1
Faculty of Economics and Business
MSc Finance: Quantitative Finance
Master thesis: 15 EC
The Impact of M&A on Stock Returns of Bidding Firms: A Case of
Asian Emerging Markets
Name: Wenbo Zhang
Student Number: 11787929
Email: wenbozhang@student.uva.nl
Supervisor: Dr. V.N. (Vladimir) Vladimirov
2 Statement of Originality
This document is written by Student, Wenbo Zhang, who declares to take full responsibility for the contents of this document.
I declare that the text and the work presented in this document are original and that no sources other than those mentioned in the text and its references have been used in creating it.
The Faculty of Economics and Business is responsible solely for the supervision of completion of the work, not for the contents.
3 Acknowledge
To start with, I would like to sincerely appreciate my supervisor Dr. V.N. (Vladimir) Vladimirov, the Associate Professor in Finance in University of Amsterdam, because Dr. Vladimir Vladimirov provided useful suggestions and clear direction for me in the process of this research.
Furthermore, I would like to genuinely acknowledge my parents, because they provided great confidence and courage for the research in the process of this research.
Last but not least, I would like to express great gratitude to one of my best friends, because he helped me to solve a number of problems in the process of this research.
4 Abstract
This study mainly investigates the impact of M&A deals on short-run performance of bidding firms in Asian emerging markets during the period 1998 to 2017. Moreover, the factors affecting stock returns of bidding firms are explored as well, including industry related M&A, listing status of targets, cross border versus domestic M&A, and payment method of M&A. Using a sample of 1803 M&A deals in Asian emerging markets, this study finds that stock market of bidding firms positively reacts to the announcement of M&A deals and information leakage also occurs associated with the announcement of M&A deals. It proves that the announcements of M&A transactions are good news to Asian emerging markets. Moreover, this study finds performance of bidding firms affect by factor of industry-related M&A, listing status of targets and payment method of M&A. To be more exact, in Asian emerging markets, bidders who acquire industry-related targets perform better than bidders who acquire unindustry-related targets. Bidders who acquire privately owned targets perform better than bidders who acquire publicly owned targets. But bidders who adopt cash to finance M&A transactions perform worse than bidders who use stocks to finance M&A transactions, which is significantly contrast to the empirical research from developed markets.
Keywords: Merger and Acquisition (M&A); Asian emerging market; Information leakage; Industry-related; Listing status of targets; Cross border versus domestic; Payment method
5 Contents
1. Introduction ... 6
2. Literature Review... 8
2.1 Motives for M&A ... 8
2.2 Previous Researches on Returns of Bidding Firms... 9
2.3 Factors That Affect the Returns of Bidding Firms ... 11
3. Hypotheses & Methodology ... 20
3.1 Empirical Hypotheses ... 20
3.2 Event Study Methodology ... 21
3.3 Cross-sectional Regression Analysis ... 23
4. Data and Descriptive Statistics ... 26
4.1 Sample Selection Criteria ... 26
4.2 Summary Statistics... 27
4.3 Empirical Analysis and Interpretation ... 30
5. Robustness Check ... 37
6. Conclusion ... 43
References ... 46
6 1. Introduction
Merger and Acquisitions (M&A) deal is the transaction in which a company acquires the power to control another firm or a combination of firms (Martin and Shalev, 2016). In theory, M&A deals are the net value of increasing activities, which can create remarkable value by combined companies (Gupta and Gerchak, 2002). Therefore, at a basic level M&A activities are used as corporate strategies by firms throughout the world to achieve their goals (Gaughan, 2005). Successful M&A deals can facilitate firms to develop rapidly due to the reallocation of resources, whilst misguided M&A deals would impede the growth potential of corporations because of a misallocation of resources (Chuang, 2016). Thus, M&A deals are vital events not only for corporations but for the economy. The number of M&A deals has increased remarkably since the early 1990s. The worldwide value creation of M&A in 1998 was 50% higher than that in 1997, and more than twice than in 1996 (Gupta and Gerchak, 2002). Given that the number of M&A deals has significantly increased in the recent years, researchers have conducted extensive empirical studies to explore the impact of M&A deals on the performance of firms. These empirical studies mainly concentrate on the impact of M&A deals in North America and European to a lesser extent. A wide range of theories and hypotheses have been proposed to explain and predict the impact of M&A deals. These theories and hypotheses include various issues related to M&A activities, for instance, the motives, attitudes, methods and consequences of M&A deals, short term and long term performance of M&A deals.
Empirical researches focus on the effect of M&A deals in emerging markets is sparse, although during the past decade the share of M&A deals in the global emerging markets increased from 5% to around 25% (Grigorieva and Petrunina, 2015). The lack of study on M&A deals in emerging markets may due to the fact that emerging markets do not have comprehensive databases on M&A deals. Moreover, the number of M&A deals occur in emerging markets is relatively small compare with the volume of M&A in developed countries (Ma, Pagan and Chu, 2009). Nevertheless, the rapid growth of M&A deals in emerging markets over the past decades has gradually appealed the attention of both investors and researchers. Most governments in emerging markets encourage M&A transactions of firms to reduce cost and improve competitiveness.
The features of emerging markets are different from that of developed markets. To start with, the developed countries have the sound legal system to protect shareholders’ interest, while the
7 emerging markets have poor legal system, which is poorly enforced as well (Porta et al., 1999). Moreover, the differences in culture and governance environment between developed markets and emerging markets, which result in the differences in firms’ structure (Kwok and Tadesse, 2006). The specific characteristic of emerging markets, may results in different performance of M&A deals. Therefore, it is reasonable for us to study whether the theories and hypotheses proposed based on developed countries are country-specific. They might not be valid in explaining the M&A deals in emerging markets (Ma, Pagan and Chu, 2009).
This paper mainly investigates the impacts of M&A deals on stock returns of bidding firms in Asian emerging markets, including China, India, Indonesia, South Korea, Malaysia, Pakistan, Philippines, Thailand and Taiwan (MSCI, 2018). This paper contributes to the existing literature regarding the M&A transactions in emerging markets. Moreover, this paper offers cross country analysis to examine whether the impact of M&A deals on bidding firms in Asian emerging markets we get would be different from the impact of M&A transactions on bidding firms in developed markets, from which we can prove whether the theories based on developed countries are applicable to emerging markets. In addition, this paper also explores how the factors, such as related and unrelated M&A, cross border or domestic of M&A, listing status of targets and payment method of M&A affect the stock returns of bidding firms in Asian emerging markets. Based on the research objective, the related literature review that provides a strong background for the hypotheses, will be introduced in the following section. Subsequently, hypotheses and methodology will be introduced, proposing empirical hypotheses and explaining how the hypotheses tests are conducted. To follow, sample selection and the test results will be represented and interpreted. Lastly, this research will give a conclusion and several recommendations for future research.
8 2. Literature Review
2.1 Motives for M&A
M&A transactions are motivated by three major motives, the Synergy Motive, Agency Motive and Hubris Hypothesis respectively. The three major M&A motives are described in this section, which provides a complete and in-depth understand about why more and more companies are willing to do the M&A transactions. Furthermore, this part also exacerbates the implications of these three motives to the relationship between the gains of targets and bidders and the correlation between target gains and total gains.
2.1.1 Synergy Motive
The synergy motive raises a presumption that managers of the target and bidder are aimed at maximizing the interest of shareholders, and they will take actively part in the M&A transactions, especially when these M&A transactions are able to generate tremendous benefits for both sets of shareholders. Therefore, the measured gains to shareholders of both targets and bidders are assumed to be positive. Under this assumption, the profit of targets increases with the total gain if the target firms have bargaining power, which mainly due to stiff competition among potential bidders or the targets can resist the bidders. Therefore, a safe and clear conclusion can be drawn that if the M&A transactions happen due to the synergy motive, it means that returns of targets and bidders, and the total gain of combined firms are positive and positively related to each other (Berkovitch and Narayanan, 1993).
2.1.2 Agency Motive
It has been pointed out that a number of M&A transactions are majorly motivated by the interest of managers of bidding firms. There are several reasons to account for this interest divergence between managers and shareholders of bidding firms, including the acquiring assets that improve the dependence of firm to acquirer management (Shleifer and Vishny, 1989), employ of free cash flow to enhance the firm’s size (Jensen, 1986), and diversification of the personal portfolio of management (Amihud and Lev, 1981). M&A transactions motivated by agency motive would lead to value extracts from shareholders of bidding firms because of the managers of bidding firms, by which means that managers of bidders receive certain gain rather than the shareholder under this situation. For instance, the specialist managers acquire firms on the basis of their own related
9 business, which causes the successful of M&A transactions depend more on their specific skill. The negative result of agency motive is that the managers of bidders can take full advantage of this dependency to increase the transaction expenditure or compete with rivals who are better than itself in running the business operations (Berkovitch and Narayanan, 1993). Such management inevitably results in the increase of agency cost, which decreases the total gains of the combined firms. Therefore, the more sever the agency problem is, the higher profit the target firms will acquire and the lower gain bidders will acquire (Bliss and Rosen, 2001).
2.1.3 Hubris Hypothesis
The hubris hypothesis holds the opinion that acquisitions are stimulated by the mistake of managers. Furthermore, this hypothesis also holds the standpoint that there are no synergy gains. The hubris hypothesis assumes that the bidder management is equivalently probable to overestimate as underestimate the synergy, which means that takeover projects will happen only if the bidding firm overestimates. Under the hubris-motived M&A transactions, bidder managers overconfident about their capabilities to evaluate the assets of targets, resulting in overpayment for the acquisitions (Roll, 1986). Target firms gain premium from bidders, thus, the returns of bidders and targets are negatively related. Logically, the synergy between the target firm and bidding firm should be zero, and the payment from the bidding firm to the target stands for a transfer. It should be noted that if the gain of targets is higher, the benefit of bidders will be lower, and the total gain between target firm and bidding firm is zero. Therefore, a safe and clear conclusion can be gotten that when the profits of bidders and targets are negatively related with each other, the gains of total and targets are irrelevant (Berkovitch and Narayanan, 1993).
2.2 Previous Researches on Returns of Bidding Firms
Extensive studies on developed countries indicate that the impact of M&A transactions on target firms is unanimous and consistent. Target firms can gain a significant and positive abnormal returns around the announcement (Ma, Pagan and Chu, 2009). However, studies still have yet to reach a consensus with regard to the value creation of M&A transactions on bidding firms. This part mainly emphasizes the inconclusive theoretical perspectives and empirical results of M&A on bidders that researchers hold.
10
2.2.1 Theoretical Researches on Returns of Bidding Firms
The impact of M&A deals on stock returns of bidding firms is a controversial issue. Researchers still have not reached a consensus on the impact upon stock returns of bidding firms although they choose the similar event and estimation windows to analyse the impact during the same period (Grigorieva and Petrunina, 2015). The inconclusive results of the effect of M&A on stock returns of bidding firms may be due to numerous variations in returns. Fuller, Netter and Stegemoller (2002) claim the variation to be partially because the stock returns of bidders provide the public with more information about the how the business of bidders is reassessed by the market than it does about the value creation of the takeover. Therefore, stock returns of bidders cannot be fully attributed to the expected value creation of takeover.
Moreover, it is even more difficult for the bidders themselves to estimate their own stock returns when M&As are announced. To start with, the relative size of targets may be smaller than that of bidders, thus, even perfect acquisition deals would have a litter effect on the stock returns of bidders. Secondly, stock returns of M&A deals merely reflect the unanticipated parts of acquisition deals. Since the bidders are engaging in the M&A deals, the stock returns only reflect the difference between the actual market returns to acquisitions and the anticipated returns of acquisitions (Fuller, Netter and Stegemoller, 2002). Thirdly, the process of M&A acquisitions would take a long time if the targets are reluctant to accept the acquisitions. Consequently, these uncertain factors make it difficult to estimate the return of bidders.
In addition, a wide range of factors, which affect the stock returns of bidders, have been explored. For instance, listing status of targets, related and unrelated acquisitions, payment method of acquisitions, domestic and cross-border acquisitions and the size of targets compared with the bidders (Asquith, Bruner and Mullins, 1982) have different impacts upon the stock returns of bidding firms as well.
2.2.2 Empirical Researches on Returns of Bidding Firms
A wide range of empirical researches have been conducted to investigate the stock returns of bidding firms. Bradley, Desai, and Kim (1988) found that the stock returns of bidders have declined over time. The significant abnormal returns of the bidder around the announcement was 4% in 1960s 1.3% in the 1970s and -3% in the 1980s respectively. Jarrell, Brickley and Netter
11 (1988) investigated 663 successful tender offers during the period 1962 to 1985, proving that despite the positive abnormal returns the targets and the bidders gain, but the stock returns of bidders are not significantly different from zero. The result is consistent with the research of Bradley, Desai and Kim (1988) with 236 successful tender offers from 1963 to 1984. Guest et al (2010) used event study to analyse a sample of 303 M&A deals in the UK, proving that over the month of M&A announcements the abnormal returns of the bidders are -1.72%, which is significant at 1% level. The research result of Guest et al is supported by the findings of Sharma and Ho (2002).
Nevertheless, Jarrell and Poulsen (1989) selected 450 tender offers during the period 1963 to 1986, indicating that bidding firms saw positive abnormal returns. Dodd and Ruback (1977) found that around the announcements of M&A both the target firms and bidding firms gain significant positive abnormal returns from the successful M&A transactions. In contrast, Asquith and Kim (1982) proved target firms gain abnormal returns whilst the bidding firms do not gain abnormal returns around the announcement of M&As. Shareholders of Chinese bidding firms experienced short-term positive returns around the announcement of M&A deals from 1998 to 2003, although the long-term post-acquisition performance is not statistically significant (Chi, Sun & Young, 2011). However, Kumar (2009) examined the post-acquisition performance of bidding firms in Indian from 1999 to 2002, indicating that M&A did not improve performance of bidders.
2.3 Factors That Affect the Returns of Bidding Firms
A wide range of factors, which affect the stock returns of bidders, have been explored. For instance, related and unrelated M&A, listing status of targets, payment method of M&A, domestic or cross-border M&A and the relative size of targets compared with the bidders (Asquith, Bruner and Mullins, 1982) have different impacts upon the stock returns of bidding firms as well. This part mainly introduces several of the factors which influence the stock returns of bidding firms. 2.3.1 Related and unrelated M&A deals
This section focuses on differentiating two different categories of M&A transactions that are related M&A and unrelated M&A respectively.
12 2.3.1.1 Related Acquisition
In the related M&A transactions, value creation can be resulted from three major sources, including the market power, economies of scale and economies of scope respectively.
2.3.1.1.1 Market Power
In the traditional framework of economies of industrial organization, the effects of market power operate when the market participators are capable of affecting the quantity and price of products in the trading market (Shepherd, 1970). On the contrary, the market power has a large possibility to result in the excess returns. It should be noted that in the related M&A transactions, the market power of one firm can be enhanced by the horizontal M&A deals that the bidding firms and target firms are running or operating in the same product market (Capron, 1999). Besides, the market power of one firm can be increased by product or market extension acquisitions where the effective size of one firm is improved in comparison to its rivals (Singh and Montgomery, 1987).
2.3.1.1.2 Economies of Scale
The economies of scale are able to cause the average cost of producing something to decrease when its output volume increases, and it can be divided into the internal economies of scale and external economies of scale respectively (Economist, 2018). The economies of scale normally happen when efficiencies are caused by the expanded production of the specific product, which means that a set of resources are efficiently and fully used in the resource framework. To be more exact, regarding large firms, they can save lots of money and resource by producing goods in high volume, which is not available for small firms. The economies of scale usually occur in a specific number of functional areas, including the selling and distribution department, research and development department, and manufacturing industry respectively. It should be noted that these traditional areas are used for ascertaining the related acquisitions (Weinhold, 1979). It cannot be neglected that economies of scale also arise in the general areas, such as the department of administration and financial management (Singh and Montgomery, 1987).
2.3.1.1.3 Economies of Scope
The first cousins to economies of scale are economies of scope that make it possible to cheaply produce a series of products together in comparison to separately produce each one of them. The
13 forms of economies arise from the interrelationships somewhere else in the business process, including utilising the outputs of one business as the inputs of another business and cross-selling one product alongside another product. Furthermore, this categories of economies also arise from the businesses sharing centralised functions, incorporating the marketing and finance (Economist, 2018). The economies of scope happen when a given set of resources are applied into the joint production of two products at least. It should be noted that when capacity utilization is improved by the enhanced production of a single product, the resource indivisibility generates the scale economies. When capacity utilization is improved by the production of two products at least, the indivisible shared resource utilization generates the scope economies (Singh and Montgomery, 1987).
Therefore, based on the complete and in-depth analyses above, a clear conclusion can be drawn that in the related M&A transactions, a number of mechanisms are available for the combination of two firms to be potentially more valuable compared with the sum of their pre-acquisition values.
2.3.1.2 Unrelated Acquisition
In the related M&A deals, the technological or product market correlations between bidders and targets are not clear in terms of the definition. If rationality is assumed on the part of bidding firms, the managers of bidding firms are expected to pay a premium to the target firms that will be less than or equal to the expected gains of bidding firm from the M&A transactions. If other conditions still remain unchanged, the available gains in the unrelated M&A deals will be lower than those in the related M&A deals. Although the specialized resources in the related M&A deals have possibility to improve efficiencies in markets activities, or enhance market power, the efficiencies and market power gains in the unrelated M&A deals have more general variety. The gains from the unrelated M&A deals have possibility to arise from the improved efficiencies of administration, decreased cost of financing, or superior human capital, but not from the specific to products or businesses. In the unrelated M&A transactions, the rise in the market power has possibility to result from the rise in the absolute breadth and size of the firm, which means that the unrelated M&A deals have possibility to improve the opportunities for reciprocal purchase and predatory pricing, and decrease the intra-industry competition by the presence of some large firms facing one another in a number of markets (Caves, 1981).
14 Therefore, based on the complete and in-depth analyses above, a safe and clear conclusion can be drawn that the value creation in the unrelated M&A deals are predicted to be positive. It should be noted that the gains from the unrelated M&A can be acquired in the related M&A. On the contrary, the specific gains in the related M&A are not predicted to be present in the unrelated M&A. Thus, the gains in the related M&A deals should be greater than the gains in the unrelated M&A deals.
2.3.2 Listing Status of Targets
Listing status of targets, private targets and public targets, is a key factor affecting the stock return of bidding firms. To be more exact, bidding firms will have different stock returns when they bid for public or private targets. Due to a wide variety of characteristics between public and private targets, such as market liquidity, information availability, bargaining power and ownership structure, the listing status of targets differently affect the stock reaction of bidders (Latorre, Herrero and Farinos, 2014).
2.3.2.1 Theoretical Researches on Listing Status of Targets
The different stock returns of the bidder may be due to the fact that bidders can get a substantial discount price if they buy private targets (Fuller, Netter and Stegemoller, 2002). Specifically, private firms suffer from a lacking of liquidity, making them not easily bought as the public targets. The investment of private targets becomes less attractive; the targets lose bargaining power to negotiate with the bidders (Capron and Shen, 2007). Consequently, bidding firms gain the discount in buying the private targets. For instance, private targets are acquired at an average discount of 20% to 30% in comparison with the equivalent public firms (Koeplin, Sarin and Shapiro, 2000). Whilst the median for private target discounts is 34% (Kooli, Kortas, and L’Her, 2003).
Information availability is another factor. According to Capron and Shen (2007), public firms are transparent and overt; they offer plenty of information to the bidders. The bidders can greatly benefit from the available information, evaluating the asset of public targets. However, private firms are less transparent, lacking in the availability of information (Capron and Shen, 2007). Private firms have difficulties to provide observable prices to potential investors (Becchetti and Trovato, 2002). Investors will increase their search costs to evaluate the market value of private firms. Private firms face poor competition and the bidding firms gain strong bargaining power. Therefore, bidders purchasing private targets can gain positive returns due to the low payment.
15 2.3.2.2 Empirical Researches on Listing Status of Targets
Regarding the stock returns of bidders purchasing different listing status of targets, Hansen and Lott (1996) selected bidders acquiring 252 public and private firms from 1985 to 1991. They proved that bidders buying private targets gain 2% higher abnormal returns around the announcement. Moreover, the returns of 65% of the bidder who acquire public targets are negative, while the merely 43% of the bidder buying private targets gain negative returns. Additionally, Moeller et al (2004), Petmezas (2009) and Martynova and Renneboog (2011) investigated the stock markets of the US, UK and several European countries respectively, they find that bidders who bid on private firms gained significant positive abnormal returns when acquisitions were announced, while the returns of the bidder who bought public companies are mixed, either non-existent or significant negative abnormal returns. Latorre, Herrero and Farinos (2014) claimed that the positive returns of the bidder who acquire private firms are independent of payment method and the relative size of targets to bidders, which is contract to the returns of acquiring of public firms. It is consistent with the finding of Fuller, Netter and Stegemoller (2002), the bidder who bid for public targets gained no significant returns when cash is paid, but did gain significant negative returns when stock is provided based on the investigation of 3,135 acquisitions.
2.3.3 Cross-border versus Domestic M&A Deals
Some reasonable consensus has been reached in previous research that the shareholders of the target firm has large possibility to gain the benefits from the domestic M&A deals, where the target firm and bidder firm are domiciled in the same country (Bradley, Desai and Kim, 1988). The research conclusions are slightly different with respect to gains to the shareholders of the bidding firm and the net benefit to the combined firm (Andrade, Mitchell and Stafford, 2011). In comparison to domestic M&A deals, value creation in cross border M&A deals is more complicated because the target firms and bidding firms are domiciled in the countries where the underlying macroeconomic factors have large differences (Narayan and Thenmozhi, 2014).
2.3.3.1 Theoretical Researches on Cross-border versus Domestic M&A Deals
With constantly increased globalisation and reduced industry regulation, cross-border M&A deals have been significant globally improved (Danbolt and Maciver, 2012). A large number of researches hold the viewpoint that the cross-border M&A deals are able to provide substantial
16 value creation for bidders, excluding the general benefits acquired from M&A transactions, since bidders are allowed to make use of some market imperfections (Kohli and Mann, 2012). Bidders are motived by different motives to acquire firms cross border, including enter into new market to gain new growth opportunity overcoming the restrictions of domestic market (Danbolt and Maciver, 2012), expand the scale of business, acquire resources which are not available in domestic market, imperfect capital markets (Wiegerinck and Von Eije, 2007) and tax systems. Specifically, the bidding companies easily take full advantage of the natural resources from the target firms’ country, incorporating coal and crude oil, which means that the bidding companies can guarantee stable supply of raw materials (Jongwanich, Brooks and Kohpaiboon, 2013). Some studies also draw the conclusion that the acquirer firms usually pay a higher price due to the following factors, including cash slack (Jensen, 1986) and hubris (Roll, 1986), which can have a negative influence on the financial outcome of acquisitions (Narayan and Thenmozhi, 2014). Thus, cross-border M&A deals would enhance the efficiency of business across the borders (Shimizu et al, 2004).
However, some studies hold the opinion that the cross-border M&A deals cause worse performance in comparison to the domestic M&A deals (Kohli and Mann, 2012). Specifically, cross border M&A deals bring returns to targets, but not to the bidder (Danbolt and Maciver, 2012). Firms engage in the cross-border M&A deals also face challenges, including differences in cultural structures, business practices and institutional regulation, would prevent firms from completely achieving their strategic targets (House et al, 2002). In foreign markets, there are risks of uncertainty and information asymmetry, which is difficult for bidding firms to adjust and balance domestic markets and the target markets (Kougut and Singh, 1988). In addition, the cross border M&A deals can have less advantages in comparison to the domestic M&As because of the asymmetric information and agency problems (Wiegerinck and Von Eije, 2007), and increasingly fierce competition (Moeller and Schlingemann, 2005). Specifically, if the bidding companies are not sufficiently informed, they will have large possibility to overestimate synergies and overpay for foreign target firms (Bertrand & Betschinger, 2012). These unique risk hinder the bidding firms learn new knowledge and capabilities through the cross-border M&A transactions.
17 2.3.3.2 Empirical Researches on Cross-border versus Domestic M&A Deals
Based on a study of 4000 cross-border M&A deals in UK, it finds that cross-border M&A deals generate lower abnormal returns for the shareholders of the bidding firms in comparison to the performance of domestic M&A deals around the announcement day (Conn et al, 2005). Moeller and Schlingemann (2005) have presented lower returns to the bidding firms in the cross-border M&A deals compared with the domestic M&A deals. Goergen and Renneboog (2004) got the consistent finding that the domestic M&A deals give rise to higher value creation for the bidding firms compared with the cross-border M&A deals. However, Danbolt (2004) have demonstrated that the target firms are able to gain more wealth in the cross-border acquisitions than compared with the domestic acquisitions, which is called as the cross-border effect. Danbolt and Maciver (2012) find that cross border M&A deals generate returns for shareholders of both the bidders and targets in comparison to the domestic M&A deals. Kohli and Mann (2011) support this viewpoint based on the study in India, they find that the shareholders of the bidding firms earn more from the cross-border M&As than that of from domestic M&A deals.
Therefore, based on the complete and in-depth analyses above, the previous literature reviews provide inconsistent opinions in regard to the wealth gains between the cross-border and domestic M&A deals for the shareholders of bidding firms. Furthermore, except the general benefits of M&A deals, the bidding firms in the cross border M&A deals are able to benefit from the differences in taxation laws, market and product imperfections, and international diversification, while the cross border M&A deals can result in increasingly fierce competition, increased organizational complexity and agency problems and asymmetric information.
2.3.4 Payment Method
2.3.4.1 Motives for Different Payment
There is a great amount of analysis from existing theoretical literature regarding the finance of M&A transactions to account for why the different payments methods that are applied into M&A transactions might have different impacts on the stock returns of the bidding firms.
Firstly, due to asymmetric information, the payments methods might bring important information to the market. If the managers of the bidding firms control the information regarding the intrinsic
18 value of the firm, which is not completely reflected in stock price before M&A transactions, there is no doubt that these managers will provide acquisition fund for the existing stockholders by using the most profitable method (Travlos, 1987). Based on the model of Myers and Majluf (1984), the managers are willing to choose the cash offer when they assert the value of the firm is underestimated. On the contrary, when they firmly believe that the firm is overvalued, they prefer the common stock exchange offer (DeAngelo, DeAngelo and Rice, 1984). It should be noted that the market participants tend to regard the cash offer as a good news regarding the true value of the bidding firms, while they tend to regard the common stock exchange offer as bad news about the true value of the bidding firm. If these information effects are crucial, the change of stock price of the bidding firms around the announcement will reflect not only the value creation from the M&A transactions but also the effects of information. Therefore, if other things remain unchanged, the bidding firms would gain higher returns by cash offers M&A transactions in comparison to the bidding firms adopt common stock exchange offers.
Secondly, the cash financed M&A deals and stock financed M&A deals have diverse tax implications. Specifically, under the M&A transactions financed by cash offers, the shareholders of target firms have the obligation to pay tax, while the shareholders of bidding firms could enhance the depreciation of acquired assets. However, stock financed M&A transactions, which are tax-free. It means that profit earned by the stockholders of target firms are postponed until the stock is sold, while the depreciation of acquired assets bidding firms acquire still remains unchanged (Travlos, 1987). Owing to the different tax rules, the bidders have to pay higher price under the cash financed M&A deals for the purpose of offsetting the tax burden upon the stockholder of target firms (Wansley, Lane and Yang, 1983). The higher acquisition price in a cash transaction compared with an exchange offer partly mirrors the additional tax credits that are captured by the acquiring firm in a taxable acquisition. Therefore, it is not apparent whether the bidding firms are able to obtain net benefit from the M&A transactions of additional tax credits that are related to a cash offer once the higher price of M&A deals is taken into consideration (Travlos, 1987).
Thirdly, if the two combined firms lack of positive relationship of cash flow, the combined firms’ default risk would decline, which could enhance their debt capacity owing to the co-insurance
19 effect (Lewellen, 1971). Furthermore, the debt capacity of the new firm will improve when any potential debt capacity is possessed in the acquired firm. It should be noted that part of the benefits from higher debt capacity are attributed to the bondholders of merging firms at the expense of stockholders unless the capital restructuring happens (Higgins and Schall, 1975). Therefore, M&A transaction financed by the common stock exchange offer results in the transformation of wealth from stockholders to bondholders, which means a decrease in the stock prices. However, according to Eger (1983), M&A financed by cash might counteract the negative changes in stock prices of the bidding firms, which remains the stock prices of the bidders unchanged.
Based on the complete and in-depth analyse above, a safe and clear conclusion can be gotten that the payment method that is used to finance M&A transaction has an important impact on stock returns of bidding firms around the M&A announcements. It should be noted that M&A transactions financed by cash is expected to have positive returns, while negative returns are predicted from M&A transactions financed by common stock.
20 3. Hypotheses & Methodology
This part mainly introduces the empirical hypotheses and methodology in this study. Based on the literature review, this study proposes six hypotheses. Regarding methodology, event study and a cross-sectional regression analysis will be adopted. Event study is applied to get the short-run abnormal return and cumulative abnormal return around the announcement of M&A transactions. The cross-sectional regression is used to determine which factors influence the performance of bidding firms in Asian emerging market.
3.1 Empirical Hypotheses
Stock price can be regarded as the present value of future cash flow. Given the rapid growth of Asian emerging markets with higher future cash flow, we assert that M&A transactions would bring positive abnormal returns to Asian emerging markets. Besides, unlike firms in developed market, firms in emerging markets do not have access to numerous resource of capital that they make decisions of M&A more carefully than firms in developed markets (Yuce, 2016). Therefore, we assert bidding firms in emerging markets can gain positive returns. The following hypotheses are proposed:
𝐻𝐻1: There is a positive impact on stock returns of bidding firms around the announcement of M&A transactions in Asian emerging markets.
The interests of shareholders in developed markets can be protected via well-developed legal system, while the emerging markets suffer from weak legal system and poor enforcement of laws. Thus, information leakage would occur in emerging markets, which reflects in stock reactions before the announcement of M&A transactions. This paper proposes the following hypotheses: 𝐻𝐻2: Information leakage will occur associated with the announcement of M&A transactions in Asian emerging markets.
Based on literature review regarding the factors affect the stock returns of bidding firms, this paper proposes the following four hypotheses:
𝐻𝐻3: In Asian emerging markets, bidders who acquire industry-related targets perform better than bidders who acquire unrelated targets.
21 𝐻𝐻4: In Asian emerging markets, bidders who acquire privately owned targets perform better than bidders who acquire publicly owned targets.
𝐻𝐻5: In Asian emerging markets, bidders who acquire cross-border targets perform better than bidders who acquire domestic targets.
𝐻𝐻6: In Asian emerging markets, bidders who adopt cash to finance M&A transactions perform better than bidders who use stocks to finance M&A transactions
3.2 Event Study Methodology
Based on the assumption of market efficiency, this paper uses event study to analyze the market reaction of bidding firms to M&A transactions. Event study and accounting study are two commonly used methods to explore the impact of M&A deals on firm performance (Akben-Selcuk and Altiok-Yilmaz, 2011). Event study focus on examining stock reaction to the announcements of M&A deals, while accounting study is based on the change of financial results of firms before and after M&A deals to measure how the transactions change operating performance. Previous researches show that accounting study may distort the measurement of firm performance, leading to negative assessment of M&A deals. For instance, performance measures using cash flow prove an increase in firm performance due to M&A deals, while performance measures based on profitability show that firm performance declines after M&A deals. Moreover, accounting study is easy to be manipulate (Yook, 2004). However, due to market efficiency, the stock reacts immediately to a specific economic event, therefore, event study can be used to measure short term stock reaction to economic events (MacKinlay, 1997). The consequence of short-term can also be regard as a predictor of the long-term impact of M&A deals on the value creation of firms. Consequently, this research mainly adopts event study to investigate stock reaction of bidding firms to M&A transactions.
To start with, appropriate length of event window should be used to correctly measure stock reaction to M&A deals. Hillmer and Yu (1979) assert that event window should end within a few hours after the announcement of M&A deals. Chang and Chen (1989) believe that event window should include several days after M&A announcements as the market keeps reacting to the
22 announcements. Krivin et al (2003) find that the length of event window should be based on the period of observation. In practice, the length of event window should be the event day plus and minus the same number of days to observe the stock reaction. One day after the event day should be included into the event window if the M&A deals are announced after trading hours. Besides, one day before the event day need be added to the event window as well to assess whether information leakage occurs before the announcement of M&A transactions. However, if the length of event window is too long, the accuracy of stock reaction to M&A deals will be lower due to confounding effect (MacKinlay, 1997). To explore the accuracy of market reaction, this paper defines the announcement date as day 0 and select 5 days prior to and after the event day, (-5, 5), as the event window. Regarding the estimation window, 60 days (-65, -6) before the event is defined to ensure the normal returns are not affected by the event.
Furthermore, market model, the most widely used mode, will be used to acquire the expected return. The expected return is defined as the stock return we expect without the existence of the M&A announcements. The market model asserts that there is a linear relationship between market return and a specific security return. MSCI emerging markets Asia index would be used as benchmark rate of Asian emerging markets, acquiring the expected returns of securities. The market model assumes the following linear relationship exists between market return and security return:
𝑅𝑅𝑖𝑖,𝑡𝑡 = 𝛼𝛼𝑖𝑖 + 𝛽𝛽𝑖𝑖𝑅𝑅𝑚𝑚,𝑡𝑡 + 𝜀𝜀𝑖𝑖,𝑡𝑡 (1) E(𝜀𝜀𝑖𝑖,𝑡𝑡) = 0 var(𝜀𝜀𝑖𝑖,𝑡𝑡) = 𝜎𝜎𝜀𝜀2𝑖𝑖
𝑅𝑅𝑖𝑖,𝑡𝑡 is the daily return rate on security 𝑖𝑖 on day t, 𝑅𝑅𝑚𝑚,𝑡𝑡 represents the daily return rate on market index on day t, 𝛼𝛼𝑖𝑖 and 𝛽𝛽𝑖𝑖 are the parameters of the market model and 𝜀𝜀𝑖𝑖,𝑡𝑡 represents the residual error term on security 𝑖𝑖 on day t.
Then we can get the abnormal returns, which is the difference between actual returns and the expected returns:
𝐴𝐴𝑅𝑅𝑖𝑖,𝑡𝑡 = 𝑅𝑅𝑖𝑖,𝑡𝑡− ( 𝛼𝛼𝚤𝚤� + 𝛽𝛽𝚤𝚤� 𝑅𝑅𝑚𝑚,𝑡𝑡) (2)
where 𝛼𝛼𝚤𝚤� and 𝛽𝛽𝚤𝚤� are estimated parameters of 𝛼𝛼𝑖𝑖 and 𝛽𝛽𝑖𝑖 over the estimated window. 𝐴𝐴𝑅𝑅𝑖𝑖,𝑡𝑡 is the estimated abnormal return of security 𝑖𝑖 over day t.
23 From equation (2), we can get AR (abnormal return) of individual security. Given N events, 𝐴𝐴𝑅𝑅
����(average abnormal return) across all the stocks on specific day t is
𝐴𝐴𝑅𝑅����𝑡𝑡= 1
𝑁𝑁∑𝑁𝑁𝑖𝑖=1 𝐴𝐴𝑅𝑅𝑖𝑖,𝑡𝑡 (3)
var(𝐴𝐴𝑅𝑅������)= 𝑡𝑡 1
𝑁𝑁2∑𝑁𝑁𝑖𝑖=1 𝜎𝜎𝜀𝜀2𝑖𝑖 (4) Therefore, the null hypothesis of average abnormal returns can be analysed using
θ = AR����t
var(AR����)1 2� ~N(0, 1) (5)
In order to the cumulative impacts of economic events, we can gain 𝐶𝐶𝐴𝐴𝑅𝑅������ (average cumulative abnormal returns) from
𝐶𝐶𝐴𝐴𝑅𝑅������(𝜏𝜏1,𝜏𝜏2) = ∑𝜏𝜏2𝜏𝜏= 𝜏𝜏1 𝐴𝐴𝑅𝑅����τ (6)
where 𝜏𝜏1 and 𝜏𝜏2 are the first and last day of the event window in which AR����τ are aggregated on corresponding days.
var(CAR������(𝜏𝜏1 ,𝜏𝜏2 )) = ∑𝜏𝜏𝜏𝜏= 𝜏𝜏2 1 var(𝐴𝐴𝑅𝑅����τ) (7)
Hence, the null hypothesis of 𝐶𝐶𝐴𝐴𝑅𝑅������ can be test by the following formulate:
θ = CAR������(𝜏𝜏1 ,𝜏𝜏2 )
var(CAR������(𝜏𝜏1 ,𝜏𝜏2 ))1 2� ~N(0, 1) (8)
When we adopt the above formulates to test AR���� or CAR������, we assume the data is normally distribute. 3.3 Cross-sectional Regression Analysis
Based on the discussion above, value creation in M&A transactions in Asian emerging markets depend on a wide range of factors, including related and unrelated M&A, cross border versus domestic M&A, listing status of targets and payment method M&A. To clearly explain the cross-sectional variations in the cumulative abnormal returns, this paper adopts the following
24 multivariate model:
CAR(𝜏𝜏1 , 𝜏𝜏2) = 𝛽𝛽0 + 𝛽𝛽1 (industry-related) + 𝛽𝛽2 (cross-border) + 𝛽𝛽3 (target-status) + 𝛽𝛽4 (payment-method)
This paper uses the cumulative abnormal returns (CAR) acquired by bidders over (𝜏𝜏1 , 𝜏𝜏2) around the announcement of M&A deals as the dependent variable in the regression analysis. The independent variable are the factors which determine the stock returns of bidding firms in Asian emerging markets. These factors are dummy variables in the regression analysis. Table 1 gives a clear description of the dependent variable and independent variables used in the regression analysis. The characteristic of these variables are proved in Table 2.
Table 1: Description of the Variables used in the Cross-sectional Regression Analysis
This table describes the dependent variable and independent variables adopts in the cross-sectional regression analysis. The regression model is as follows:
CAR(τ1 , τ2) = β0 + β1 (industry-related) + β2 (cross-border) + β3 (target-status) + β4 (payment-method)
Dependent variable
CAR(𝜏𝜏1 , 𝜏𝜏2) Cumulative abnormal returns around the announcement of M&A from day 𝜏𝜏1 to day 𝜏𝜏2
Independent variables
Industry-related Industry-related M&A deals, which is dummy variable.
The target firms and the bidding firms are in the related industry if the dummy variable equals 1, otherwise the target firms and the bidding firm are not in the related industry if the dummy variable equals 0. The dummy variable is assigned via comparing the first two digits of the bidder primary SIC code with the first two digits of the target primary SIC code. The
25 dummy variable takes 1 for the matching SIC codes, while dummy variable equals 0 for the un-matching SIC codes. cross-border Cross border M&A deals, which is dummy variable.
If the M&A transactions occur cross border, the dummy variable takes1. If the M&A transactions occur in domestic , the dummy variable equals 0.
target-status The listing status of targets, which is a dummy variable. The target firm is privately owned if the dummy variable equals 1, otherwise the target firms is publicly owned if the dummy variable equals 0.
payment-method The payment method of M&A transactions, which is dummy variable.
If the payment is by cash, the dummy variable equals 1. The dummy variable takes 0 when the payment is via stock.
26 4. Data and Descriptive Statistics
4.1 Sample Selection Criteria
The main sources to select the sample of bidding firms are Thomson ONE and Datastream. This study selects the events of M&A transactions of bidding firms in Asian emerging markets during the period 1998 to 2017 from Thomson ONE. The time period begins in 1998 because there was few M&A deals prior to 1998 in Asian emerging market. Besides, 1998 was in the late of fifth wave of M&A, during that period emerging market actively participate the M&A global market. After collecting the events, the corresponding data of these events are acquired from Datastream. Moreover, the following criteria are used to select the sample:
1. The bidding firms must be listed firms of the nine Asian emerging countries, China, India, Indonesia, South Korea, Malaysia, Pakistan, Philippines, Thailand and Taiwan from 1998 to 2017.
2. The bidding firms should have available data on Datastream. 3. The targets can be public or private firms.
4. The minimum value of M&A transactions is $10 million. 5. The M&A transactions should be completed.
6. The acquisition type should be merge or acquisition.
7. The payment method of M&A deal should be only cash or only stock.
8. There is no other announcement of M&A transactions over the estimation and event windows of the selected bidding firms.
9. If on the same day, the bidding firms announce more than one M&A deals, this study chooses the one with higher value of transaction.
10. The bidding firms should initially hold less than 50% shares of the potential targets’ stock then acquire 50% or more than 50%, but less than 100% of the targets’ shares.
Apart from these criteria, we need attach attention to the announcement day on weekends. Due to no stock price on weekends, we will regard the first trading day as the announcement day if the acquisitions are announced on weekends. Based on these selection criteria, this paper gets1803 M&A deals in Asian emerging markets from 1998 to 2017.
27 4.2 Summary Statistics
Figure 1: Distribution of M&A Transactions of Bidding Firms in Asian Emerging Market by Years
This figure depicts the number of M&A deals occurs in each year in Asian emerging markets, including China, India, Indonesia, South Korea, Malaysia, Pakistan, Philippines, Thailand and Taiwan over the period 1998 to 2017.
Figure 2: Distribution of M&A Transactions of Bidding Firms in Asian Emerging Markets by Markets
This figure describes the number of M&A deals occurs in each of the nine countries in Asian emerging markets, including China, India, Indonesia, South Korea, Malaysia, Pakistan, Philippines, Thailand and Taiwan over the period 1998 to 2017.
0 50 100 150 200 250 300 350 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
28 From Figure 1 and Appendix 1, we can see that during the period 1998 to 2017, 1803 M&A transactions occur in Asian emerging markets. There are extreme smaller number of M&A deals in 1998 and 1999, which is only 26 deals in the two years. After 2000, the number of M&A transactions in Asian emerging markets gradually increases. Moreover, during the financial crisis, 2007 to 2008, there are more M&A transactions in Asian emerging markets than that of before the financial crisis, which are 112 deals and 126 deals respectively. In addition, in recent years, the number of M&A deals substantially increases. After 2008, the number of M&A deals unstably increases, reaching the highest number in 2015 with 315 deals. Then the number of M&A transactions gradually declines, but still with relative large number.
From Figure 2 and Appendix 1, we can find that China occupies the largest number of M&A transaction with 819 among the nine countries in Asian emerging markets. Then followed by South Korea with the number of 462 M&A transactions. India and Malaysia ranked the third and fourth, the number of M&A transactions were quite small with 185 and 118 M&A deals correspondingly. Pakistan plays a little role in M&A transactions in Asian emerging markets, with only 5 M&A deals over the past 20 years.
Table 2: Characteristics of Bidding Firms in Asian Emerging Markets
This table indicates the characteristics of factors influencing the stock returns of bidding firms in Asian emerging markets during the period 1998 to 2017, including related industry, listing status
0 100 200 300 400 500 600 700 800 900
29 of targets, cross border versus domestic M&A and payment method of M&A.
From this table, we can see that there are 1,046 unrelated M&A transactions, which occupies 58.01% of the total sample, while the related M&A transactions are 757 with 41.99%. Thus, unrelated M&A transactions accounts for larger proportion than related M&A transactions in Asian emerging markets. In terms of the factor of cross border versus domestic transaction, more M&A deals occur in domestic market, with the number of 1,536 deals occupying 85.19%. While cross-border M&A deals only 267 accounting for only 14.81%. Thus, in Asian emerging markets domestic M&A transactions plays dominant role. Regarding the factor of target status, the number of private target is 1,414 M&A transactions occupying 78.42%. While the purchase of public target is only 389 accounting for only 21.58&, which is quite small. For the factor of payment method,
Factors Type Number of cases Percentage(%)
industry-related Related Unrelated 757 1,046 41.99 58.01
cross-border Cross border
Domestic
267 1,536
14.81 85.19
target status Private
Public 1,414 389 78.42 21.58 payment-method Cash Stock 1,085 718 60.18 39.82
30 the number of cash payment transaction was 1,085 occupying more than half of the full sample with the proportion of 60.18%, while the stock payment of M&A transactions was 718 with only 39.82%.
4.3 Empirical Analysis and Interpretation
4.3.1 Estimation Results of Event Study
Figure 3: Average Abnormal Returns and Average Cumulative Abnormal Returns of Bidding Firms in Asian Emerging Markets in Event Window
This figure describes the average abnormal (AAR) and the average cumulative abnormal returns (CAAR) of the bidding firms in the event window (-5, 5). The announcement day, day 0, is the day when an M&A transaction is announced. The abnormal returns are calculated as the differences between the actual returns and expected returns from the market model.
Figure 3 shows the plots of average abnormal return (AAR) and average cumulative abnormal return (CAAR) of the bidding firms in Asian emerging markets in event window (-5, 5). Regarding the AAR, over the event window the AAR of bidders starts to gradually increases until day -3, then it declines until day -2. After that, the AAR significantly increases and reaching the highest point on day 0. Subsequently, the AAR dramatically declines. After day 3, the AAR slightly declines. In terms of the average cumulative abnormal return (CAAR), over the event window, it starts to slightly increase until day -3. Then CAAR noticeably rises, peaking the highest point on
0 1 2 3 4 5 -5 -4 -3 -2 -1 0 1 2 3 4 5 AAR(%) CAAR(%)
31 day 5. The most significant increase of AAR and CAAR around the announcement day, day 0, suggesting stock market of bidding firms significantly reacts to the announcement of M&A transactions.
Table 3: The Test Results of Average Abnormal Returns of Bidding Firms in Asian Emerging Markets on Specific Selected Day
This table describes the impact of M&A announcements upon short-run market performance of bidding firms in Asian emerging markets. The announcement day, day 0, is the day when an M&A transaction is announced. The abnormal returns are calculated as the differences between the actual returns and expected returns from the market model. The symbols *, **, and *** indicate statistical significant at level of 10%, 5% and 1% respectively.
Event Day Average Abnormal Return (%) t-Statistic
-5 0.0673 0.83 -4 0.0850 0.85 -3 0.3510 3.62*** -2 0.1209 1.33* -1 0.5647 5.35*** 0 1.3631 10.87*** 1 0.7812 5.46*** 2 0.4520 3.41*** 3 0.2345 1.69** 4 0.1572 1.45* 5 0.2223 1.42*
Table 3 shows average abnormal returns of bidding firms in Asian emerging markets five days before and five days after the event day. Form this table, we can see that all the average abnormal returns are positive over the event window. Almost all the average abnormal returns are statistically significant positive except the average abnormal returns on day -5 and day -4. Before the announcement of M&A transactions, on day -3, day -2 and day -1, the average abnormal return
32 is 0.3510%, 0.1209%, and 0.5647% respectively, which are statistically significant at the 1% level, 10% level and 1% level correspondingly. The significant positive average abnormal returns occur before the announcement of M&A deals proves the existence of information leakage in Asian emerging markets. On the M&A announcement day, day 0, the average abnormal return reaches the highest, which is 1.3631% and statistically significant at the 1% level. After the announcement day, the average abnormal returns gradually decrease but still statistically significant positive. From this table, we can see the stock market of bidding firms in Asian emerging markets positively reacts to the M&A announcements. Besides, information leakage occurs before the announcement of M&A transactions in Asian emerging markets.
Table 4: The Test Results of Average Cumulative Abnormal Returns of Bidding Firms in Asian Emerging Markets over Different Event Windows
This table reports average cumulative abnormal returns over different event windows. Cumulative abnormal returns are calculated by applying the market model over the period beginning 65 days and ending 6 days prior to the announcement of M&A transactions for different event windows around the announcement day. The announcement day, day 0, is the day when an M&A transaction is announced. CAR(𝜏𝜏1 , 𝜏𝜏2) represents cumulative abnormal returns from day 𝜏𝜏1 to day 𝜏𝜏2. The symbols *, **, and *** indicate statistical significant at 10%, 5% and 1% respectively.
Event Window Average Cumulative Abnormal Returns (%) t-Statistic CAR(-5, 5) 4.3991 8.99*** CAR(-3, 3) 3.8673 9.84*** CAR(-1, 1) 2.7091 11.47*** CAR(-5, -4) 0.1523 1.14 CAR(-3, -1) 1.0365 6.23*** CAR(-1, 0) 1.9278 11.66*** CAR(0, 1) 2.1443 10.43*** CAR(1, 3) 1.4676 5.19*** CAR(3, 5) 0.6140 2.31**
33 Table 4 indicates the average cumulative abnormal returns of bidding firms in Asian emerging markets over various event windows. From this table, we can see all the average cumulative abnormal returns in different event windows are significant positive, but only the average cumulative abnormal returns over event window (-5, -4), prior to the announcement day, is positive but not statistically significant. Before the announcement of M&A deals, the average cumulative abnormal returns in event windows (-3, -1) and (-1, 0) are 1.0365% and 1.9278%, both of them are statistically significant at the 1% level. The average cumulative abnormal returns occur over event windows before the announcement of M&A transactions proves that information leakage exists before the announcement in Asian emerging markets. After the announcement day, the average cumulative abnormal returns over even window (0, 1), (1, 3) and (3, 5) are 2.1443%, 1.4676% and 0.6140% correspondingly, which are all statistically significantly. Test results in Table 2 can prove the existence of information leakage before the announcement of M&A transactions in Asian emerging markets and Asian emerging markets positively reacts to M&A announcements.
Both the test results of average abnormal returns and average cumulative abnormal returns prove that the stock market of bidding firms in Asian emerging markets positively reacts the announcement of M&A and the existence of information leakage. Therefore, from the test results of both average abnormal return and cumulative average abnormal return, 𝐻𝐻1 (There is a positive impact on stock returns of bidding firms around the announcement of M&A transactions in Asian emerging markets.) and 𝐻𝐻2 (Information leakage will occur associated with the announcement of M&A transactions in Asian emerging markets) are supported.
4.3.2 Estimation Results of Cross-sectional Regression
The cross-sectional regression analysis is adopted to determine the effect of explanatory variables on cumulative abnormal returns of bidding firms in Asian emerging markets around the announcement of M&A transactions. The regression results are showed in Table 5. In this regression, the dependent variable is cumulative abnormal returns (CARs) acquired by the bidding firms over seven different event windows, which should capture sufficient information regarding the M&A deals revealed around the announcement.
34 Table 5: Cross-sectional regression analysis of bidding firms’ CARs
This table describes the results of regression analysis on bidding firms’ short-run cumulative abnormal return (CARs). The regression model is expressed as CAR(τ1 , τ2) = β0 + β1 (industry-related) + β2 (cross-border) + β3 (target-status) + β4 (payment-method). The symbols *, **, and *** indicate statistical significant at level of 10%, 5% and 1% respectively.
Dependent variable
CAR(-5, 5) CAR(-3, 3) CAR(-1, 1) CAR(-1, 0) CAR(0, 1) CAR(1, 3) CAR(3, 5) Constant Coefficient t-test 0.0505 4.04*** 0.0407 4.05*** 0.0264 4.37*** 0.0204 4.81*** 0.0174 3.31*** 0.0116 1.60 0.0075 1.10 industry-related Coefficient t-test 0.0018 0.18 0.0060 0.75 0.0080 1.68* -0.0002 -0.07 0.0118 2.83*** 0.0104 1.80* -0.0015 -0.28 target-status Coefficient t-test 0.0444 3.69** 0.0363 3.76*** 0.0216 3.72*** 0.0146 3.58*** 0.0192 3.79*** 0.0194 2.77*** 0.0143 2.16** cross-border Coefficient t-test -0.0071 -0.50 -0.0042 -0.37 -0.0041 -0.59 -0.0049 -1.02 0.0003 0.06 -0.0003 -0.04 0.0027 0.35 payment-method Coefficient t-test -0.0682 -6.59*** -0.0539 -6.48*** -0.0316 -6.33*** -0.0195 -5.57*** -0.0266 -6.11*** -0.0274 -4.55*** -0.0205 -3.61*** No. of observation 1,803 1,803 1,803 1,803 1,803 1,803 1,803 𝑅𝑅2 0.0303 0.0293 0.0292 0.0249 0.0286 0.0156 0.0090 Adjusted 𝑅𝑅2 0.0282 0.0271 0.0271 0.0227 0.0264 0.0134 0.0068
W.Zhang University of Amsterdam 35 independent variables equal zero. For instance, in CAR (-3, 3) regression, the estimated intercept is 4.07%, which represents the CAR (cumulative abnormal return) gained by bidders under the condition that the independent variables industry-related, target-status, cross-border and payment-method all equal zero. Moreover, the intercept in CAR (-5, 5) egression is 5.05%, which is larger than that of in CAR (-3, 3) regression and CAR (-1, 1) regression. It means that longer event window captures more information regarding the announcement of M&A deals.
The coefficient of industry-related variable, takes one if the targets and the bidders are in the related industry and zero otherwise, is positive and statistically significant different from zero in CAR (-1, 1), CAR (0, 1) and CAR (1, 3) regressions. Therefore, the independent variable industry related has a positive and significant impact upon CAR (-1, 1), CAR (0, 1) and CAR (1, 3) gained by bidding firms, which are statistically significant at the level of 10%, 1% and 10% respectively. Besides, it indicates that bidding firms can earn higher CARs if the bidding firms and the target firms operate in the related industry. Thus, 𝐻𝐻3 (In Asian emerging markets, bidders who acquire industry-related targets perform better than bidders who acquire unrelated targets). This result is consistent with the theory introduced above.
The coefficient of target-status variable, equals one if the targets are privately owned and zero if the targets are publicly owned, is positive and significantly different from zero in all the CAR regressions. Consequently, the independent variable listing status of targets has a positive and significant effect on upon CAR acquired by bidders around the announcement of M&A deals. it also means that shareholders of bidding firms can earn relative higher CAR if they acquire the private target firms. Thus, 𝐻𝐻4 (In Asian emerging markets, bidders who acquire privately owned targets perform better than bidders who acquire publicly owned targets) is supported in our study. The coefficient of cross-border variable, reports one if the M&A deals occur aboard and zero if the M&A deals take place in their domestic market, which is not significant at all. It indicates that the factor cross border does not have impact on CAR gained by bidding firms. The negative coefficient shows that bidders acquire cross-border targets perform worse than bidders acquire domestic targets, which is not statistically significant different from zero. As a result, 𝐻𝐻5 (In Asian emerging markets, bidders who acquire cross-border targets perform better than bidders who acquire domestic targets) is not supported.
W.Zhang University of Amsterdam 36 The coefficient of payment-method variable, equals one if the M&A deals financed by cash and zero if the M&A deals financed by stock, is negative and significantly different from zero in all the CAR regressions at 1% level. Consequently, the independent variable payment method has a negative and significant effect on upon CAR acquired by bidders around the announcement of M&A deals. It also indicates that shareholders of bidding firms can earn lower CAR if they finance the M&A deals via cash. Consequently, 𝐻𝐻6 (In Asian emerging markets, bidders who adopt cash to finance M&A transactions perform better than bidders who use stocks to finance M&A transactions) is not supported in this study.
This finding of payment method is significantly contrast to the empirical research from developed markets, where cash financed M&A deals perform better than stock financed M&A deals (Abhyankar, Ho and Zhao, 2005). But the empirical result of this study is consistent with the study of Yang, Guariglia and Guo, 2017) on China. They explored M&A transaction in China from 1998 to 2015 and proved that bidding firms earn lower returns if they bid M&A financed by cash compare with the M&A financed by stock. Alshwer, Sibilkov and Zaiats, (2011) contended that if the financially constrained bidding firms have high growth opportunities but facing relatively high opportunity cost of holding cash, they tend to save money to avoid forgoing profitable projects in the near future. This indicates that both of financing constraints and opportunity cost of holding cash would affect the payment method of M&A deals. Yang, Guariglia and Guo (2017) believed that financially constrained bidding firms are reluctant to finance M&A by cash due to the higher opportunity cost of holding cash. On the contrary, if firms can easily access to the financial markets, easily acquire fund for future investments, they might not have a strong preference for certain payment methods. Based on the assumption of opportunity cost of holding cash, in emerging markets, bidding firms prefer to finance M&A by cash when facing a relative low opportunity cost of holding cash. When the opportunity of investment is low, it would lead to the waste of cash, which results in poor performance of bidding firms. As a result, in Asian emerging markets, cash financed M&A deals have a negative impact upon the stock reaction of bidding firms.
W.Zhang University of Amsterdam 37 5. Robustness Check
This paper excludes the financial firms from the bidding firms to test whether the results are robust to non-financial bidding firms in Asian emerging markets. By excluding the financial firms, this study gets 1,589 non-financial firms during the period 1998 to 2017. According to Appendix 2 and Appendix 3, the number of M&A deals gradually increases from 1998 to2005. After 2005, M&A deals significantly rises, reaching 115 in 2008. Then the number of M&A deals declines in 2009 with 80. Subsequently, the number of M&A rises, peaking to 295 in 2015. And then it shows a downward trend, but still with relative large number. Based on the Appendix 2 and Appendix 4, we can find that China has the largest number of M&A transaction with 774 among the nine countries in Asian emerging market. Then followed by South Korea with 410 M&A transactions. India and Taiwan ranked the third and fourth, the number of M&A transactions were quite small with 167 and 90 M&A deals correspondingly. Pakistan plays a little role in M&A transactions in Asian emerging market, with only 4 M&A deals over the past 20 years.
Moreover, according to Appendix 5, it reports the characteristics of factors influencing the stock returns of non-financial bidding firms. We can see that there are 680 deals of related M&A transactions, which occupies 42.79% of the sample, while the unrelated M&A transactions are 909 with 57.21%. Thus, unrelated M&A transactions account for larger proportion than related M&A transactions in non-financial bidding firms in Asian emerging markets. Regarding the factor of listing status of targets, the number of private target is 1,293 occupying 81.37%. While the purchase of public target is only 296 accounting for only 18.63%, which is quite small. In terms of the factor of cross border or domestic transaction, domestic M&A transactions play s dominant role with 1,356 deals while only 233 cross border deals. For the factor of payment method, the number of cash payment transaction was 978 occupying more than half of the full sample with the proportion of 61.55%, while the stock payment of M&A transactions was 611 with only 38.45%. Table 6: The Test Results of Average Abnormal Returns of Non-financial Bidding Firms in Asian Emerging Markets on Specific Selected Day
This table describes the impact of M&A announcements upon short-run market performance of bidding firms in Asian emerging market. The announcement day, day 0, is the day when an M&A transaction is announced. The abnormal returns are calculated as the differences between the actual
