of coefficients from these various models is excellent."—Contemporary Sociology"An extremely well-written book that will certainly prove an invaluable acquisition to the practicing statistician who finds other literature on analysis of discrete data hard to follow or heavily theoretical."—The StatisticianIn this revised and updated edition of their popular book, David Hosmer and Stanley Lemeshow continue to provide an amazingly accessible introduction to the logistic regression model while incorporating advances of the last decade, including a variety of software packages for the analysis of data sets. Hosmer and Lemeshow extend the discussion from biostatistics and epidemiology to cutting-edge applications in data mining and machine learning, guiding readers step-by-step through the use of modeling techniques for dichotomous data in diverse fields. Ample new topics and expanded discussions of existing material are accompanied by a wealth of real-world examples-with extensive data sets available over the Internet.
In empirical studies of differences between firms which are acquired and those which are not, researchers typically divide firms into two groups—acquired and nonacquired. In this paper, we argue that cash takeovers may be sufficiently different from noncash acquisitions that failure to distinguish between them may lead to inappropriate generalizations. We provide evidence from the mid 1970s that three categories of firms can be distinguished: nonacquired, acquired in a cash takeover, and acquired in an exchange of securities.
Introduction and Historical PerspectiveTechnical Background
Experimental ExperienceSummary Interpretation, and Examples of Diagnosing Actual Data for CollinearityAppendix 3A: The Condition Number and InvertibilityAppendix 3B: Parameterization and ScalingAppendix 3C: The Weakness of Correlation Measures in Providing Diagnostic InformationAppendix 3D: The Harm Caused by Collinearity
A model of optimal dividend payout is presented in which increased dividends lower agency costs but raise the transactions cost of external financing. The optimal dividend payout ratio minimizes the sum of these two costs. A cross-sectional test of the model relates dividend payout to the fraction of equity held by insiders, the past and expected future revenue growth of the firm, the firm's beta coefficient, and the number of common stockholders. The coefficients of all variables are significant in the predicted directions. The results indicate that investment policy influences dividend policy.
This paper contrasts the "static tradeoff" and "pecking order" theories of capital structure choice by corporations. In the static tradeoff theory, optimal capital structure is reached when the tax advantage to borrowing is balanced, at the margin, by costs of financial distress. In the pecking order theory, firms preferinternal to external funds, and debt to equity if external funds are needed. Thus the debt ratio reflects the cumulative requirement for external financing. Pecking order behavior follows from simple asymmetric information models. The paper closes with a review of empirical evidence relevant to the two theories.
This article discusses the potential promise and limits of oversight of corporate managers by major institutional investors. I discuss the reasons to believe that, at least for systemic issues that arise at many firms, there can be value is assigning one set of loosely watched agents (institutional money managers) to watch another set (corporate managers). This is partly because, as long as it takes a number of institutions to strongly influence corporate actions, the institutions can also watch each other, thus reducing the risk that any one of them will extract private benefits from the firm. The case for shared institutional voice (with six or ten institutions, often different types of institutions, exercising joint influence) is stronger than the case for direct institutional control of a firm by a particular institution. In a companion paper, The Value of Institutional Investor Monitoring: The Empirical Evidence, UCLA Law Review, Vol. 39, pp. 895-939 (1992), http://ssrn.com/abstract=1132063, I survey the empirical evidence on the value of large shareholder oversight of managers.
This paper examines the relation between the market reaction to primary seasoned equity offerings and alternative measures of the profitability of the issuing firm's growth opportunities. While the sample offerings display a positive relation between announcement period prediction errors and several ex ante measures of growth opportunities, this relation is not monotonic and appears to be driven by a small subset of younger, higher growth firms, whose announcement effects are insignificantly different from zero. For the remainder of the sample firms, there is no relation between the estimated profitability of new investment and the market reaction to announced equity offerings. Moreover, announcement effects are nonpositive regardless of how profitable investment opportunities are expected to be. These findings collectively suggest that investment opportunities play, at best, a minor role in explaining the cross-sectional distribution of equity offering announcement effects.
This research develops and tests a model for the prediction of tender offer outcomes. Variables that increase the supply of "obtainable shares" (such as increased bid premiums or the payment of solicitation fees ) are shown to increase the probability of success. Increased ownership of target firm shares by the bidder also incease the probability of success. Variables that impede the tendering of hares (such as target management opposition or a competing bid) decrease the probability of success. Tests of the model utilizing both linear and logistic analysis support the theoretical constructs and help resolve the paradoxical findings of previous research.
In this paper I explore the effects of politics on corporate finance, including the determinants of capital structure and the regulatory and legal factors governing the market for corporate control. I examine the effects and consequences of the active corporate control market of the 1980s, then I outline the enormous political controversy and inaccurate media portrayals that ensued, and contrast them to the results obtained from intensive study of the phenomena by academic economists. First, I review new macroeconomic evidence on changes in productivity in American manufacturing that is dramatically inconsistent with popular claims that corporate control transactions were crippling the industrial economy in the 80s. Second, I show how the restructuring movement of the 1980s reflected the re-emergence of active investors in the U.S. and how restructuring addressed the conflict between management and shareholders over control of corporate free cash flow. Third, I summarize my conception of LBO associations as new organizational forms that overcome the deficiencies of large public conglomerates. I also discuss the similarity between LBO associations and Japanese business financing networks known as keiretsu. Fourth, I argue that the highly-leveraged financial structures of the 1980s should lead to a Japanese-style privatization of bankruptcy (i.e., out-of-court reorganization). Fifth, I present a theory of boom-bust cycles in venture markets that explains why many companies involved with late-1980s leveraged transactions encountered financial distress. Sixth, I argue that misguided changes in the tax and regulatory codes and in bankruptcy court decisions have distorted the normal economic incentives for out-of-court reorganizations, resulting in increased costs of financial distress and a sharp rise in the number of Chapter 11 filings. Seventh and last, I propose a set of changes in the Chapter 11 process designed to reduce the costs of financial distress and thus maximize the total value of the firm to all investors.
It is well known that historically a larger number of firms issue common stock and the proportion of external financing accounted for by equity is substantially higher in expansionary phases of the business cycle. We show that this phenomenon is consistent with firms selling seasoned equity when they face lower adverse selection costs, which occurs in periods with more promising investment opportunities and with less uncertainty about assets in place. Thus, firm announcements of equity issues are predicted to convey less adverse information about equity values in such periods. Empirically, we find evidence that generally supports these predictions. Consistent with historical patterns, firms in recent times have tended to increase equity more frequently in expansionary periods. While business cycle variables have significant explanatory power, interest rate variables are generally insignificant. The adverse selection effects as measured by the average negative price reaction to seasoned common stock offering announcements is significantly lower in expansionary periods and in periods with a relatively larger volume of equity financing. These offer announcement effects are less negative for smaller stock offerings and for issuers with less uncertainty about assets in place.
This paper investigates the ability of the pecking-order model, the agency model, and the timing model to explain firms' decisions whether to issue debt or equity, the shock price reaction to their decisions and their actions afterward. We find strong support for the agency model. Firms often depart from the pecking order because of agency considerations. We fail to find support for the timing model.
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.
This study examines the effect of mergers on the wealth of bidding firms' shareholders. Bidding firms gain significantly during the twenty-one days leading to the announcement of each of their first four merger bids. These results fail to support the capitalization hypothesis that bidders' gains are captured at the beginning of merger programs. Bidders' abnormal returns are positively related to the relative size of the merger partners, and the gains during the announcement period are larger for mergers which are successful. Though the gains are larger prior to 1969, merger bids after 1969 also significantly increase the wealth of bidding firms' shareholders. The results suggest that the inconclusive findings of the earlier studies may be due to methodological deficiencies. The findings of this study are consistent with value-maximizing behavior by the management of bidding firms.
Many corporate assets, particularly growth opportunities, can be viewed as call options. The value of such ‘real options’ depends on discretionary future investment by the firm. Issuing risky debt reduces the present market value of a firm holding real options by inducing a suboptimal investment strategy or by forcing the firm and its creditors to bear the costs of avoiding the suboptimal strategy. The paper predicts that corporate borrowing is inversely related to the proportion of market value accounted for by real options. It also rationalizes other aspects of corporate borrowing behavior, for example the practice of matching maturities of assets and debt liabilities.
We investigate the relationship between management ownership and market valuation of the firm, as measured by Tobin's Q. In a 1980 cross-section of 371 Fortune 500 firms, we find evidence of a significant nonmonotonic relationship. Tobin's Q first increases, then declines, and finally rises slightly as ownership by the board of directors rises. For older firms, there is evidence that Q is lower when the firm is run by a member of the founding family than when it is run by an officer unrelated to the founder.
This paper presents a stock-flow consistent macroeconomic model in which financial fragility in firm and household sectors evolves endogenously through the interaction between real and financial sectors. Changes in firms' and households' financial practices produce long waves. The Hopf bifurcation theorem is applied to clarify the conditions for the existence of limit cycles, and simulations illustrate stable limit cycles. The long waves are characterized by periodic economic crises following long expansions. Short cycles, generated by the interaction between effective demand and labor market dynamics, fluctuate around the long waves.
Thesis (Ph.D.)--University of Rochester, 1987 Photocopy.
Thesis (Ph. D.)--University of Oklahoma, 1992. Includes bibliographical references (leaves 122-126).
The author documents the effect of growth opportunities on the stock price response to security offerings. For equity offerings, the stock price decline for mature firms exceeds the decline for growth firms. For straight and convertible debt offerings, mature firms experience a significant price decline while growth firms experience no significant price change. Regression analysis indicates that the stock price response to new financing is significantly, positively related to a variety of growth opportunity measures. Holding growth opportunities fixed, the stock price response depends on the type of security offered (equity vs. debt) and, for straight debt offerings, Moody's bond ratings. Copyright 1992 by University of Chicago Press.
This paper attempts to provide the user of linear multiple regression with a battery of diagnostic tools to determine which, if any, data points have high leverage or influence on the estimation process and how these possibly discrepant data points differ from the patterns set by the majority of the data. The point of view taken is that when diagnostics indicate the presence of anomolous data, the choice is open as to whether these data are in fact unusual and helpful, or possibly harmful and thus in need of modifications or deletion. The methodology developed depends on differences, derivatives, and decompositions of basic regression statistics. There is also a discussion of how these techniques can be used with robust and ridge estimators. An example is given showing the use of diagnostic methods in the estimation of a cross-country savings rate model.
This paper examines the within day pattern of common stock returns surrounding announcements of new issues of equity and debt by industrial firms. During the first fifteen minutes following new equity issue announcements, there is an abnormally large number of transactions, high volume, and a -1.3% average return. There is also a small, but statistically significant negative average return one hour preceding the announcement. The size of the offering, the stated purpose of the issue and the estimated profitability of new investments do not have a significant impact on stock returns. New debt issue announcements also do not have a significant impact on stock returns. After the issuance of new shares, there is a significant price recovery of 1.5%. This evidence is not consistent with many theoretical rationales for the negative market reaction to new equity issue announcements.
This paper develops a simple formula for approximating Tobin's q. The formula requires only basic financial and accounting information. Results of a series of regressions comparing our approximate q values with those obtained via Lindenberg and Ross' (1981) more theoretically correct model indicate that at least 96.6% of the variability of Tobin's q is explained by approximate q.
This study views the firm's future investment opportunities as operating options and examines the effect of growth opportunities on the firm's systematic risk using contingent claims analysis. The study predicts that the greater the portion of a stock's market value accounted for by the firm's growth opportunities, the higher the systematic risk. Overall, our empirical results strongly support this hypothesis. Furthermore, including firm size in empirical analysis does not significantly change the relationship between the stock beta and growth variables. Thus, we conclude that the effect of growth on stock risk is independent of firm size.
The medium of exchange in acquisitions is studied in a model where (1) bidders' offers bring forth potential competition and (2) targets and bidders are asymmetrically informed. In equilibrium, both securities and cash offers are observed. Securities have the advantage of inducing target management to make an efficient accept/reject decision. Cash has the advantage that, in equilibrium, it serves to "preempt" competition by signaling a high valuation for the target. Implications concerning the medium of exchange of an offer, the probability of acceptance, the probability of competing bids, expected profits, and the costs of bidders are derived. Copyright 1989 by American Finance Association.
We develop a measure of free cash flow using Tobin's q to distinguish between firms that have good investment opportunities and those that do not. In a sample of successful tender offers, bidder returns are significantly negatively related to cash flow for low q bidders but not for high q bidders; further, the relation between cash flow and bidder returns differs significantly for low q and high q bidders. This result holds for several cash flow measures suggested in the literature and also in multivariate regressions controlling for bidder and contest-specific characteristics.
This paper analyzes how managerial control of voting rights affects firm value and financing policies. It shows that an increase in the fraction of voting rights controlled by management decreases the probability of a successful tender offer and increases the premium offered if a tender offer is made. Depending on whether managerial control of voting rights is small or large, shareholders' wealth increases or falls when management strengthens its control of voting rights. Management can change the fraction of the votes it controls through capital structure changes, corporate charter amendments, and the acquisition of shareholder clienteles.
This paper examines the hypothesis that an important role of corporate takeovers is to discipline the top managers of poorly performing target firms. The authors document that the turnover rate for the top manager of target firms in tender offer-takeovers significantly increases following completion of the takeover and that prior to the takeover these firms were significantly under-performing other firms in their industry as well as other target firms which had no post-takeover change in the top executive. We interpret the results to indicate that the takeover market plays an important role in controlling the nonvalue maximizing behavior of top corporate managers. Copyright 1991 by American Finance Association.
The authors test the proposition that corporate control considerations motivate the means of investment financing-cash (and debt) or stock. Corporate insiders who value control will prefer financing investments by cash or debt rather than by issuing new stock, which dilutes their holdings and increases the risk of losing control. Their empirical results support this hypothesis: in corporate acquisitions, the larger the managerial ownership fraction of the acquiring firm the more likely the use of cash financing. Also, the previously observed negative bidders' abnormal returns associated with stock financing are mainly in acquisitions made by firms with low managerial ownership. Copyright 1990 by American Finance Association.
This paper analyzes the explanatory power of some recent theories of optimal capital structure. The study extends empirical work on capital-structure theory in three ways. First, it examines a broader set of capital-structure theories, many of which have not previously been analyzed empirically. Second, since the theories have different empirical implications in regards to different types of debt instruments, the authors analyze measures of short-term, long-term, and convertible debt rather than an aggregate measure of total debt. And third, the study uses a factor-analytic technique that mitigates the measurement problems encountered when working with proxy variables. Copyright 1988 by American Finance Association.
This paper considers a firm that must issue common stock to raise cash to undertake a valuable investment opportunity. Management is assumed to know more about the firm's value than potential investors. Investors interpret the firm's actions rationally. An equilibrium model of the issue-invest decision is developed under these assumptions. The model shows that firms may refuse to issue stock, and therefore may pass up valuable investment opportunities. The model suggests explanations for several aspects of corporate financing behavior, including the tendency to rely on internal sources of funds, and to prefer debt to equity if external financing is required. Extensions and applications of the model are discussed.
The existing literature on the post-merger performance of acquiring firms is divided. The authors reexamine this issue, using a nearly exhaustive sample of mergers between NYSE acquirers and NYSE/AMEX targets. The authors find that stockholders of acquiring firms suffer a statistically significant loss of about 10 percent over the five-year post- merger period, a result robust to various specifications. Their evidence suggests that neither the firm size effect nor beta estimation problems are the cause of the negative post-merger returns. They examine whether this result is caused by a slow adjustment of the market to the merger event. Their results do not seem consistent with this hypothesis. Copyright 1992 by American Finance Association.
A vast and often confusing economics literature relates competition to investment in innovation. Following Joseph Schumpeter, one view is that monopoly and large scale promote investment in research and development by allowing a firm to capture a larger fraction of its benefits and by providing a more stable platform for a firm to invest in R&D. Others argue that competition promotes innovation by increasing the cost to a firm that fails to innovate. This lecture surveys the literature at a level that is appropriate for an advanced undergraduate or graduate class and attempts to identify primary determinants of investment in R&D. Key issues are the extent of competition in product markets and in R&D, the degree of protection from imitators, and the dynamics of R&D competition. Competition in the product market using existing technologies increases the incentive to invest in R&D for inventions that are protected from imitators (e.g., by strong patent rights). Competition in R&D can speed the arrival of innovations. Without exclusive rights to an innovation, competition in the product market can reduce incentives to invest in R&D by reducing each innovator's payoff. There are many complications. Under some circumstances, a firm with market power has an incentive and ability to preempt rivals, and the dynamics of innovation competition can make it unprofitable for others to catch up to a firm that is ahead in an innovation race.
The rise of managed healthcare organizations (MCOs) and the associated increased integration among providers has transformed US healthcare and at the same time raised antitrust concern. This paper examines how competition among MCOs affects the efficiency gains of improved price coordination achieved through integration. MCOs offer differentiated services and contract with specialized and complementary upstream providers to supply these services. We identify strategic pricing equilibria under three different market structures: overlapping upstream physician-hospital alliances, upstream-downstream arrangements such as Preferred Provider Organizations, and vertically integrated Health Maintenance Organizations. The efficiency gains achieved depend not only on organizational form but also on the toughness of premium competition. We show that, contrary to popular thinking, providers and insurers do not earn maximum net revenue when they are monopolies or monopsonies, but rather at an intermediate level of market power. Furthermore, closer integration of upstream and downstream providers does not necessarily increase net revenues.
Recent empirical evidence has shown that internal capital markets within multinational corporations are used to reduce overall financing costs by optimizing the mix of internal and external debt of affiliates in different countries. We show that this cost saving use of internal capital markets is not limited to multinationals, but that domestic business groups actively optimize the internal/external debt mix across their subsidiaries as well. We use both subsidiary and group level financial statement data to model the bank and internal debt concentration of Belgian private business group affiliates and show that a pecking order of internal debt over bank debt at subsidiary level leads to a substantially lower bank debt concentration for group affiliates as compared to stand-alone companies. However, as the group's overall debt level mounts, groups increasingly locate bank borrowing in subsidiaries with low costs of external financing (i.e. large subsidiaries with important collateralable assets) to limit moral hazard and dissipative costs.
Thesis--Massachusetts Institute of Technology.
This paper presents empirical test results of alternative hypotheses regarding differences in returns to shareholders of bidding firms that choose different payment methods (cash or securities). The evidence is consistent with the payment method signaling hypothesis, which asserts that when management of the bidding firm believes its own stock to be overvalued (undervalued), securities (cash) will be the preferred payment method. The results are not consistent with either the overpayment hypothesis or the present value/hubris hypothesis. The findings also explain the conflicting results reported in prior work on gains to bidding firms.