Universiteit van Amsterdam
Anti-‐takeover Provisions and Abnormal Value Creation in
Mergers and Acquisitions in the United States
Alex de Gooijer 10372008
Finance and Organization Finance
15-‐07-‐2015
Supervisor: Tolga Caskurlu Abstract
This paper investigates whether target anti-‐takeover provisions have an effect on bidder shareholders abnormal returns. I find that in the investigated
acquisitions, bidder shareholders receive 0.23% cumulative abnormal return. Moreover, the research concludes that a takeover of a target firm with more than the average anti-‐takeover provisions influences the abnormal return for bidder shareholders in the United States since 2000. This study therefore establishes that anti-‐takeover provisions are an important determinant for bidder returns.
Statement of Originality
This document is written by student Alex de Gooijer who declares to take full responsibility for the contents of this document.
I declare that the text and the work presented in this document is original and that no sources other than those mentioned in the texts 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.
Table of Contents
Abstract……….……...………...…1
Statement of Originality………..2
Table of Contents……….……….…3
1. Introduction……….………..………4
1.1 Motivation………...……….…4
1.2 Research question…………...………...……….………4
1.3 Brief summary of methodology and potential results.………..……5
1.4 Overview of the thesis………..……….……...………..………..5
2. Literature Review………..………….………...6
2.1 The thesis in the relevant literature…….………...……….6
2.2 Most related papers and difference with thesis….………...……….11
2.3 Hypothesis that follow from the literature……….………….………….12
3. Data description and Model setup……...………..13
3.1 Data construction……… ……….13
3.2 Data description……….16
3.3 Model setup………..20
4. Results and Analyses……….21
4.1 Results………...…….……….21
4.2 Analyses………..24
5. Conclusion and Discussion………..……….27
5.1 Conclusion……….27 5.2 Discussion………..28 References………...………...29 Appendices………..…………...………31
1. Introduction
1.1 Motivation
It is rather interesting that the value of two firms combined can be higher than the separate values of these firms prior to a merger and acquisition. It would therefore be interesting to investigate to which factors this abnormal value creation can be attributed to. I therefore want to examine whether takeovers have indeed created such abnormal bidder shareholder value since 2000. Moreover, I want to study the influence of the number of anti-‐takeover
provisions target firms have on the abnormal returns for bidder shareholders. This topic is of societal relevance, because from the 1980s, organizations have increasingly adopted anti-‐takeover provisions, which can be used to prevent takeovers. This increase in provisions is partly due to enforced laws in the United States that give firms improved protection against takeovers
(Gompers, Ishii and Metrick, 2001). These provisions give managers more power and protection. Consequently, these provisions could be harmful for firms,
because they make it more difficult to fire managers that do not maximize shareholder value and hence do not act in the best interest of the firm. Besides, this study is of academic relevance, because it is one of the first studies that also takes the years after the crisis into account, in combination with the anti-‐
takeover provisions. The influence of the financial crisis on abnormal returns is therefore also considered.
1.2 Research question
To this end, the following research question will be examined: did the level of anti-‐takeover provisions have an influence on the abnormal returns for bidder shareholders, created by mergers and acquisitions in the United States since 2000?
This study focuses on the United States, because company data from databases is widely available for listed firms in the United States. Besides, the states in the US differ in the provisions that they oblige (Gompers et al., 2001), which makes the United States an interesting research area. Furthermore, I chose 2000 as a starting point for my research, since the merger and acquisition
activities have increased most drastically over the last decade. This study hence uses the most recent data that is available, which makes the results more
representative. Finally, I will consider all the relevant takeovers, not only the large ones, because Gompers et al. (2001) find that the size of a firm is positively correlated with the number of anti-‐takeover provisions.
1.3 Summary of methodology and potential results
In order to answer my research question, I will perform an empirical research that takes 369 mergers and acquisitions into account. The analysis relies on abnormal value creation and should provide a good description about the value increase for the bidder shareholders after a takeover that differed from the expectations of the market. I use the databases CapitalIQ and Compustat to collect data on mergers and acquisitions. And I use the database Eventus with the Cusip codes retrieved by Compustat, in order to examine the abnormal returns. After gathering all the abnormal returns and relevant data for the independent variables for the bidder firms, I will perform several regressions and robustness checks to examine the influence of the level of anti-‐takeover provisions on abnormal returns for bidder firms.
With relation to anti-‐takeover provisions, the abnormal returns for takeovers of firms with strong shareholder rights are expected to be higher than acquisitions of weak target shareholder firms (Gompers et al., 2001).
Furthermore, it is expected that the value creation of mergers and acquisitions will mostly be accrued to the target shareholders, and not to the bidder
shareholders, for whom negative, or even zero abnormal returns can be expected (Andrade, Mitchell and Stafford, 2001).
1.4 Chapter overview
This paper is structured as follows. It starts with a literature review, followed by the data description and the model setup. Subsequently, I will state the results of my research, and analyse the results. Finally, I will provide a discussion of the results and my research question will be answered in the conclusion.
2. Literature Review
2.1 The thesis in the relevant literature
This section discusses why and when takeovers occur, and furthermore provides a broad overview of the factors that influence abnormal value creation for bidder shareholders.
Literature indicates that the shareholder value created by mergers and acquisitions accrues mostly to the target company (Andrade et al., 2001). There are many economically viable reasons for why mergers might occur. That is, mergers and acquisitions are positively related to efficiency, through its impact on economies of scale. Furthermore, when two firms merge, their overall market power increases. Besides, a merger can improve management in the target company, by replacing poorly performing management. Moreover, mergers occur due to high agency costs such as overexpanding. Finally, mergers can be used to take advantage of opportunities for diversification (Andrade et al., 2001). Since takeovers come in waves and each wave takes place in different industries, a large part of merger activity might be a result of industry-‐level shocks, for example a technological innovation (Andrade et al., 2001). This evidence of industry-‐level shocks has substantially increased the understanding of why and when mergers occur (Andrade et al., 2001). Finally, Andrade et al. (2001) argue that mergers and acquisitions produce immense reallocation of resources, both within and across industries.
The first factor that influences the abnormal value creation I examine is how the acquiring company finances the transaction. A takeover can be financed broadly in two ways, with stock or cash. If managers observe that a target firm is overvalued in the stock market, managers are expected to finance the
transaction with stock. Subsequently, the stock price of the target firm will fall after the takeover transaction and therefore target firm shareholders seem to prefer cash instead of stock financing (Andrade et al., 2001). Furthermore, Chang (1998) provides evidence for negative abnormal returns for a takeover that is financed with stock, and no abnormal returns whatsoever for a takeover that is financed with cash. Moreover, Beitel, Schiereck and Wahrenburg (2004) state that takeover transactions create more value if the target firm is performing
poorly compared to their competitors before the takeover announcement. This is generally due to bad management performance of the target company, which the bidding firm can improve after the takeover (Beitel et al., 2004).
The second factor that will have an influence on the abnormal returns is the type of target firm, namely private or public. Chang’s (1998) results conclude that abnormal returns for takeovers of a private target firm, is higher than a takeover of a public target firm. Abnormal returns are higher for takeovers of private firms, since private takeovers are less prone to a loss of face, because generally more people are involved in a takeover of a public firm (Conn, Cosh, Guest and Hughes, 2005). Second, blockholders exist more often in acquisitions of private firms. Moreover, these blockholders are expected to monitor the firm after the takeover (Conn et al., 2005). Third, information disclosure in private firms is easier, since in public firms more rules are required to disclose
information (Conn et al., 2005). Finally, takeovers of private firms are less likely to have competing takeover bids, because of the more illiquid stocks of private firms (Conn et al., 2005).
Furthermore, I examine whether the bidding firm makes a tender offer. Mergers are usually friendly deals where the target managers cooperate (Loughran & Vijh, 1997). Tender offers are made directly to target firm shareholders, and the offer is not negotiated in beforehand with target managers. These tender offers are made to avoid resistance of the target managers and additionally signal confidence in the acquirer’s capability to realize efficiency gains from the takeover (Loughran & Vijh, 1997). Loughran & Vijh (1997) argue that bidding shareholders gain little or no abnormal returns from tender offers, and these gains are expected to be lower or even negative for mergers without a tender offer. Further evidence is given that mergers are more often financed with stock, and tender offers with cash. Given that takeovers with a cash payment earn higher abnormal returns partly explains the higher
abnormal returns from a tender offer (Loughran & Vijh, 1997). Bradley, Desai and Kim (1998) conclude that a successful tender offer raises the combined value of the target and bidder firm by an average of 7.4%. In the perspective of weak shareholder rights, Bhagat, Shleifer, Vishny, Jarrel & Lawrence (1990) provide evidence that in the 1980s wealth of bidder shareholders decreased due
to overpayment for tender offers. These takeovers were driven by managerial objectives, instead of shareholders objectives.
Fourth, the size of the firms considered is expected to have an influence on the abnormal value creation for bidder shareholders. Loughran & Vijh (1997) state that abnormal returns decrease as the size of target to bidder firm
increases. Furthermore, Moeller, Schlingemann and Stulz (2003) find that large firms make relative large acquisitions that result in large losses and small firms make relatively small acquisitions that result in small gains. Moeller et al. (2003) therefore suggest that acquisitions overall result in losses for shareholders, because the large losses incurred by large firms outweigh the gains earned by small firms. Moeller et al. (2003) propose several possible reasons for this size effect. First, small firms tend to acquire mostly private firms, and in alignment with the argument before, private takeovers are expected to create higher abnormal returns. Second, small firms more often pay for a takeover with cash instead of stock, which earns a higher abnormal return. Furthermore, the size effect can be explained by different firm characteristics between small and large firms. Fourth, the incentives between managers and shareholders are generally better aligned in small firms (Moeller et al., 2003). Moreover, managers have typically more firm ownership in small firms and managers in large firms are more often sensitive to hubris. Hubris occurs when during the takeover, managers are poorly performing and act in their own interest (Hayward & Hambrick, 1997). Besides, in large firms, managers are often the ones to
complete a takeover, which also indicates that hubris is more a problem for large firms (Moeller et al., 2003). Finally, Moeller et al. (2003) conclude that large firms generally pay too much for a takeover, and wealth is therefore
redistributed from bidder shareholders to target shareholders. So according to Moeller et al. (2003), there is zero or negative abnormal value creation for takeovers by large firms and positive abnormal value creation for takeovers by small firms.
Furthermore, a bid is perceived to be hostile if the target firm publicly rejects it, or if the bidder firm defines it as unsolicited or unfriendly (Andrade et al., 2001). Bhagat et al. (1990) conclude that most hostile acquisitions imply allocating assets to firms in the same industry and represent de-‐conglomeration
of American entities. Moreover, hostile takeovers create large operational changes in firms and gains to target shareholders. The benefits of these hostile takeovers are cost savings from joint operations, increases in market power and tax benefits (Bhagat et al., 1990).
Sixth, the degree of competition among bidding firms is expected to impact the abnormal value creation for bidder shareholders. Competition between the actual and potential bidders ensures that gains in takeovers will mainly be accrued to target firm shareholders (Bhagat et al., 1990). Bhagat et al. (1990) state that target shareholders cannot obtain all value gains in each takeover transaction. If there is any part of the value gain that is not lost to the target firm through competition, bidding shareholders could also gain from a takeover. These bidder gains are especially large when the bidder and target firms are in the same industry (Bhagat et al., 1990). Bradley et al. (1998)
conclude that competition between bidder firms increases the abnormal returns to target firm shareholders, and decreases returns to bidder shareholders.
Furthermore, an important factor that will have an influence on the abnormal value creation of bidder shareholders is the announcement date of the takeovers considered. With respect to the research period in this thesis, the global financial crisis will have the largest impact on the abnormal returns in this perspective. Acharya, Philippon, Richardson, and Roubini (2009) state that the integration of global financial markets has brought large welfare gains due to developments in efficiency, which could be reflected by the rate of the economic growth. These developments have moreover also increased fragility during the financial crisis. Consequently, financial institutions were harmed and capital markets reduced the supply of capital to the real economy (Acharya et al., 2009). In the United States, the collapse of the housing market in 2006 initiated a wave of defaults. Furthermore on June 20th, 2007, the bankruptcy of two highly levered Bear-‐Stearns managed hedge funds that invested in asset-‐backed
securities, is identified as the event that started systematic failure (Acharya et al., 2009).
Aalbers (2008) argues that the financial crisis of the 1980s generated a takeover wave in the banking sector. As such, the financial crisis of 2007 was also expected to start a takeover wave in het banking sector. Moreover, Stearns
& Allan (1996) argue that during the financial crisis of the 1980s, the sitting president Reagen in the United States issued new Merger Guidelines by the Antitrust Division. These guidelines dramatically lowered the number of takeovers during the 1980s financial crisis. One could therefore assume that merger waves are common during financial crises. However, Guaghan (2010) states that a merger wave took place from 2003 to 2008, and ended in 2008 because of the effects of global recessions and the financial crisis. All in all, it would be interesting to examine the influence of the financial crisis on the abnormal value creation for bidder shareholders, since Erkens, Hung & Matos (2012) suggest that firms with higher management ownership and more
independent boards, had worse stock returns during the financial crisis of 2007 to 2009 because of excessive risk taking prior to the crisis. Furthermore, firms with high management rights raised more equity capital during the crisis.
Finally, the factor I examine to have an influence on the abnormal value creation for bidder shareholders, is the number of anti-‐takeover provisions of the target firm. To examine this factor, the paper is used from Gompers et al. (2001), which examines the influence of corporate governance provisions related to anti-‐takeover measures and shareholder rights, on the abnormal return. Gompers et al. (2001) use twenty-‐four corporate governance provisions to create a Governance Index for approximately 1500 firms per year. This index is constructed for each firm by adding one point to the index, for each provision that reduces shareholder rights (Gompers et al., 2001). The index makes no attempt to accurately indicate the importance of each provision, however is easily and transparently constructed. For example a golden parachute is such a provision, which provide cash and non-‐cash compensation to managers during events that do not need the approval of shareholders.
Gompers et al. (2001) classify firms with few corporate governance provisions to the shareholder portfolio, which represents strong shareholder rights. Furthermore, firms with many provisions are classified in the
management portfolio, which represents firms with weak shareholder and strong management rights (Gompers et al., 2001). Gompers et al. (2001) conclude that firms with weaker shareholder rights obtain lower returns, have worse operating performance and are involved in higher capital expenditure and
takeover activity. Furthermore, most of these provisions are created for management to prevent a hostile takeover (Gompers et al., 2001). The correlation between the number of anti-‐takeover provisions,
abnormal returns and the resulting agency cost are explained because of several reasons. First, anti-‐takeover provisions that decrease shareholder rights
consequently increase agency cost (Gompers et al., 2001). Second, Gompers et al. (2001) argue that anti-‐takeover measures decrease plant-‐level efficiency. Third, the adoption of anti-‐takeover measures forced by states increase agency cost (Gompers et al., 2001). Corporate governance tries to prevent these agency problems, caused by the separation of ownership and control (Gompers et al., 2001). In the United States, agency costs are solved by legal protection of minority investors, the adoption of board of directors as monitors of managers and by an active market for corporate control (Gompers et al., 2001). The success of these techniques depends on security regulation, corporate law, charter provisions and other rules (Gompers et al., 2001). Furthermore,
Gompers et al. (2001) state that the creation of firm distinguishing anti-‐takeover measures, is mostly due to corporate governance provisions adopted and laws passed in the second half of the 1980s. Besides, managers who perceive that firm performance in the future will be poor, can adapt anti-‐takeover provisions to protect their managerial functions (Gompers et al., 2001). Finally, according to Gompers et al. (2001) anti-‐takeover measures do not necessarily have any power, however could be simply a signal of increased agency cost that decrease plant-‐level efficiency.
2.2 Most related papers and difference with thesis
Andrade et al. (2001) state that mergers and acquisitions produce immense reallocation of resources, both within and across industries. Furthermore,
evidence is provided that shareholder value created by mergers and acquisitions mostly accrues to the target company (Andrade et al., 2001). From the literature some factors are indicated that influences the abnormal return for bidder
shareholders. Chang (1998) presents evidence for negative abnormal returns for a takeover financed with stock and no abnormal returns for a takeover financed with cash. Chang’s (1998) results also give evidence that abnormal returns for
takeovers of private target firms are higher than takeovers of public target firms. Furthermore, Loughran & Vijh (1997) suggest that bidding shareholders earn higher abnormal returns if the bidding firm makes a tender offer. Besides, Loughran & Vijh (1997) state that abnormal returns decreases as the size of target to bidder firm increases. Bhagat et al. (1990) provide evidence that
competition between bidder shareholders and hostile takeovers create abnormal returns to target shareholders. Furthermore, Erkens et al. (2012) suggest that firms with higher management ownership and more independent boards had worse stock returns during the financial crisis of 2007 to 2009. Gompers et al. (2001) conclude that firms with weaker shareholder rights have lower abnormal returns, have worse operating performance and are involved in higher capital expenditure and takeover activity. Furthermore, evidence is given that board membership is correlated to the agency problems at firms (Gompers et al., 2001).
This thesis differs upon the given literature that it is more relevant. From the literature review is seen that much prior research is performed on abnormal value creation and on anti-‐takeover provisions in relation to merger value creation, though this empirical research uses more recent data. Consequently, this study is of academic relevance because it is one of the first studies that also takes the years after the crisis into account, in relation to the anti-‐takeover provisions discussed in the literature.
2.3 Hypothesis that follow from the literature
In this thesis, the influence of the number of anti-‐takeover provisions on the abnormal returns of the bidder shareholders since 2000 in the United States is examined. Because an empirical research is performed, I have designed one statistical hypothesis by using the relevant literature to investigate the research question.
𝐻!: A takeover of a target firm with more than the average number of anti-‐ takeover provisions, has zero influence on the abnormal return for bidder shareholders.
𝐻!: A takeover of a target firm with more than the average number of anti-‐ takeover provisions, has an influence on the abnormal return for bidder shareholders.
From the literature I find that abnormal returns mostly accrues to target instead of bidder firm shareholders. Furthermore, I expect that bidder shareholders obtain lower abnormal returns during a takeover of a firm with relative many provisions.
3. Data description and Model setup
In section 3.1 I will explicitly state how the sample in this thesis is constructed and in section 3.2 explain which independent variables will be used in the
empirical research. Furthermore, section 3.3 explains the research methodology.
3.1 Data construction
The following screening criteria indicate how the sample is constructed.
• First, I gather data on takeover deals in the period between 2000 and 2015. Since the estimation period around every event study is three years, I will select mergers and acquisitions from CapitalIQ with a takeover announcement between January 1!" 2003 until December
31!! 2011. This criterion provides 349.095 transactions that fulfil the
requirement of the announcement date.
• The target company is required to be an American listed company in this thesis, since data for the abnormal returns by Eventus is only available for firms that are listed on the NYSE, AMEX and NASDAQ stock exchange. After adding this requirement, the sample remains 46.614 takeover deals.
• Third, I add two deal conditions, namely that the mergers and acquisitions that are analysed in this research are financial or approved by the shareholders. I incorporate these criteria, because they provide information on shareholder rights, which is essential
because shareholder rights are a central topic in this research. I will however not use these criteria in the research model, since the criteria concerning anti-‐takeover provisions, which will be discussed later, better reflects shareholder rights. Nevertheless, I will keep these conditions in the criteria to indicate how the final sample size is constructed. The sample consists of 11.446 takeover deals after adding these criteria.
• Next, I add a criterion indicating the type of payment for the
acquisition, namely cash, stock or a combination of these. At this point, 9.923 merger and acquisition deals are provided.
• The next criterion is the deal attitude from the takeover between the target firm and the bidder firm, namely hostile or friendly. After this criterion, 9.859 transactions are given.
• Sixth, I examine whether the bidding firms made a tender offer. To not only capture the takeover deals with a tender offer from CapitalIQ, also the requirements are added that the takeover could be a cash merger or equity reinvested. After adding this requirement, 5.401 takeover deals are provided by CapitalIQ.
• Furthermore, I examine whether the target company is public or private and hence add this as a requirement in CapitalIQ. At this point, 5.278 takeover deals are given.
• Finally, I add information regarding all the anti-‐takeover provisions as a criterion, given in appendix B. This remains a takeover sample of 2.214 from CapitalIQ.
In this thesis, abnormal returns are gathered using Eventus, for which the Cusip codes are used from Compustat. I tried to find the abnormal returns for bidder shareholders for these 2.214 takeovers, however I could find the abnormal returns for only 369 takeovers by the following reasons:
• First, I eliminate the takeover deals from the sample that are
cancelled, since only closed deals are examined. This remains a sample of 1.834 takeovers.
• Second, to find the abnormal return for a firm by Eventus, it should be listed on the NYSE, AMEX or NASDAQ stock exchange. From this,
another criterion should be added in CapitalIQ, namely that also the bidder firm is incorporated in the United States. At this point, 1.121 takeover deals are given.
• Third, I only examine takeovers with a deal value greater than five million, since takeovers with a lower deal value are expected to have little or no influence on the abnormal returns for bidder shareholders. This criterion slightly deviates from Moeller et al. (2003), which considers takeovers with a deal value higher than one million. Eliminating the takeovers with a deal value lower than five million remains a sample of 1.083 takeovers.
• Fourth, I add the criterion in CapitalIQ that the CIK codes should be provided for the bidder firms, which are used to find the Cusip codes in Compustat. However, CapitalIQ did not provide CIK codes for 245 bidding firms, which are therefore eliminated from the sample and is reduced to 838 takeovers.
• Furthermore, in this thesis only takeovers are examined involving one bidder firm, since analysing abnormal returns for bidder shareholders in takeovers with multiple bidder firms is complicated. 194 takeovers are therefore eliminated and a sample of 644 takeovers remains. • As mentioned, bidder firms involved should be incorporated in the
United States, to find the Cusip codes. Subsequently, these Cusip codes are available in Compustat if firms are listed on the NYSE, AMEX or NASDAQ stock exchange. However, the requirement that bidder firms should be incorporated in the United States, does not imply that they are listed on one of these stock exchanges. By considering the sample, 112 bidding firms are detected from which Compustat cannot find the Cusip codes, presumably because they are not listed on one of the mentioned stock exchanges. Eliminating these 112 takeovers remains a sample of 532 takeovers.
• Finally, there are two reasons explaining the sample size of 369 instead of 532 takeovers, however the takeovers lost by either reason is not tracked properly. First, the abnormal returns for some of the bidding firms are not found, since the abnormal returns from Eventus
are not available in the estimation period considered in this research. For example, this could be due to the bidding firm itself was taken over short after it made the takeover, or due to other comparable reasons in which the continuation of the company ended. Second, the sample contains bidding firms who took over several firms in a certain period, and therefore are eliminated from the sample. These takeovers are eliminated, since in this empirical research the influence on the abnormal return of a single takeover to bidding shareholders is considered. However, if a bidder firm acquired in the same period a target firm with a relative high and low deal value, only the takeover is eliminated with the relative low deal value. The takeovers with a high deal value remain in the sample, since only these takeovers are
expected to have a tremendous effect on the abnormal returns for bidder shareholders. The sample remains 369 takeovers after eliminating the mentioned takeovers.
3.2 Data description
From the relevant literature, I find the explanatory variables that should be used in my empirical research. First, the independent variables are considered that will not be used in this paper, then the independent variables are considered which will be used in the empirical research.
First, the independent variable concerning the hostility of the takeovers is omitted, since CapitalIQ designated 367 of the 369 takeovers as friendly. Because only two takeovers are indicated as hostile, a dummy variable concerning these hostile takeovers will have low explanatory power in the empirical model. Second, the variable concerning the relatedness of the bidder and target firm is omitted from the empirical model, because I presume related firms will also contain a comparable number of anti-‐takeover provisions. Moreover, this variable is omitted to avoid high correlation in the empirical model.
Finally, the explanatory variable indicating competition among bidding firms is omitted. As mentioned, approximately all the takeovers are indicated as friendly, from which competition among bidding firms presumably was low for the takeovers considered. Moreover, the level of competition and the number of
anti-‐takeover provisions presumably are correlated, since one would expect less bidding firms to compete in a takeover of a target firm with relative many
takeover defences. Furthermore, the sample contains mostly takeovers of private target firms, which are less likely to have competing takeover bids (Conn et al., 2005).
All the other relevant explanatory variables discussed in the literature will be part of my empirical research. First, the type of payment is investigated, namely cash, stock or a combination of these. However, the takeovers in the sample consist mostly of cash payments, though also a number of stock and combined payments. This dummy variable is included in the model, since takeovers with cash payments are expected to create higher abnormal returns.
Second, a dummy variable indicating a private target firm is included, since literature suggests that differences exist in the abnormal returns between a takeover of a private and public firm. Furthermore, a takeover of a private target firm is expected to create higher abnormal returns for bidder shareholders. Third, a dummy variable is included in the model to indicate whether a tender offer is made, since literature suggests that abnormal returns for bidder shareholders are higher when a tender offer is made.
Fourth, a dummy variable concerning the financial crisis is included in the empirical model. Acharya et al. (2009) state that the financial crisis had its
largest impact from December 2007 until June 2009. It is therefore manually indicated whether a takeover announcement occurred in the financial crisis. This explanatory variable is perceived to be useful, because firms with higher
management ownership and more independent boards had worse stock returns during the financial crisis of 2007 to 2009 (Erkens et al., 2012). Moreover, a table is provided in appendix A to indicate the spread between the announcements of the takeovers in the sample.
Fifth, an explanatory variable related to the size of the firms considered is included in the empirical model. According to Moeller et al. (2003), there is lower abnormal value creation for takeovers by large firms. Relative size is added to the empirical model, and is measured by dividing the transaction value by the equity market capitalization of the bidder firm at the end of the fiscal year before the takeover announcement (Moeller et al., 2003). Information regarding
the transaction value is retrieved from CapitalIQ. Furthermore, the market capitalization is calculated by multiplying a bidder firm’s shares outstanding by the market price of one share, from which information is retrieved from
Compustat. Though, Gompers et al. (2001) state that the size of a firm is positively correlated with the anti-‐takeover provisions it has. However, all the independent variables will be checked for multicollinearity later in this paper. Finally, an explanatory variable is included in the model to indicate the number of anti-‐takeover provisions target firms had during the takeover. For the data collecting I deviate from Gompers et al. (2001), which used twenty-‐four corporate governance provisions. However, CapitalIQ provide twenty-‐eight anti-‐ takeover provisions and deviate somewhat from the corporate governance provisions used by Gompers et al. (2001). In appendix B the anti-‐takeover provisions are presented from CapitalIQ. Furthermore, the provisions Gompers et al. (2001) provide, except for two, are hurting the shareholders and should be summed up to indicate the number of provisions each firm has. Moreover, if the target firms also did not have the two provisions that would benefit the target shareholders, also these should be added to the number of corporate governance provisions of a target firm. In this paper I calculate the number of anti-‐takeover provisions of target firms in the same way manually, only deviate by using the provisions provided by CapitalIQ. In appendix B, sixteen provisions are provided that diminish shareholder rights and twelve that enhance shareholder rights. Moreover, a table is provided in appendix C to indicate the spread between the number of takeover defences among target firms in the sample. To examine the influence of takeovers of target firms with more than the average number of anti-‐takeover provisions on the abnormal returns for bidder shareholders, the dummy variable High is created. An average number of anti-‐takeover provisions of eight can be found in appendix C. Literature suggests that a takeover of a target firm with more than the average number of anti-‐takeover measures, results in lower abnormal returns for bidder shareholders.
Besides the factors that influence the abnormal returns for bidder
shareholders discussed in the literature review, another independent variable is added to the empirical model that is discussed by Gompers et al. (2001). The independent variable Tobin’s Q is added to the model, which Gompers et al.
(2001) uses for the valuation of firms. Gompers et al. (2001) argue that this variable should be added to the model, since state and national laws of anti-‐ takeover provisions affect firm value. So this variable analyses what the
influence of the bidder firm value, which is affected by anti-‐takeover provisions, is on the abnormal returns for bidder shareholders. Gompers et al. (2001) discusses that Tobin’s Q is measured by dividing the market value of assets, for which I used the market price per share, by the book value of assets. The market price per share and the book value per share are retrieved from Compustat. Furthermore, in Table 1 the descriptive statistics are given of the explanatory variables used in the empirical research.
Table 1. Descriptive statistics
This table is a summary of the dependent and independent variables used in this empirical research. The High dummy equals one for a takeover of a target firm with more than the average number of anti-‐takeover provisions. The Crisis dummy equals one if the announcement date of the takeover took place between December 2007 to June 2009. The Cash dummy equals one if the type of payment for the takeover is cash. The Combined dummy equals one if the type of payment for the takeover is a combination of cash and stock. The Tender dummy equals one for takeovers with a tender offer. The Private dummy equals one for takeovers where the target firm is private. Relative size is the transaction value divided by the equity market capitalization of the bidder firm at the end of the fiscal year before the takeover announcement. Tobin’s Q is measured by dividing the market price per share by the book value per share.
Mean Standard deviation Min Max Dependent variable: Abnormal return 0.0049 0.1060 -‐0.7087 2.5155 Independent variables: High 0.4148 0.4927 0 1 Crisis 0.1195 0.3243 0 1 Cash 0.9537 0.2102 0 1 Combined 0.0368 0.1884 0 1 Tender 0.3189 0.4661 0 1 Private 0.9367 0.2435 0 1 Relative size 0.3416 1.3187 0.0002 20.9816 Tobin’s Q 4.0515 18.0994 -‐36.3324 314.4516
Eventus is used to estimate the cumulative abnormal return for the short time periods around the event dates. The cumulative abnormal return measures the average abnormal return for the bidder shareholders, measured by using the
adjusted value weighted market model in Eventus. Fama (1998) suggests that the market model should be used to find the cumulative abnormal return, since the market model provides firm-‐specific expected return estimates. Moreover, the value weighted abnormal return corresponds to the sum of the abnormal returns across bidder shareholders, divided by the market capitalization of these shareholders (Moeller et al., 2003).
Furthermore, in the empirical research Eventus is used to gather the abnormal returns for a longer time period around the event data for the bidder shareholders in the sample. For this longer time period, an event window is used of three years before the takeover announcement and three years after the announcement. Because the abnormal returns for bidder shareholders are investigated three years after a takeover, I limit the period of the empirical research to December 2011.
3.3 Model setup
Fama, Fisher, Jensen and Roll (1969) argue that an event study should be used to test the statistical hypothesis. Fama et al. (1969) examined with an event study whether there was uncommon behavior in the rates of return on a security in the case of a stock split, in the months surrounding the stock split. In this empirical research the events are the takeover announcements.
Especially the papers from Beitel et al. (2004), Gompers et al. (2001) and Moeller et al. (2003) provide insight on how the empirical model should look like. The following empirical model is created:
AR = β1*Dummy private + β2*Dummy tender + β3*Dummy all cash + β4*Dummy combined + β5*Dummy crisis + β6*Dummy High + β7*Relative size + β8*Tobin’s Q + ε.
To examine if the independent variables have significant influence on the
abnormal returns for bidder shareholders and to investigate if the sample meets the OLS assumptions, robustness checks are performed. First, the sample is examined for potential large outliers. Second, the sample is tested for
homoscedasticity. Finally, multicollinearity among the independent variables is tested. Moreover, robust regressions are performed that will further reduce the
effect of potential large outliers on the regressions (Rousseeuw and Leroy, 2005).
It should be clear that I am primarily interested from the empirical model, what the influence of the level of anti-‐takeover provisions is on the abnormal returns for bidder shareholders, and subsequently what the coefficient, t-‐value and standard error is for the dummy variable concerning these provisions.
4. Results and Analyses
The results from the empirical research are given in section 4.1. Furthermore, I will give an analysis concerning the results in section 4.2.
4.1 Results
This section provides the cumulative abnormal returns for the short time periods around the event date and the investigation concerning the robustness checks mentioned in section 3.2. Furthermore, the results are provided
regarding the OLS-‐regressions and robust regressions.
The results concerning the cumulative abnormal return are given in table 2, for which the market adjusted value weighted index is used. I find a
cumulative abnormal return of 0.23% for the bidder shareholders in the sample for the event window (-‐1, +1), which is significantly different from zero at 10% level.
Table 2. Cumulative abnormal return
This table presents the cumulative abnormal return for the 369 mergers and acquisitions from the sample. Furthermore, along with the cumulative abnormal returns, the z-‐values are provided in parentheses. I respectively analysed the following event windows for the cumulative abnormal return around the announcement date: (-‐30, -‐1), (-‐1, +1), (0, 0), (+1, +1) and (+2, +30).
CAR(!!",!!) CAR(!!,!!) CAR(!,!) CAR(!!,!!) CAR(!!,!!") All M&As -‐0.49%
[-‐1.485] [1.725]* 0.23% [1.591] 0.17% [1.265] 0.06% [1.063] 0.91%
n 369 369 369 369 369
Respectively *, ** and *** indicates statistical significance at the 0.10, 0.05 and 0.01 levels.
The first robustness check that is performed is the investigation of large outliers. Stock and Watson (2012) state that large outliers can make OLS regressions misleading. One source of large outliers is data entry errors (Stock and Watson,
