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RESEARCH PAPERS | M & A

Takeover Process

WHAT DRIVES THE TAKEOVER PROCESS? NEW EVIDENCE FROM THE INNER WORKINGS OF INTERNAL M&A TEAMS

Nihat Aktas, Audra L. Boone, Alexander Witkowski, Guosong Xu, and B. Burcin Yurtoglu
2018
This paper provides insights into the inner workings of internal corporate merger and acquisition teams using survey evidence from 65 firms from Austria, Germany and Switzerland. The responses indicate the growing reliance on a firm’s own employees for implementing takeover strategies. Firms are proactive in deal initiation, such that they rely more on their internal analysis to generate investment ideas and less on investment banks. Deals negotiated by CEOs are on average of better quality in terms of announcement returns. Moreover, M&A team factors can explain approximately 45% of the acquirer fixed effects in announcement return regressions. >more


CEO Incentives

THE LONG-TERM CONSEQUENCES OF SHORT-TERM INCENTIVES

Alex Edmans, Vivian W. Fang, and Allen Huang
2018
This paper shows that short-term stock price concerns induce CEOs to take value-reducing actions. Vesting equity, our measure of short-term concerns, is positively associated with the probability of a firm repurchasing shares, the amount of shares repurchased, and the probability of the firm announcing a merger or acquisition (M&A). When vesting equity increases, stock returns are more positive in the two quarters surrounding both repurchases and M&A, but more negative in the two years following repurchases and four years following M&A. A potential driver of the negative longrun returns to M&A is subsequent goodwill impairment. These results are inconsistent with CEOs buying underpriced stock or companies to maximize long-run shareholder value, but consistent with these actions being used to boost the short-term stock price and improve the conditions for CEO equity sales. CEOs sell their own stock shortly after using company money to buy the firm’s stock, also inconsistent with the latter being motivated by undervaluation. >more


Antitakeover Provisions

WHICH ANTITAKEOVER PROVISIONS MATTER?

Jonathan M. Karpoff, Robert J. Schonlau, and Eric W. Wehrly
2018
Researchers disagree about which, if any, antitakeover provisions affect firms’ takeover likelihoods. Reflecting such disagreement, researchers variously use the G-index, E-index, other ad hoc indices, or selected individual provisions such as classified boards, to measure firms’ takeover defenses. In tests that account for the endogenous use of antitakeover provisions, we find that 11 of the 24 G-index provisions are robustly and negatively related to takeover likelihood, while two are positively related. Various indices used in the literature to measure takeover defense, including the G-index and E-index, relate to takeover likelihood to the extent they include this subset of provisions. >more


Premiums

END-OF-DAY PRICE MANIPULATION AND M&AS

Douglas J. Cumming, Shan Ji, Sofia Johan, and Monika Tarsalewska
2018
Based on M&As over 45 countries from 2003-2014, we show that the presence of end-of-day (EOD) target price manipulation prior to M&As increases the probability of an M&A deal withdrawal, and decreases the premium paid. More detailed exchange trading rules that govern manipulation across countries and over time lower the probability of withdrawal, mitigate the negative impact of EOD manipulation on withdrawal, and raise premiums paid. Finally, while there are fewer cases of acquirer price manipulations prior to M&As, the data indicate positive acquirer price manipulation in share M&As increases the probability of deal withdrawal. >more


Management Practices

MANAGEMENT PRACTICES AND MERGERS AND ACQUISITIONS

John (Jianqiu) Bai, Wang Jin, and Matthew Serfling
2018
We provide new empirical evidence on the sources of value creation in mergers and acquisitions by using a dataset of establishment-level management practices from the U.S. Census Bureau. We find that firms with better management practices tend to acquire establishments with worse management practices, and following the acquisition, improve the target’s management practices. These improvements are larger when acquirers have a greater incentive and ability to make these changes and are also followed by increases in establishment performance. Overall, our findings suggest that spillovers of good management practices constitute an important source of synergies from mergers and acquisitions. >more


Bid Prices

ACQUIRER REFERENCE PRICES AND ACQUISITION PERFORMANCE

Qingzhong Ma, David A. Whidbee, and Wei Athena Zhang
2018
In a comprehensive sample of mergers and acquisitions, we find a reference price effect: Acquirers earn higher (lower) announcement-period returns when their pre-announcement stock prices are well below (near) their 52-week highs. This reference price effect is stronger in acquisitions of private targets, deals involving greater uncertainty, and acquirers with greater individual investor ownership, and it is reversed in the subsequent year. Further, acquirer reference prices affect bid premia and target announcement-period returns in deals with greater uncertainty in acquirer valuation. The overall evidence is consistent with investors irrationally using 52-week high prices as a measure of acquirer valuation. >more


Opportunistic Acquirers

INEFFICIENCIES AND EXTERNALITIES FROM OPPORTUNISTIC ACQUIRERS

Di Li, Lucian A. Taylor, and Wenyu Wang
2017
If opportunistic acquirers can buy targets using overvalued shares, then there is an inefficiency in the merger and acquisition (M&A) market: The most overvalued rather than the highest-synergy bidder may buy the target. We quantify this inefficiency using a structural estimation approach. We find that the M&A market allocates resources efficiently on average. Opportunistic bidders crowd out high-synergy bidders in only 7% of transactions, resulting in an average synergy loss equal to 9% of the target's value in these inefficient deals. The implied average loss across all deals is 0.63%. Although the inefficiency is small on average, it is large for certain deals, and it is larger when misvaluation is more likely. Even when opportunistic bidders lose the contest, they drive up prices, imposing a large negative externality on the winning synergistic bidders. >more


Access to finance

THE VALUE OF ACCESS TO FINANCE: EVIDENCE FROM M&A

Jess Cornaggia, and Jay Y. Li
2018
We examine synergies in mergers and acquisitions generated by firms’ comparative advantages in access to bank finance. We find robust evidence that greater access to bank finance increases firms’ attractiveness as acquisition targets. Targets’ comparative advantage in bank finance improves bank credit supply and reduces financing costs for the merged firms. These effects are more pronounced for acquirers with greater frictions in accessing bank loans and acquirers with greater growth opportunities. Overall, this paper reveals that targets, not just acquirers, contribute to financial synergies in M&A. >more


Strategic versus Financial Bidders

DO PRIVATE EQUITY FIRMS PAY FOR SYNERGIES?

Benjamin Hammer, Nils Janssen, Denis Schweizer, and Bernhard Schwetzler
2018
Stylized facts suggest that strategic acquirers can pay for synergies, while private equity (PE) firms cannot because of the missing operating fit with the portfolio company. However, if PE firms initiate buy-and-build strategies, there is potential for an operating fit between the portfolio firm and its add-on acquisitions. Thus, synergistic value could be priced in at entry. We analyze the pricing of 1,155 global PE buyouts and find strong support for a valuation effect from buy-and-build strategies. Our results indicate that PE sponsors pay a premium of up to 47% at entry when the portfolio company acquirers add-ons in the same industry within a two-year time window after the buyout. Consistent with bargaining power theory, the effect strengthens when the portfolio firm has acquisition experience, and when the PE sponsor faces pressure to invest because of unspent fund capital (referred to as “dry powder”) or deal competition. These findings remain robust after addressing alternative explanations, endogenous selection, and reverse causality. They have important implications for the literature on strategic versus financial bidders in takeovers. >more


Organizational capital

ORGANIZATION CAPITAL AND MERGERS AND ACQUISITIONS

Kai Li, Buhui Qiu, and Rui Shen
2018
Using a sample of completed U.S. merger and acquisition (M&A) transactions over the period 1984-2014, we find that acquirer organization capital as measured by capitalized selling, general, and administrative (SG&A) expenses is associated with superior deal performance. We show that high organization-capital acquirers achieve significantly higher abnormal announcement period returns, and better post-merger operating and stock performance, than low organization-capital acquirers. Additional tests suggest a causal relation between acquirer organization capital and deal performance. We further show that post-merger, high organization-capital acquirers cut more on the cost of goods sold, invest more in SG&A expenses, and achieve greater asset turnover and innovative efficiency. >more


Home Bias

CEO HOME BIAS AND CORPORATE ACQUISITIONS

Kiseo Chung, T. Clifton Green, and Breno Schmidt
2018
CEOs are significantly more likely to purchase targets near their birth place, reflecting either beneficial informational advantages or inefficient managerial objectives. Evidence from bidder announcement returns supports the latter view. Acquirer returns are significantly lower for CEO home bias acquisitions, and the negative announcement effect is stronger when the target is located further away, among poorly-governed firms, and when the CEO has a deeper birth place connection. Home bias CEOs are more likely to purchase stock following merger announcements, which supports a familiarity bias interpretation over agency concerns. Our findings suggest that CEO home bias influences firm investment. >more


Economic Nationalism

THE IMPACT OF ECONOMIC NATIONALISM IN EUROPE ON THE RETURNS TO RIVALS OF CROSSBORDER M&A BIDS

Ronan Powell, Sarah Prendergast, and Ruchira Sharma
2017
We examine the wealth effects of economic nationalism on domestic and foreign rivals using a novel sample of government blocked EU cross-border takeover bids. Regressions show a significantly larger net contagion effect of 0.73% (€31m) on bid announcement for domestic rivals relative to foreign. Government intervention results in larger negative returns, which become even more negative at bid resolution, especially for domestic rivals. Domestic rivals lose significantly more (€23m) over the whole bid period, likely consistent with lower future takeover likelihood. We show that economic nationalism has a significant cost, which is not only confined to the EU blocking country. >more


Shareholder Voting

VOTE AVOIDANCE AND SHAREHOLDER VOTING IN MERGERS AND ACQUISITIONS

Kai Li, Tingting Liu, and Julie Wu
2018
We examine whether, how, and why acquirer shareholder voting matters. We show that acquirers with low institutional ownership, high deal risk, and high agency costs are more likely to bypass shareholder voting. Such acquirers have lower announcement returns and make higher offers than those who do not. To avoid a shareholder vote, acquirers increase equity issuance and cut payout to raise the portion of cash in mixed-payment deals. Employing a regression discontinuity design, we show a positive causal effect of shareholder voting concentrated among acquirers with higher institutional ownership. We conclude that shareholder voting mitigates agency problems in corporate acquisitions. >more


The Impact of Policy Uncertainty

DOES POLICY UNCERTAINTY AFFECT MERGERS AND ACQUISITIONS?

Alice A. Bonaime, Huseyin Gulen, and Mihai Ion
2017
Political and regulatory uncertainty is strongly negatively associated with merger and acquisition activity at the macro and firm levels. The strongest effects are for uncertainty regarding taxes, government spending, monetary and fiscal policies, and regulation. Consistent with a real options channel, the effect is exacerbated for less reversible deals and for firms whose product demand or stock returns exhibit greater sensitivity to policy uncertainty, but attenuated for deals that cannot be delayed due to competition and for deals that hedge firm-level risk. Contractual mechanisms (deal premiums, termination fees, MAC clauses) unanimously point to policy uncertainty increasing the target’s negotiating power. >more


Acquirer Performance

CASH-RICH ACQUIRERS DO NOT ALWAYS MAKE BAD ACQUISITIONS: NEW EVIDENCE

Ning Gao, and Abdul Mohamed
2018
Cash-rich acquirers on average perform better than their cash-poor counterparts. This observation is driven by financially constrained acquirers and by the deals made between the 1990s and 2000s. It is robust to alternative measures of financial constraints, to both the short term and the long term, and to the different institutional setting such as the U.K. We conclude cash richness primarily reflects acquirer managers’ private information of deal quality instead of agency costs. The precautionary motive can explain the positive cash holdings effect on acquirer performance. >more


Merger Waves

INTERNATIONAL TRADE AND PROPAGATION OF MERGER WAVES

Muhammad Farooq Ahmad, Eric de Bodt, and Jarrad Harford
2017
Cross-border merger activity is growing in importance. We map the global trade network each year from 1989 to 2016 and compare it to cross-border and domestic merger activity. Trade-weighted merger activity in trading partner countries has statistically and economically significant explanatory power for the likelihood a given country will be in a merger wave state, both at the cross-border and the domestic levels, even controlling for its own lagged merger activity. The strength of trade as a channel for transmitting merger waves varies over time and is affected by import tariffs cuts, Euro, EU, EEA, and WTO entry. Overall, the full trade network helps our understanding of merger waves and how merger waves propagate across borders. >more


Human Capital

HUMAN CAPITAL RELATEDNESS AND MERGERS AND ACQUISITIONS

Kyeong Hun Lee, David C. Mauer, and Qianying Xu
2017
We construct a measure of the pairwise relatedness of firms’ human capital to examine whether human capital relatedness is a key factor in mergers and acquisitions. We find that mergers are more likely and merger returns and post-merger performance are higher when firms have related human capital. These relations are stronger or only present in acquisitions where the merging firms do not operate in the same industries or product markets. Reductions in employment and wages following mergers with high human capital relatedness suggest that the merged firm has greater ability to layoff low quality and/or duplicate employees and reduce labor costs. We further show in a falsification test that human capital relatedness has no effect on acquiring firm returns in asset sales when little or no labor is transferred, which helps validate our measure of human capital relatedness. >more


Vertical Integration

MANAGERIAL RISK-TAKING INCENTIVES AND MERGER DECISIONS

Chen Lin, Micah S. Officer, and Beibei Shen
2017
We provide evidence concerning the effect of managerial risk-taking incentives on merger and acquisition (M&A) decisions and outcomes for different types of mergers: vertical, horizontal, and diversifying. Using chief executive officer (CEO) relative inside leverage to proxy for the incentives of risk-averse managers, we find that CEOs with higher inside leverage are more likely to engage in vertical mergers, and those mergers generate lower announcement returns for shareholders. This effect of CEO relative inside leverage on returns for shareholders in vertical acquisitions is more pronounced when the acquirer has a higher degree of informational opacity, weak governance, and excess cash. >more


Overinvestment

CASH WINDFALLS AND ACQUISITIONS

Bastian von Beschwitz
2018
This article studies the effect of cash windfalls on the acquisition policy of companies. As identification I use a German tax reform that permitted firms to sell their equity stakes tax-free. Companies that could realize a cash windfall by selling equity stakes see an increase in the probability of acquiring another company by 19 percent. I find that these additional acquisitions destroy firm value. Following the tax reform, affected firms experience a decrease of 1.2 percentage points in acquisition announcement returns. These effects are stronger for larger cash windfalls. My findings are consistent with the free cash flow theory. >more


Misvaluation

WINNING BY LOSING: EVIDENCE ON THE LONG-RUN EFFECTS OF MERGERS

Ulrike Malmendier, Enrico Moretti, and Florian S. Peters
2018
Do acquirors profit from acquisitions, or do acquiring CEOs overbid and destroy shareholder value? We present a novel approach to estimating the long-run abnormal returns to mergers exploiting detailed data on merger contests. In the sample of close bidding contests, we use the loser’s post-merger performance to construct the counterfactual performance of the winner had he not won the contest. We find that bidder returns are closely aligned in the years before the contest, but diverge afterwards: Winners underperform losers by 50 percent over the following three years. Existing methodologies, including announcement effects, fail to capture the acquirors’ underperformance. >more


Role of Investment Banks

IS IT THE INVESTMENT BANK OR THE INVESTMENT BANKER? A STUDY OF THE ROLE OF INVESTMENT BANKER HUMAN CAPITAL IN ACQUISITIONS

Thomas J. Chemmanur, Mine Ertugrul, and Karthik Krishnan
2017
Using a novel data set that links individual investment bankers to the acquisition deals they advise on, we find that individual investment bankers with greater deal experience are associated with higher acquisition returns and post-acquisition operating performance, particularly for acquirers in complex and more opaque industries. The advisory fee on acquisitions is also positively associated with the investment banking team's experience. Finally, when more experienced investment bankers switch to a new bank, acquirers are more likely to move with them. Overall, our results suggest that the human capital of individual investment bankers is valuable to acquirers. >more


Takeover Competition

HOW HAS TAKEOVER COMPETITION CHANGED OVER TIME?

Tingting Liu, and J. Harold Harold Mulherin
2017
We study a random sample of completed and withdrawn takeovers during the 1981 to 2014 time period to provide new evidence on the role of takeover impediments such as poison pills, staggered boards and state antitakeover devices. Do such impediments act in the interest of management by promoting entrenchment or do they act in shareholder interest by improving bargaining power during the takeover auction process? We first confirm the growing trend of takeover impediments over time in our sample. We then relate these trends to changes in the takeover auction process over time. Although we corroborate prior findings of a decline in hostile takeovers and publicly reported takeover auctions between the 1980s and later time periods, we find that takeover competition across the entire auction process between deal initiation and completion has not declined. In effect, takeover competition via auctions has gone underground. Moreover, takeover premiums have not declined over time. We interpret the results to be consistent with the shareholder interest/bargaining power hypothesis and inconsistent with the management interest/entrenchment hypothesis. Our analysis highlights the usefulness of research sources for SEC merger documents including microfiche, Lexis Nexis and Thomson One Financial that provide historical information on the takeover auction process prior to the EDGAR filings that started in the mid-1990s. >more


League Tables

THE EFFECTS OF INVESTMENT BANK RANKINGS: EVIDENCE FROM M&A LEAGUE TABLES

François Derrien, and Olivier Dessaint
2017
This paper explores how league tables, which are rankings based on market shares, influence the M&A market. A bank’s league table rank predicts its future deal flow, above and beyond other determinants of this future deal flow. This creates incentives for banks to manage their league table ranks. League table management tools include selling fairness opinions and reducing fees. Banks use such tools mostly when their incentives to do so are high: when a transaction affects their league table position or when they lost ranks in recent league tables. League table management seems to affect the quality of M&A transactions. >more


Asset Specificity

ASSET SPECIFICITY AND FIRM VALUE: EVIDENCE FROM MERGERS

Joon Ho Kim
2017
This study explores the effect of asset specificity on a target firm’s value in a merger. Using US merger data, I show that, when their industry experiences a negative cash flow shock, target firms that consist of more industry-specific real assets receive a lower merger premium than do those consisting of more generic assets. Results also suggest that the asset specificity discount in the target return is more pronounced if target firms are financially distressed. However, the negative value effect of asset specificity is mitigated in the presence of financially unconstrained industry rivals who place high value on the targets’ assets, compete for the targets, and, thereby, are more likely to acquire the targets. Overall, the results are consistent with the hypothesis that asset specificity of a firm is an important determinant of the firm’s value. >more


Acquisition Returns

ADVERTISING, ATTENTION, AND ACQUISITION RETURNS

Eliezer M. Fich, Laura T. Starks, and Anh L. Tran
2016
We examine the hypothesis that advertising allows a takeover target’s management to increase the firm’s profile and their own negotiating power, leading to higher subsequent takeover premiums. Our evidence from 7,095 merger bids supports this hypothesis. Moreover, we find an economically significant decrease in the acquirer’s market capitalization during the announcement period. To consider the possibility of codetermination of target advertising and takeover premiums, we employ instrumental variable tests as well as propensity matching methods and our results hold. Further, we find targets that advertise are more likely to be pursued by multiple bidders and receive revised increased bids. >more


Acquisition Premiums

WHAT IS THE SHAREHOLDER WEALTH IMPACT OF TARGET CEO RETENTION IN PRIVATE EQUITY DEALS?

Leonce Bargeron, Frederik P. Schlingemann, Chad J. Zutter, and René M. Stulz
2017
There is a widespread belief among observers that a lower premium is paid when the target CEO is retained by the acquirer in a private equity deal because the CEO’s potential conflicts of interest leads her to negotiate less aggressively on behalf of the target shareholders. Our empirical evidence is not consistent with this belief. We find that, when a private equity acquirer retains the target CEO, target shareholders receive an acquisition premium that is larger by as much as 18% of pre-acquisition firm value when accounting for the endogeneity of the retention decision. Our evidence is consistent with what we call the “valuable CEO hypothesis.” With this hypothesis, retention of the CEO can be valuable to private equity acquirers because, unlike public operating companies with managers in place, these acquirers have to find a CEO to run the post-acquisition company and the incumbent CEO may be the best choice to do so because she has valuable firm-specific human capital. When a private equity acquirer finds a target with a CEO who can manage the post-acquisition company better than other potential CEOs, we expect target shareholders to receive a larger premium because the post-acquisition value of the target is higher. >more


M&A Contests

EMPIRICAL EVIDENCE OF OVERBIDDING IN M&A CONTESTS

Eric de Bodt, Jean-Gabriel Cousin, and Richard Roll
2016
Overbidding implies a failure to adequately account for the winner’s curse. Surprisingly few papers have attempted to develop a direct empirical test of the presence of overbidding in M&A contests. We develop such a test grounded on a necessary condition for profit maximizing bidding behavior; the test is not subject to endogeneity concerns. Our results strongly support the existence of overbidding. We provide evidence that overbidding is related to the joint presence of conflicts of interest and irrational bidding behavior. >more


Firm Integration

PRODUCT INTEGRATION AND MERGER SUCCESS

Gerard Hoberg, and Gordon M. Phillips
2017
We examine the importance of firm integration to the outcomes of mergers and acquisitions using new product-based ex ante measures of product integration within the firm at the firm and firm-pair level. Our ex ante measures are significantly associated with ex post statements by managers in their 10-K indicating difficulties with merger and acquisition integration and also employee retention issues. We find that firms performing mergers and acquisitions in markets with high product integration difficulty experience lower ex post profitability, higher ex post expenses, and a higher propensity to divest assets. Upon announcement, acquirers experience lower announcement returns and targets experience significantly higher announcement returns when ex ante product integration gaps are high. Examining long-term stock market returns, we find that the anomaly that acquiring firms have lower longer-term stock returns primarily occurs for firms with high integration gaps, high cash balances and low growth options. >more


Hedge Fund Activism

ACTIVISM MERGERS

Nicole M. Boyson, Nickolay Gantchev, and Anil Shivdasani
2016
Shareholder value creation from hedge fund activism occurs primarily by influencing takeover outcomes for targeted firms. Controlling for selection decisions, activist interventions substantially increase the probability of a takeover offer. Third-party bids for activist targets have higher returns, premia, and completion rates but these patterns are reversed when the activist is the bidder. Failed bids for activism targets lead to improvements in operating performance, financial policy, and positive long-term abnormal returns, suggesting a value-enhancing role of activism. The positive long-term performance from hedge fund activism arises from monitoring target management during M&A contests rather than target undervaluation or bidder overpayment. >more


Rumors

M&A RUMORS: WHY SELLERS HATE THEM

Yan Alperovych, Douglas J. Cumming, and Alexander Peter Groh
2016
We provide large sample evidence on the causes and consequences of takeover rumors. 55.2% of non-completed M&A deals involve rumors while only 17.3% of completed deals involve them. Probit-regressions reveal that rumors are deal-breakers, reducing the likelihood of deal completion by 37-41%. Simultaneous equations confirm this result even if rumors are not exogenous events but spread on purpose, e.g. in an attempt to prevent an M&A transaction, or if they are caused by unobservable effects. If a transactions still emerges even if rumored, then the rumor has destroyed $7.8 million of value of the median M&A deal. >more


Takeover Bids

BID RESISTANCE BY TAKEOVER TARGETS: MANAGERIAL BARGAINING OR BAD FAITH?

Thomas W. Bates, and David A. Becher
2017
This paper examines management’s motives for rejecting takeover bids and the associated shareholder wealth effects. We develop several measures of initial bid quality and find a significant negative correlation between contested offers and bid quality. The likelihood of higher follow-on offers decreases in bid quality and is greater when targets have classified boards and CEOs have significant personal wealth tied to the transaction. Moreover, CEOs who fail to close high quality offers experience a significant rate of forced turnover. Overall, the results support a price improvement motive for contested bids. >more


Employment Protection

EMPLOYMENT PROTECTION AND TAKEOVERS

Olivier Dessaint, Andrey Golubov, and Paolo F. Volpin
2016
Labor restructuring is a key driver of takeovers and the associated synergy gains worldwide. In a difference-in-differences research design, we show that major increases in employment protection reduce takeover activity by 14-27% and the combined firm gains (synergies) by over half. Consistent with the labor channel behind these effects, deals with greater potential for workforce restructuring show a greater reduction in volume, number, and synergies. Increases in employment protection impede layoffs, resulting in wage costs that match the magnitude of synergy losses. Offer prices are not fully adjusted, with both bidders and targets exhibiting lower returns following the reforms. >more


Takeover Laws

DO TAKEOVER LAWS MATTER? EVIDENCE FROM FIVE DECADES OF HOSTILE TAKEOVERS

Matthew D. Cain, Stephen B. McKeon, and Steven Davidoff Solomon
2016
This study evaluates the relation between hostile takeovers and 17 takeover laws from 1965 to 2014. Using a hand-collected dataset of largely exogenous legal changes we find that certain takeover laws, such as poison pill and business combination laws, have no discernible impact on hostile activity, while others such as fair price laws have reduced hostile takeovers. We construct a Takeover Index from the laws and find that higher takeover protection is associated with lower firm value, consistent with entrenchment and agency costs. However, conditional on a bid, firms with more protection achieve higher premiums, consistent with increased bargaining power. >more


Managerial Motivation

M&A DEAL INITIATION AND MANAGERIAL MOTIVATION

Jana P. Fidrmuc, and Chunling Xia
2016
On a sample of 1098 US publicly listed target firms, we show that target initiated deals face potential financial distress and have higher CEO ownership. We further show that CEOs are motivated to offer their firm for sale due to their higher ownership, golden parachutes and stock and stock option grants before the takeover. Moreover, motivated CEOs seem to actively participate in deal negotiations rather than be just bribed not to resit the deal and their ownership and equity grants are positively correlated with premium. This suggests a positive role for deal initiation for target shareholders. >more


Director Experience

THE EFFECT OF DIRECTOR EXPERIENCE ON ACQUISITION PERFORMANCE

Laura Casares Field, and Anahit Mkrtchyan
2016
Prior research finds that firms hire directors for their acquisition experience, regardless of acquisition quality (whether their prior acquisitions earned positive or negative announcement returns). Using several short- and long-run measures, we examine the effects of directors’ acquisition experience on the acquisition performance of firms hiring them. We find that board acquisition experience is positively related to subsequent acquisition performance, demonstrating that firms appropriately value experience. Beyond experience itself, however, the quality of directors’ prior acquisitions is also important. Our results suggest that firms may be better served to select directors based upon both past acquisition experience and acquisition performance. >more


Diversification

THE HUMAN FACTOR IN ACQUISITIONS: CROSS-INDUSTRY LABOR MOBILITY AND CORPORATE DIVERSIFICATION

Geoffrey A. Tate, and Liu Yang
2016
The benefits of internal labor markets are largest when they include industries that utilize similar worker skills, facilitating cross-industry worker reallocation and collaboration. We show that diversifying acquisitions occur more frequently among industry pairs with higher human capital transferability. Such acquisitions result in larger labor productivity gains and are less often undone in subsequent divestitures. Moreover, acquirers retain more high skill workers and more often transfer workers to jobs in other industries inside the merged firm. Overall, our results identify human capital as a source of value from corporate diversification and provide an explanation for seemingly unrelated acquisitions. >more

Agency Conflicts

EMPLOYEE-MANAGER ALLIANCES AND SHAREHOLDER RETURNS FROM ACQUISITIONS

Ronald W. Masulis, Cong Wang, and Fei Xie
2016
We identify a subtle but important role for employee voting rights in manager-shareholder agency conflicts highlighted by corporate acquisitions. When employees hold larger equity positions, acquirers make more unprofitable empire-building acquisitions, while disciplinary takeover bids are less likely to follow. Importantly, these findings are concentrated in firms where worker-manager alliances are more likely, e.g., when workers enjoy favorable employment policies and higher job security, and in diversifying acquisitions that are less likely to trigger layoffs. Overall, our evidence indicates that potential worker-management alliances when employees hold large voting blocks exacerbate manager-shareholder agency conflicts and facilitate managerial extraction of private benefits. >more