Mergers, acquisitions and dividend payments in OECD countries: Domestic versus cross-border deals

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Mergers, acquisitions and dividend payments in OECD countries:

Domestic versus cross-border deals

Mariëlle Nijmeijer S2037637 Master Thesis Finance

Master Thesis International Financial Management

Supervisor: Dr. J.H. von Eije Co-evaluator: Dr. A.J. Meesters

June 19, 2015 12,408 words

Abstract

This paper examines if dividend payments of the acquiring firm changes when engaging in a merger and/or an acquisition, in particular of those firms which engage in international M&As. For the period 2000 to 2009, a total of 251 M&As are taken into account. The results indicate that dividend payments increase after an M&A deal. Furthermore, post-M&A dividend payments increase even more in cross-border deals compared to domestic ones. However, when a company headquartered in a civil law country acquires a target in a common law country, dividend payments increases less in comparison to other cross-border deals.

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1. Introduction

Improvement in the welfare of stakeholders of companies is a common area of interest and M&As offer a useful tool for achieving this purpose (Udeh and Igwe, 2013). The strategy of mergers and acquisitions can be welfare enhancing for stakeholders and M&As have been increasing in frequency these last decades (Dereeper and Turki, 2013). It has widely been examined that shareholders of the acquired firm benefit due to increased stock returns (Jarrell and Poulsen, 1989; Rhéaume and Bhabra, 2008; Khanal et al., 2014), while the impact on returns for acquiring firm shareholders is unclear (Barney, 1988; Jarrell and Poulsen, 1989; Becher, 2009; Khanal et al., 2014).

Yet, stock returns after M&A deals are not the only interest of shareholders. Olabode and Makinde (2003) studied M&As in the banking industry and discovered that the commonest expectation of shareholders after M&A deals is not an increase in stock returns but in particular, they found that shareholders expect a higher dividend payment after the merger or acquisition. Dividends per share increased significantly after mergers in Nigeria (Udeh and Igwe, 2013) and in stock-financed takeovers (Vitkova, 2014). Dereeper and Turki (2012) concluded that acquiring firms are disposed to adjust their dividend policies to those of targets in case of stock mergers. Since these studies only focus on one sector, one country or one type of M&A deal, it is necessary to examine dividend payments in a broader context to obtain a more generalizable result. This paper aims to analyze changes in dividend payments of the acquiring firm due to M&A deals in OECD countries. Therefore, the following research question will be examined and answered in this paper:

What is the effect of mergers and acquisitions on dividend payments of the acquiring firm?

In addition, even if dividend payments have been examined, no attention is given to the geographical implications of the M&A deals on shareholders. Since cross-border mergers and acquisitions are growing in number and size and are generally more complex, it is interesting to analyze whether the effect on dividend payments of the acquiring firm is different for cross-border M&As than for domestic ones. Therefore, a second research question is formulated:

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The results of this study show that cash dividend payments after an M&A deal indeed change. Post-M&A dividend amounts are higher than the dividend amounts paid to shareholders before the merger or acquisition. These dividend payments increase even further when the M&A is a cross-border deal. However, when a company located in a civil law country acquires a firm headquartered in a common law country, it will pay lower dividends in comparison to other cross-border deals. Since inflation might make the absolute amounts of dividend payments increase over time, a robustness check is performed by using a dividend-to-assets ratio to neutralize the effects to a large extend. Using this ratio yields a different outcome for the tests for equality of means and medians. These tests only found a significant increase in dividend ratio five years after the M&A deal compared to five years before the deal, but did not find evidence that cross-border deals lead to higher dividend payments. In contrast, the regression analysis found that the dividend ratio increases significantly after an M&A deal, and when the deal is cross-border, dividend payments will be even higher. However, cross-border M&A deals where the target is headquartered in a common law country and the acquirer in a civil law country lead to lower dividend payments in comparison to other cross-border deals.

This paper contributes to existing research because it combines two main fields of finance, namely M&As and dividends, and the combination of these two has not been widely examined. Previous literature mainly focuses on short-run shareholder effects of firm value and shareholder returns regarding the M&A announcement. Less attention is paid to the longer-term management policies after the deal, such as the dividend policy. Since dividend payments are also of great interest to shareholders, it is relevant to examine how M&As influence the dividend payments. Only a few researchers have been examining the influence of M&A deals on dividend payments, but they only look at a specific sector, deal type or country. More importantly, they do not assess the geographical scope of the deal, namely whether cross-border M&As differ from domestic deals with respect to dividends. This is an essential element since cross-border M&As are a fast track of international growth strategy (Deng and Yang, 2015). Hence, this paper addresses the gap in the literature by looking at dividend payments of both domestic and cross-border M&A deals.

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headquartered in a different legal system. If more cash is needed for dividends, it also gives them the opportunity to (re)evaluate their decisions and the reservation of cash for growth, diversification and expansion strategies.

The paper is structured as follows. First, research concerning M&A deals and dividends will be discussed in section II. In section III, the methodology is explained and the sample data is described in section IV. The results of the analysis will be published in section V. Finally, the research question will be answered and limitations of this study will be discussed in section VI.

2. Literature Review

2.1 Mergers and acquisitions

Mergers and acquisitions have been increasing in frequency these last decades. The two main theoretical frameworks explaining why firms engage in mergers and acquisitions are transaction cost economics and resource-dependence theory.

Transaction cost theory is concerned with the relative efficiency of different exchange processes and focuses on the costs of acquiring and handling information (Udeh and Igwe, 2013). This theory suggests that M&As occur from a need to decrease the effects of environmental uncertainty on a transaction, such as opportunism of partners due to market imperfections (Yin and Shanley, 2008). Firms merge in order to economize transaction costs in a world of uncertainty, where contractual arrangements are too expensive (Shimizu et al., 2004).

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M&As are thus an important vehicle for improving corporate profitability and growth. They provide a key mechanism by which firms gain access to new resources that produce operating efficiencies, increase revenues and reduce costs by achieving greater scale (Anand, Capron and Mitchell, 2005). Moreover, firms involved in M&A deals improve their organizational learning capability. As firms engage in M&A activity, they gain important acquisition process knowledge regarding pre-acquisition evaluation and post-acquisition integration (Collins et al., 2009). The organizational learning process produces new knowledge that in turn can result in competitive advantage and improved firm performance (Hitt et al., 2000) both for a new merger or acquisition as well as on behalf of future M&As.

2.2 M&As and shareholder returns

Mergers and acquisitions are extensively researched in the financial literature, especially with respect to its short-term effect on shareholder value. Empirical studies have found a positive increase in value for acquired-firm shareholders on M&A announcements, meaning that shareholders of the target firm benefit from the merger or acquisition (Jarrell and Poulsen, 1989; Rhéaume and Bhabra, 2008). However, empirical evidence on the relationship between the M&A announcement and stock price of acquiring-firm shareholders is mixed. Some researchers found a positive result (Becher, 2009; Khanal et al., 2014) while other studies have shown negative effects (Barney, 1988; Jarrell and Poulsen, 1989). Barney (1988) states that acquiring a related firm will only result in abnormal returns for the shareholders of the acquiring firm when the acquirer enjoys private and uniquely valuable synergistic cash flows with targets or unexpected synergistic cash flows. This is in line with Becher (2009) who states that non-positive acquirer returns are not wealth maximizing ventures and are motivated by entrenchment and hubris, whereas positive returns are motivated by synergy.

2.3 Dividend policy

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shareholders. There are several reasons why companies are distributing cash to their shareholders.

The first reason comes from the agency theory. Agency costs arise due to information asymmetry and conflicts of interest between corporate insiders, such as management, and outside investors. Investors face agency costs because managers can use a firm’s cash flows for their personal benefit instead of distributing it to shareholders. Dividend payments to shareholders reduce the cash available to managers and diminishes their ability to waste this capital, so that dividends alleviate the agency problem (Jensen, 1986).

Secondly, the signaling theory states that companies utilize dividend payments as a signaling device. Baker, Farrelly and Edelman (1985) questioned CFOs about corporate dividend policies and concluded that the anticipated level of a firm’s future earnings is a major determinant of dividend policy. Managers increase dividends only if they are reasonably sure that they can permanently maintain them at the new level (Lintner, 1956). Therefore, unexpected changes in dividend payments convey news about future cash flows and reveal new information to investors. Post-acquisition dividend policy can be used as a signaling mechanism by management in an attempt to communicate more precise information to capital markets about the earnings or cash flows expected to be generated after the acquisition (Vitkova, 2014).

Lastly, the clientele theory of dividends suggest that management can increase the value of the company by following a payout policy that meets the preferences of its investors which are currently not met by other companies in the market (Vitkova, 2014). In case of M&A deals, the acquirer will alter its dividend policy after the deal in order to accommodate the preferences of the target’s shareholders. Dereeper and Turki (2012) show that acquirers are more likely to adjust their dividend policy to that of the target in stock deals and when the dividend policies of the companies are different. In all-stock acquisitions, it is more likely that the target’s shareholder becomes part of the acquiring company’s investor base, suggesting that the dividend clientele of the acquirer will change as a result of the takeover (Vitkova, 2014). Since the target’s shareholders can decide to sell their ownership in the acquirer when they are dissatisfied with the dividend policy of the management, there is a strong incentive for the acquirer to adjust its policy in order to meet the preferences of its changed dividend clientele.

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2.4 M&As and dividends

A few studies have looked at the effect of M&A deals on dividends. Udeh and Igwe (2013) studied mergers and acquisitions in Nigeria and found that M&As have a positive and significant effect on dividend per share in 80 percent of the companies studied. A study of Olabode and Makinde (2003) revealed that dividend payments increased only in 41.3% of the M&A deals in the banking sector. Furthermore, Vitkova (2014) found that in all stock-financed takeovers, the post-acquisition dividends per share increased significantly. Moreover, Dereeper and Turki (2012) concluded that the acquirer is disposed to adjust its dividend policy in accordance with the ex-ante dividend policy of the target. They also state that the level of post-M&A dividends should reflect the level of profits generated by the combined economic assets of both firms and such superior operating performance of acquirers relative to their industry are found by Heron and Lie (2002). Healy, Palepu and Ruback (1992) found significant improvements in the asset productivity of acquirers relative to their industries, meaning higher post-merger operating cash flows. Michel and Shaked (1984) observed that synergies created by related M&As have a positive impact on the profits of the firms. Hence, since mergers and acquisitions increase profitability (Udeh and Igwe, 2013) and profit is related to dividends (Lintner, 1956; Fama and French, 2001; DeAngelo, DeAngelo and Stulz, 2006; Nnadi et al., 2013), dividend payments should increase after an M&A deal. Therefore, this paper will examine the following hypothesis:

Hypothesis 1: Dividend payments of the acquiring firm increase after M&A deals.

2.5 International M&As

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In contrast, cross-border acquisitions might also result in higher organizational costs. Since cross-border M&As are more complex than domestic ones, the acquiring firm has to incur higher costs of coordination and control. Managing the integration post-merger is difficult, especially in countries with different languages, religions or legal systems. Differences in national culture, customer preferences, business practices and government regulations may hinder firms from fully realizing their strategic objectives (Shimizu et al., 2004). Higher levels of cultural distance between firms have been associated with higher degree of conflicts during the day-to-day post-acquisition integration period (Morosoni, Shane and Singh, 1998). These conflicts of interests between the two firms, together with information asymmetry in foreign markets, make cross-border M&As more expensive than domestic ones.

Prior studies looking at the short-term wealth effects of acquirer shareholders of domestic and cross-border acquisitions may also be indicative of future long-run performance, and thereby of the possibility to increase dividends. However, these studies provide ambiguous results. On one hand, shareholders of acquiring firms place greater value on cross-border M&A announcements than on domestic ones (Feito-Ruiz and Menéndez-Reguejo, 2011). This indicates that there is a positive cross-border effect for acquirers (Francis, Hasan and Sun, 2008) and cross-border M&As are value enhancing for shareholders (La Porta et al., 2000). On the other hand, other authors found that cross-border mergers and acquisitions trigger lower wealth effects than domestic operations (Goergen and Renneboog, 2004). According to Moeller and Schlingemann (2005), US firms who acquire cross-border targets relative to those that acquire domestic targets experience lower announcement stock returns of approximately 1 per cent.

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acquiring US targets. This is in line with research of Saboo and Gopi (2009) who found that mergers have a positive effect on key financial ratios of firms acquiring domestic firms while a slightly negative impact is found for firms acquiring cross-border targets.

Hence, short-run shareholder return analysis and long-run post-M&A performance is not conclusive. Therefore, the following is hypothesized:

Hypothesis 2: Changes in dividend payments for cross-border M&As do not differ from dividend payment changes for domestic deals.

2.6 Corporate governance in international M&As

A major determinant of the success of cross-border acquisitions is the relative quality of the governance systems of the acquirer and target countries (von Eije and Wiegerinck, 2010). Differences in laws and enforcement explain the intensity and pattern of mergers and acquisitions around the world (Rossi and Volpin, 2004). A more active market for mergers and acquisitions is the outcome of a corporate governance regime with stronger investor protection and better accounting standards.

The disciplining influence of investors is stronger in high quality corporate governance common law countries (Allen, Bernardo and Welch, 2000). Common law countries have a legal system that protects investors and this means that shareholders are able to force managers to adapt policies that are more in line with shareholder preferences. In these countries, shareholders will force managers to pay out cash flows more easily than in civil law countries where there is lower investor protection (LaPorta, LoSilanes, Shleifer and Vishny, 2000). As a result, companies headquartered in a common law country are more likely to pay cash dividends and pay higher cash dividend amounts than companies headquartered in a civil law country (von Eije and Megginson, 2008). According to Martynova and Renneboog (2008), acquiring firms may adopt voluntarily the better corporate governance system of the target in acquisitions. This suggests that when the acquiring firm is headquartered in a civil law country and acquires a target in a common law country, the acquirer adopts the better corporate governance and practices of the target. The acquirer then complies to stricter regulations and higher demands from investors. Therefore, it can be suggested that dividend payments will increase if a firm headquartered in a civil law country acquires a firm from a common law country.

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3. Methodology

In order to test the hypotheses presented in the previous section, two quantitative sets of analyses will be performed, namely tests for equality of means and medians and regression analyses.

3.1 Tests for equality of means and medians

In the tests for equality of means, mean dividend payments of the firm five and three years prior to the M&A will be compared with dividend payments five and three years after the M&A respectively using a T-test. In addition, tests for equality of medians are performed since mean dividend payments may be susceptible to the influence of outliers. Therefore, median dividend payments five and three years prior to the M&A will be compared with median dividend payments five and three years after the M&A using a Wilcoxon signed-rank test.

Firstly, a test on the entire dataset will be performed for both means and medians in order to test the first hypothesis. This will test if dividend payments of the acquiring firm increase after the M&A deal and it will show if there is, in general, a difference in dividend payments. Thereafter, the data of domestic and cross-border M&A deals are separated and three alternative tests will be performed: one for domestic M&As, one for cross-border M&As and one for comparing domestic and cross-border deals. With the last test, the second hypothesis will be examined if cross-border M&As lead to changes in dividend payments compared to domestic deals. For this test, a T-test is used for testing means and a Wilcoxon rank-sum test is used for medians.

3.2 Regression analysis

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3.2.1 Control variables

The first control variable used is the size of the company (SIZE). According to Fama and French (2002), dividend payers are large firms, while companies that have never distributed funds to shareholders tend to be smaller in size. The larger the company, the more cash it has available to distribute to its shareholders. The leverage of the company (LEVERAGE) is included as a control variable because the risk associated with high degrees of financial leverage results in low-dividend payments since firms need to maintain their internal cash flows to meet their repayment obligations (Dereeper and Turki, 2013). Another control variable is a firm’s profitability (PROFITABILITY) since Fama and French (2001) state that firms with current high-profitability rates tend to pay dividends, while low-profit firms tend to retain profits. They also state that firms with low growth rates tend to pay dividends, while high-growth firms tend to retain profits. Therefore, the growth opportunities of a firm (GROWTH) are included in the regression as well. Moreover, dividends and share repurchases are substitute methods of returning cash to shareholders (Grullon and Michaely, 2002) and therefore, the value of shares repurchased (REPURCHASE) should be included in the analysis. Furthermore, the deal type, which can be a merger or an acquisition, will be included in the analysis (ACQUISITION). When firms merge, their assets will be combined and the new company has more cash available to distribute to its shareholders, suggesting a higher increase in dividend payments with mergers. Moreover, the method of payment (CASH PAYMENT) is included as deals financed with cash might lead to a lower increase in dividend payments due to a lack of cash since the acquiring firm has spent its retained earnings in its bid to acquire the target. In addition, the analysis controls for firms in the banking sector (BANKS) and utilities sector (UTILITIES). Lastly, the completion year of the deal (YEAR) is incorporated into the regression and includes 10 dummy variables representing the time span 2000-2009, with the exclusion of one year.

3.2.2 Regression models

The first regression tests if M&A deals have an effect on dividend payments, and is given by

𝐷𝐼𝑉𝑖,𝑡= 𝛼 + 𝛽1𝐴𝐹𝑇𝐸𝑅𝑖,𝑡+ 𝛽2𝐴𝐶𝑄𝑈𝐼𝑆𝐼𝑇𝐼𝑂𝑁𝑖,𝑡+ 𝛽3𝐶𝐴𝑆𝐻 𝑃𝐴𝑌𝑀𝐸𝑁𝑇𝑖,𝑡+ 𝛽4𝑆𝐼𝑍𝐸𝑖,𝑡+ 𝛽5𝐺𝑅𝑂𝑊𝑇𝐻𝑖,𝑡

+ 𝛽6𝐿𝐸𝑉𝐸𝑅𝐴𝐺𝐸𝑖,𝑡+ 𝛽7𝑃𝑅𝑂𝐹𝐼𝑇𝐴𝐵𝐼𝐿𝐼𝑇𝑌𝑖,𝑡+ 𝛽8𝑅𝐸𝑃𝑈𝑅𝐶𝐻𝐴𝑆𝐸𝑖,𝑡+ 𝛽9𝐵𝐴𝑁𝐾𝑆𝑖,𝑡

+ 𝛽10𝑈𝑇𝐼𝐿𝐼𝑇𝐼𝐸𝑆𝑖,𝑡+ 𝛽11𝑌𝐸𝐴𝑅00𝑖,𝑡+ 𝛽12𝑌𝐸𝐴𝑅01𝑖,𝑡+ 𝛽13𝑌𝐸𝐴𝑅02𝑖,𝑡+ 𝛽14𝑌𝐸𝐴𝑅03𝑖,𝑡

+ 𝛽₁₅𝑌𝐸𝐴𝑅04_𝑖,𝑡+ 𝛽₁₆𝑌𝐸𝐴𝑅05_𝑖,𝑡+ 𝛽₁₇𝑌𝐸𝐴𝑅06_𝑖,𝑡+ 𝛽₁₈𝑌𝐸𝐴𝑅07_𝑖,𝑡+ 𝛽₁₉𝑌𝐸𝐴𝑅08_𝑖,𝑡+ 𝜀_𝑖,𝑡

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payment occurred before the M&A (AFTER=0) or after the deal (AFTER=1), where the year of the M&A deal is considered as after. ACQUISITION is a dummy variable indicating if the deal is an acquisition (ACQUISITION=1) or a merger (ACQUISITION=0). CASH PAYMENT is a dummy variable being one if the deal is paid purely with cash and zero otherwise. SIZE is measured as the natural logarithm of a firm’s total assets. GROWTH is a firm’s market-to-book value of equity. LEVERAGE is the debt-to-equity ratio of a firm. PROFITABILITY is measured as the current return on assets (ROA). REPURCHASE is the value of shares repurchased by the firm in Euros. BANKS is a dummy variable equaling one if the firm is a bank and zero otherwise.

UTILITIES is a dummy variable being one if the firm is in the utilities industry and zero

otherwise. YEAR00, YEAR01, YEAR02, YEAR03, YEAR04, YEAR05, YEAR06, YEAR07 and

YEAR08 are dummy variables equaling one if the M&A deal occurred in 2000, 2001, 2002,

2003, 2004, 2005, 2006, 2007 and 2008 respectively. This means that the acquisition-year 2009 is used as the benchmark year. ɛ is the error term.

The second regression will test if the international dimension of M&A deals influences dividend payments, and will be labelled as regression model (2). Regression model (1) is used with the inclusion of an extra variable, namely INTERNATIONAL, which is a dummy variable measuring whether the M&A is cross-border (INTERNATIONAL=1) or domestic (INTERNATIONAL=0).

The third hypothesis is about international M&A deals and expects an increase in dividend payments if the acquirer is being headquartered in a civil law country and acquires a target company in a common law country. For this hypothesis, a subsample of cross-border deals is used and the hypothesis is tested with regression model (3), which uses regression model (1) with the inclusion of the dummy variable COMMON. This variable equals one if the acquirer is headquartered in a civil law country and the target in a common law country and zero otherwise.

3.3 Robustness tests

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regressions. For consistency in the regression analysis, the variable REPURCHASES is also transformed into a ratio of repurchases-to-assets.

4. Data

This section describes the generation of the dataset together with the characteristics of the M&A deals. It also presents the data sources. Furthermore, the sample characteristics are discussed.

4.1 M&A characteristics

The dataset consists of mergers and acquisitions from the period 2000 to 2009 in OECD countries retrieved from the Orbis database. These years reflect the need for data required to study pre-merger dividend payments extended over a period of five years before the year of the M&A and a post-merger dividend payment five years after, which approach is in line with Dereeper and Turki (2013). The dataset includes M&As that are completed by listed firms where both the acquirer and the target should be listed. Because firms have to disclose it when they buy back shares, increase capital or increase a minority stake in their target company, these actions are considered as M&A deals by Orbis. As a result, some M&A deals are present multiple times, and those will be removed. Moreover, companies that have conducted more than one M&A deal will be removed because overlap will exist in the pre- and post-M&A periods of the deals. So, only companies who conducted one merger or one acquisition are taken into the sample. Lastly, firms that do not have available information about their dividend payments will be removed as well, leading to a total dataset of 251 M&As. This total dataset consists of 230 acquisitions, of which 116 are domestic and 114 are cross-border, and 21 mergers, of which 11 domestic and 10 cross-border deals. The generation of the dataset, criteria and number of observations can be found in appendix A. All the financial information (e.g. dividends, assets, leverage, etc) is obtained from Datastream.

4.2 Sample characteristics

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firms who engage in an M&A deal. It can be seen that average dividend payments increase over time, not only after the M&A but also before the deal. This increase in dividend payments over time is higher for cross-border deals than for domestic deals. Moreover, cross-border deals have, on average, higher dividend payments compared to domestic deals.

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Figure 1 - Development of the average dividend payments around the M&A deal

This graph shows the development of average dividend payments for all M&A deals, domestic deals and cross-border deals. The horizontal axis represents the years before and after the M&A deal, where year 0 corresponds to the year of the merger or acquisition. The vertical axis is the average amount of cash dividends paid by firms in thousands of Euros.

When looking at the median of dividend payments, table 2 gives the same results; dividend payments increase over time and dividend payments of firms engaging in cross-border deals are higher than of those engaging in domestic M&A deals.

The descriptive statistics for each variable occurring in the regression analysis of the total sample and cross-border sample are shown in tables 3 and 4 respectively. Both tables report the number of firm-year observations, the mean, minimum and maximum value and the standard deviation of the variables. 0 200.000 400.000 600.000 800.000 1.000.000 1.200.000 1.400.000 -5 -4 -3 -2 -1 0 1 2 3 4 5 C ash d ivi d e n d s (€ 0 0 0 s) Time

Average dividend payments

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As can be seen in these tables, the average dividend amount paid to shareholders is €464,671,978, which is lower than the dividends of €771,608,804 paid when engaging in cross-border deals. However, the standard deviations of both samples are extremely high, indicating a large spread in dividend payments between firms and years. For both datasets, the minimum amount of dividends paid is zero, meaning that the sample includes firms that do not pay dividend at all in one or more years. The same holds for dividend-to-assets ratio, where the average is 0.016 for all deals and 0.019 for cross-border deals only.

The average company engaging in a merger or acquisition is large; the natural logarithm of its assets is 22.654. The average company has a market-to-book value of equity of 2.119, a debt-to-equity ratio of 43.864%, a return-on-assets of 3.732% and makes repurchases worth €370,611,579. More than 8 percent of the companies in the sample are banks and almost 10 per cent are in the utilities sector. Moreover, more than 90 per cent of the sample consists of acquisition deals and about 90 per cent of all deals are paid with only cash. Most M&A deals are conducted in 2007, where in 2000 the least deals occurred.

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5. Results

5.1 Test for equality

Table 5 displays the results of the test for equality of means for both the total and the cross-border sample.

As can be seen in table 5 panel A, for both time spans [-3;3] and [-5;5], the test gives significant results, meaning that dividend payments before and after the M&A do significantly differ from each other. Dividend payments three and five years after the M&A deal are €256,599,032 (p=0.002) and €439,339,626 (p=0.000) higher than three and five years before the deal respectively.

When looking at domestic M&As, the results are again significant and positive for both time spans [-3;3] and [-5;5]. Dividend payments three years after a domestic M&A are €130,434,969 higher (p=0.055) than three years before the M&A, and dividend payments five years after a domestic M&A deal are €157,863,339 higher (p=0.024) compared to five years prior to the deal. For cross-border M&As, the results are again positive and significant for both time spans. Dividend payments three and five years after a cross-border M&A deal are €376,701,701 and €710,437,811 higher than three and five years before the deal with p-values of 0.008 and 0.000 respectively. By comparing the dividend changes between domestic deals and cross-border deals, panel B shows that both have a positive change, meaning that dividend payments increase after the deal. Nevertheless, the dividend increase is significantly higher (p=0.006 and p=0.001) in cross-border M&As for both time spans.

Table 6 shows the results of the tests for equality of medians for both the total and the cross-border sample.

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than mean amounts. The test for equality of medians gives significant results for both time spans [-3;3] and [-5;5]. As can be seen in panel A of table 6, dividend payments three and five years after the M&A deal are €45,488,000 (p=0.005) and €70,690,000 (p=0.001) higher than three and five years before the deal respectively.

For domestic M&A deals, the results are again significant and positive for both time spans. Dividend payments three years after a domestic M&A are €12,034,000 higher (p=0.051) than three years before the deal, and dividend payments five years after the deal are €26,283,000 higher (p=0.002) compared to five years before the M&A deal. For cross-border M&A deals, dividend payments are €184,140,000 higher (p=0.017) when comparing dividend payments three years after the deal with three years prior to the deal, and €264,414,000 higher (p=0.006) when comparing dividend payments five years after and five years before the deal. When looking at the difference in dividend payments between domestic and cross-border deals, panel B shows that both have a positive change, meaning that dividend payments increase after the deal. Moreover, the dividend increase is significantly higher (p=0.000 and p=0.001) for cross-border deals for the time spans [-3;3] and [-5;5] respectively.

5.2 OLS regression

Before starting the regression analysis, it is necessary to analyze the correlations between the individual variables to see whether multicollinearity occurs. Appendix B provides a table with the correlations between the dependent, independent and control variables and shows that no variables are highly correlated amongst each other, meaning that multicollinearity is not a major problem in the analysis.

The output of the OLS regression for the total dataset (from t-5 till t+5 for all firms) can be

found in table 7. The regression analysis is performed with year dummies as described earlier, but their output coefficients are not shown in this table for convenience. Moreover, the regression corrects for heteroskedasticity using White heteroskedasticity-consistent standard errors.

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From the OLS estimates in table 7, it can be observed that merging with or acquiring a target company leads to significantly higher dividend payments. Firms who merge or acquire another company pay on average per year an extra €140,011,301 (p=0.000) in cash dividends compared to their payments before the M&A. In table 7 column 2, the analysis of dividend payments is extended by including a dummy variable for international M&A deals. When adding this dummy, the dummy variable AFTER gives even a higher coefficient of 146,673,525 (p=0.000). When regressing the total dividend payment on the international dummy, it gives an estimate of 285,887,741 (p=0.000). This translates to an additional cash dividend of €285,887,741 paid by the acquiring firm when engaging in a cross-border M&A deal.

For both regressions, it is found that an acquisition leads to higher dividend payments than a merger, however, not significantly for the first regression. For the method of payment, different signs are found for both regressions. Column 2 states a positive coefficient while column 3 states a negative coefficient, however, it should be noted that these results are not significant (p=0.937 and p=0.977 respectively). Furthermore, dividends increase if leverage is lower, profitability is higher and the firm is larger, which is consistent with the findings in the literature. The market-to-book value of a firm has a positive significant effect on dividends, which is not in line with literature. An explanation might be the substitution effect that LaPorta et al. (2000) found. They state that companies that are willing to issue equity in the future are paying dividends now to establish a reputation for decent treatment of minority shareholders. So, dividends increase when a growing company wants to signal that it is a good investment opportunity for investors. Furthermore, dividends are higher when firms have a higher amount of repurchases, meaning that share repurchases are complementary with dividend payments and not substitutes as literature suggests. An explanation for this might be that dividends are sticky, and if companies want to give shareholders a one-time benefit, they will repurchase shares instead of paying a higher dividend that should to be reduced in the future. Moreover, firms in the banking sector pay lower dividends while firms in the utilities sector pay higher dividends. The year dummies (not shown) are negative and reflect that, on average, the dividends paid in the years 2000-2008 are smaller than those paid in 2009.

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In table 8, the results from the OLS estimates of all cross-border deals are presented. As before, the regression analysis corrects for heteroskedasticity and is executed with year dummies, but they are –again– not displayed in the table.

From table 8, it can be derived that M&As still lead to annually significantly higher (p=0.000) dividend payments of about €255,496,919. When a company is headquartered in a civil law country and acquires a company in a common law country, dividend payments are on average €136,911,707 smaller, however, this decrease is only marginally significant (p=0.081). As in the previous regressions, acquisitions lead to higher dividend payments than mergers. M&A deals purely paid with cash reduce the dividend payments, however this result is not significant (p=0.670). Furthermore, dividend payments are higher if leverage is lower, firms are larger and when the firm is more profitable; however the latter is not significant (p=0.382). A company with a higher market-to-book value pays higher dividends, suggesting the substitution effect of LaPorta et al. (2000). Moreover, share repurchases and dividends are complements rather than substitutes. Firms in the utility sector pay higher dividends, while banks pay insignificantly lower dividends. The year dummies are negative and reflect inflation over the past years.

In conclusion, hypothesis 3 is rejected; cross-border deals with the target in a common law country and acquirer in a civil law country results in lower dividend payments in comparison with other cross-border deals.

5.3 Robustness tests

Several robustness checks are performed using a different measure for the independent variable of dividend payments, namely a ratio of dividend-to-assets. The reason for the use of this measure is that there may be inflation that makes the absolute amounts increase over time for each firm. Dividing the dividend amounts by total assets will neutralize the effects to a large extend.

5.3.1 Test for equality

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(p=0.349) than the 0.021 three years after the deal. The time span [-5;5] gives a different picture; the dividend ratio five years after the deal is 0.009 and is significantly higher (p=0.022) than the ratio of 0.005 five years before the deal. For domestic M&As, no significant results can be found. The dividend ratio three years after the deal is 0.014 lower (p=0.250) compared to three years before the deal, while the dividend ratio five years after the deal is 0.004 higher (p=0.158) compared to five years before the deal. For cross-border M&As, the results are positive, but only significant for the [-5;5] time span. The dividend ratio three (five) years after the deal are 0.002 (0.009) higher than three (five) years before the deal. When the changes in dividend ratio between domestic deals and cross-border deals are compared (table 7, panel B), it can be observed that payout ratios for cross-border deals are not significantly larger; p=0.179 for [-3;3] and p=0.303 for [-5;5].

The results of the test for equality of medians can be found in table 10. Panel A shows almost the same results as table 9 but with lower ratios. The median dividend ratio three years after the deal is 0.007, which is not significantly lower (p=0.194) compared to the ratio of 0.006 three years before the deal. The dividend ratio five years after the deal is 0.009, which is significantly higher (p=0.020) than the ratio of 0.004 five years prior to the deal. When looking at domestic M&As, the results are positive but only significant for the [-5;5] time span. The dividend ratio three (five) years after the deal are 0.002 (0.003) higher than three (five) years before the deal. For cross-border M&As, no significant results can be found. The dividend ratio three years after the deal is 0.003 higher (p=0.442) compared to three years before the deal, while the dividend ratio five years after the deal is 0.005 higher (p=0.241) than five years before. When observing the changes in median dividend ratios of domestic and cross-border deals, panel B of table 9 shows that both are positive. When comparing the positive changes of domestic deals with those of cross-border deals, it can be observed that the larger payout ratios for cross-border deals are not significantly; p=0.657 for [-3;3] and p=0.361 for [-5;5]

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5.3.2 Regression analysis

Table 11 presents the outcomes of the OLS of the robustness test. Again, year dummies are used in the analysis but are not shown in the table below, and the regression corrects for heteroskedasticity.

Table 11 shows largely the same results as before. For the total sample, the dividend ratio increases with 0.002 (p=0.078) and 0.002 (p=0.056) after an M&A deal in columns 1 and 2 respectively. For cross-border mergers and acquisitions, column 3 shows that the dividend ratio increases with 0.004 (p=0.000). This is consistent with the positive and significant coefficient of the dummy variable INTERNATIONAL in column 2. From column 3 it can be derived that when a company headquartered in civil law country acquires a company in a common law country, this leads to a significantly lower dividend ratio of 0.005 (p=0.001) in comparison to other foreign M&A deals.

For all regressions, it can be found that an acquisition leads to a higher dividend ratio than a merger. In line with theory, dividend ratios are higher when leverage is lower, profitability is higher and when the firm is smaller (due to a ratio of dividends divided by assets). Firms with a high market-to-book value pay higher dividends, which indicates a substitution effect. Share repurchases are substitutes of dividends, as can be seen from the negative but insignificantly coefficient in the regression. The dividend ratio is lower for banks and higher for companies in the utilities industry. For the total sample, M&A deals paid with only cash lead to higher dividend ratios, while for the cross-border sample, this leads to lower (but insignificant) dividend ratios.

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5.4 Overall discussion of hypotheses

The results presented above can be interpreted with regards to the research question. The aim of this paper is to analyze the effect of mergers and acquisitions on dividend payments of the acquiring firm, especially with regards to companies engaging in cross-border M&A deals.

Theory suggests that dividend payments after the M&A deal should increase due to higher post-M&A profits. Because of the merger or acquisition, the acquirer grows and gains access to new resources that provide operating efficiencies, increase revenues and reduce costs by achieving greater scale (Anand et al., 2005). Moreover, firms are learning from the M&A process, which may result in competitive advantages and improved firm performance (Hitt et al., 2000). The higher profitability results in higher dividend payments conveying news about future earnings. Therefore, the first hypothesis is “Dividend payments of the acquiring firm increase

after M&A deals”. Both the test for equality of means and medians as well as the OLS regression

state that the first hypothesis is supported; cash dividends distributed to shareholders increase significantly after a merger or acquisition. Likewise, the ratio of dividend-to-asset increases as well, but only marginally significantly for the OLS regression and significantly for the test of equality of means and medians at the [-5;5] time span. The higher dividend payments found in this study are also consistent with empirical findings of Udeh and Igwe (2013) and Vitkova (2014) who found that post-M&A dividends per share increase.

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expensive. Since it is unclear whether the benefits outweigh the costs of cross-border M&A deals, hypothesis 2 states that “Changes in dividend payments for cross-border M&As do not

differ from dividend payment changes for domestic deals”. The results of the test for equality of

means and medians as well as the OLS regression lead to hypothesis 2 being rejected; cash dividend payments are significantly higher in cross-border deals compared to domestic deals. However, the dividend ratio gives positive but insignificant results for the tests of equality and positive and significant results for the regression. It is assumed that, due to synergies, profits per unit increase. However, the increase in profits (and dividends) may not be as high as the increase in assets, leading to a lower dividend ratio. Hence, the results are weakly in line with Stiebale and Trax (2011) who state that cross-border deals are not value-destroying but value-enhancing to shareholders, which might lead to increased post-M&A dividend payments.

An important success factor of cross-border acquisitions is the quality of the governance systems of the countries in which the acquirer and target operate. Martynova and Renneboog (2008) state that, in M&A deals, the acquiring firm may adopt voluntarily the better corporate governance system of the target. Since common law countries have a legal system that protects investors, companies headquartered in a common law country are paying higher dividends compared to companies in a civil law country (LaPorta et al., 2000; von Eije and Megginson, 2008). The acquirer should adhere to stronger investor protection of the target and will be forced to pay more dividends. This results in hypothesis 3, stating that “Cross-border M&A deals where

the target is headquartered in a common law country and the acquirer in a civil law country lead to higher dividend payments”. The results of the regression analysis indicate that this hypothesis

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6. Conclusion

This paper examines whether mergers and acquisitions change the dividend payments of the acquiring firm, especially regarding international M&A deals in OECD countries. Between 2000 and 2009, a total of 251 M&As are taken into consideration. This total dataset consists of 230 acquisitions, of which 116 are domestic and 114 are cross-border, and 21 mergers, of which 11 domestic and 10 cross-border deals. By looking at dividend payments of the acquirer five years prior to the M&A till five years post-M&A, the total sample comprises 1,837 firm-year observations.

The significant results of the cash dividend amounts indicate that post-M&A dividends are higher. This increase in dividend payments is even higher for cross-border deals compared to domestic deals. However, when a company headquartered in a civil law country acquires a target in a common law country, post-M&A cash dividends are lower compared to other cross-border deals. The robustness check with a ratio of dividend-to-assets supports the outcomes weakly for the tests for equality of means and medians. These tests only found a significant increase in dividend ratio for the time span [-5;5] but did not found evidence of different dividend payments among cross-border and domestic deals. The regression analysis provides significant results; dividend ratio increases after an M&A deal. Post-M&A dividend payments are higher for cross-border deals than for domestic deals. However, M&A deals where the acquirer is headquartered in a civil law country and the target in a common law country lead to lower dividend payments.

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Table 1 - Average of dividend payments around the M&A deal

Year -5 -4 -3 -2 -1 0 1 2 3 4 5

All deals 248,596 295,204 319,712 370,589 443,082 502,731 534,292 535,580 576,311 597,361 687,935 Domestic deals 75,941 117,394 96,061 125,099 164,936 168,236 183,972 202,039 226,496 220,863 233,805 Cross-border deals 425,427 477,316 548,773 622,018 727,958 845,318 893,088 877,189 934,589 982,968 1,153,053 This table describes the development of the average dividend payments in thousands of Euros around the M&A deal for all deals, as well as for domestic and cross-border deals. Year 0 is the year in which the M&A occurred.

Table 2 - Median of dividend payments around the M&A deal

Year -5 -4 -3 -2 -1 0 1 2 3 4 5

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Table 3 - Descriptive statistics of total sample

Firm-year

observations Mean Minimum Maximum Std. Dev.

Dividend amount (€) 2,761 464,671,978 0.000 16,194,000,000 1,007,622,445

Dividend ratio 2,761 0.016 0.000 2.817 0.066

Percentage after M&A 2,761 54.546 0.000 100.000 49.802

Percentage of international deals 2,761 49.402 0.000 100.000 50.006

Deal type (% of acquisitions) 2,761 91.634 0.000 100.000 27.694

Method of payment (% paid with cash only) 1,903 89.017 0.000 100.000 31.276

Size (natural logarithm assets) 2,761 22.654 13.809 28.589 2.592

Growth opportunities (market-to-book value) 2,761 2.119 0.040 71.440 2.429

Leverage (%) 2,761 43.864 0.000 191.410 26.029

Profitability (%) 2,761 3.732 -110.360 95.756 9.281

Repurchases (€) 2,513 370,611,579 0.000 43,803,000,000 2,220,788,323

Percentage in utilities sector 2,761 9.960 0.000 100.000 29.952

Percentage in banking sector 2,751 8.367 0.000 100.000 27.694

M&A deal in 2000 2,761 0.052 0.000 1.000 0.222 M&A deal in 2001 2,761 0.080 0.000 1.000 0.271 M&A deal in 2002 2,761 0.060 0.000 1.000 0.237 M&A deal in 2003 2,761 0.120 0.000 1.000 0.324 M&A deal in 2004 2,761 0.104 0.000 1.000 0.305 M&A deal in 2005 2,761 0.124 0.000 1.000 0.329 M&A deal in 2006 2,761 0.120 0.000 1.000 0.324 M&A deal in 2007 2,761 0.135 0.000 1.000 0.342 M&A deal in 2008 2,761 0.127 0.000 1.000 0.334 M&A deal in 2009 2,761 0.080 0.000 1.000 0.271

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Table 4 - Descriptive statistics of cross-border sample

Firm-year

observations Mean Minimum Maximum Std. Dev.

Dividend amount (€) 1,364 771,60,804 0.000 16,194,000,000 1,244,223,536

Dividend ratio 1,364 0.019 0.000 0.550 0.029

Percentage after M&A 1,364 54.546 0.000 100.000 49.811

Percentage of M&As from civil to common law country 1,364 13.710 0.000 100.000 34.408

Deal type (% of acquisitions) 1,364 91.936 0.000 100.000 27.239

Method of payment (% paid with cash only) 946 90.698 0.000 100.000 29.062

Size (natural logarithm assets) 1,364 23.614 15.849 28.589 2.444

Growth opportunities (market-to-book value) 1,364 2.348 0.040 71.440 2.843

Leverage (%) 1,364 48.050 0.000 105.450 25.289

Profitability (%) 1,364 4.780 -110.360 51.020 7.756

Repurchases (€) 1,243 610,486,336 0.000 43,803,000,000 3,079,388,618

Percentage in utilities sector 1,364 14.516 0.000 100.000 35.239

Percentage in banking sector 1,364 10.484 0.000 100.000 30.646

M&A deal in 2000 1,364 0.073 0.000 1.000 0.260 M&A deal in 2001 1,364 0.113 0.000 1.000 0.317 M&A deal in 2002 1,364 0.048 0.000 1.000 0.215 M&A deal in 2003 1,364 0.113 0.000 1.000 0.317 M&A deal in 2004 1,364 0.081 0.000 1.000 0.272 M&A deal in 2005 1,364 0.129 0.000 1.000 0.335 M&A deal in 2006 1,364 0.137 0.000 1.000 0.344 M&A deal in 2007 1,364 0.129 0.000 1.000 0.335 M&A deal in 2008 1,364 0.113 0.000 1.000 0.317 M&A deal in 2009 1,364 0.065 0.000 1.000 0.246

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Table 5 - Results of the test for equality of means (dividend payments in Euros)

Time span [-3;3] Time span [-5;5]

Panel A Year -3 Year +3 T-statistic Year -5 Year +5 T-statistic

Total dataset 319,711,518 576,310,550 -3.084*** 248,595,593 687,935,219 -4.219***

Domestic dataset 96,060,559 226,495,528 -1.931* 75,941,228 233,804,567 -2.270**

Cross-border dataset 535,810,236 912,511,937 -2.662*** 415,377,622 1,125,815,433 -3.843***

Panel B Domestic change Cross-border change T-statistic

(dom-crossb) Domestic change Cross-border change

T-statistic (dom-crossb) Domestic versus

cross-border deals 130,434,969 376,701,701 -2.726*** 157,863,339 710,437,811 -3.305*** This table gives the outcomes of the test for equality of means for a time span [-3;3] representing three years prior to the M&A deal and three years after the deal, and the time span [-5;5] representing five years before and five years after the deal. The amounts reported in the table are the cash dividend amounts in Euros. Change represents the difference between the dividend amounts after the M&A deal and before the deal.

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Table 6 - Results of the test for equality of medians (dividend payments in Euros)

Panel A Year -3 Year +3 Statistic Year -5 Year +5 Statistic

Total dataset 38,166,000 83,654,000 2.815*** 28,965,000 99,655,000 3.386***

Domestic dataset 12,726,000 24,760,000 1.950* 7,742,000 34,025,000 3.061***

Cross-border dataset 182,210,000 366,351,000 2.388** 119,285,000 383,698,000 2.738***

Panel B Domestic change Cross-border change Statistic

Statistic (dom-crossb) Domestic versus

cross-border deals 10,977,000 94,459,000 -3.636*** 12,394,000 137,427,000 -3.006*** This table gives the outcomes of the test for equality of medians for a time span [-3;3] representing three years prior to the M&A deal and three years after the deal, and the time span [-5;5] representing five years before and five years after the deal. The amounts reported in the table are the cash dividend amounts in Euros. Change represents the difference between the dividend amounts after the M&A deal and before the deal. The Wilcoxon signed-rank test is used in Panel A, whereas in panel B the Wilcoxon rank-sum test is used.

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Table 7 - Results of the OLS regression for the total dataset of M&As in OECD countries in the period 2000-2009 (1) (2) AFTER 140,011,301 [4.01] *** 146,673,525 [4.27 *** INTERNATIONAL 285,887,741 [7.17] *** ACQUISITION 74,406,625 [1.13] 154,367,114 [1.99] ** CASH PAYMENT 4,754,593 [0.08] -1,742,712 [-0.03] SIZE 207,407,401 [18.19] *** 187,525,936 [16.21] *** GROWTH 15,833,541 [3.25] *** 9,898,073 [2.29] ** LEVERAGE -3,657,499 [-3.64] *** -3,060,052 [-3.08] *** PROFITABILITY 6,068,747 [2.02] ** 4,787,175 [1.75] * REPURCHASE 0.050 [2.93] *** 0.047 [2.68] *** BANKS -109,327,818 [-1.79] * -134,870,381 [-2.25] ** UTILITIES 443,271,491 [5.20] *** 380,394,264 [4.61] *** C -3,755,301,777 [-15.05] *** -3,477,391,798 [-11.30] *** NUMBER OF OBSERVATIONS 1,744 1,744 ADJUSTED R2 _0.371 _0.387

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Table 8 - Results of the OLS regression for cross-border deals in OECD countries in the period 2000-2009 (1) AFTER 255,496,919 [4.48] *** COMMON -136,911,707 [-1.75] * ACQUISITION 515,170,187 [5.80] *** CASH PAYMENT -49,141,396 [-0.43] SIZE 246,490,772 [13.19] *** GROWTH 15,377,325 [2.84] *** LEVERAGE -6,038,022 [-3.07] *** PROFITABILITY 4,126,331 [0.88] REPURCHASE 0.028 [2.47] ** BANKS -96,510,901 [-0.98] UTILITIES 339,605,025 [3.38] *** C -3,692,822,380 [-7.62] *** NUMBER OF OBSERVATIONS 875 ADJUSTED R2 _0.471

This table shows the results for the linear regression model with only cross-border M&A deals. The dependent variable is the cash dividend amount paid by the firm in Euros. C is the constant. AFTER represents a dummy variable for whether or not the dividend payment occurred before the M&A. COMMON is a dummy variable whether or not the acquirer is headquartered in a civil law country and the target in a common law country. ACQUISITION is a dummy variable whether the deal is an acquisition or a merger. CASH PAYMENT is a dummy variable for deals purely paid with cash. SIZE is the natural logarithm of a firm’s total assets. GROWTH is a firm’s market-to-book value of equity. LEVERAGE is the debt-to-equity ratio of a firm. PROFITABILITY is measured as the current return on assets. REPURCHASE represents the amount of shares repurchased in Euros. BANKS is a dummy variable whether the firm is a bank. UTILITIES is a dummy variable for a firm in the utilities sector. YEAR dummies are included in the regression but are not displayed. (1) represent the third regression equation. The table exhibits the coefficient together with the t-statistic in brackets.

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Table 9 - Results of the test for equality of means (dividend-to-assets ratio)

Panel A Year -3 Year +3 T-statistic Year -5 Year +5 T-statistic

Total dataset 0.021 0.015 0.937 0.012 0.018 -2.305**

Domestic dataset 0.025 0.011 1.153 0.009 0.013 -1.416

Cross-border dataset 0.017 0.019 -0.813 0.014 0.019 -1.860*

Panel B Domestic change Cross-border change T-statistic

T-statistic (dom-crossb) Domestic versus

cross-border deals -0.014 0.002 -1.792 0.004 0.005 -1.033

This table gives the outcomes of the test for equality of means for a time span [-3;3] representing three years prior to the M&A deal and three years after the deal, and the time span [-5;5] representing five years before and five years after the deal. The amounts reported in the table are ratios of dividends to assets. Change represents the difference between the dividend ratios after the M&A deal and before the deal.

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Table 10 - Results of the test for equality of medians (dividend-to-assets ratio)

Panel A Year -3 Year +3 Statistic Year -5 Year +5 Statistic

Total dataset 0.006 0.007 1.299 0.005 0.009 2.332**

Domestic dataset 0.004 0.006 1.260 0.004 0.007 2.441**

Cross-border dataset 0.008 0.011 0.768 0.008 0.013 1.173

Panel B Domestic change Cross-border change Statistic

Statistic (dom-crossb) Domestic versus

cross-border deals 0.002 0.003 0.444 0.003 0.005 0.361

This table gives the outcomes of the test for equality of medians for a time span [-3;3] representing three years prior to the M&A deal and three years after the deal, and the time span [-5;5] representing five years before and five years after the deal. The amounts reported in the table are ratios of dividends to assets. Change represents the difference between the dividend amounts after the M&A deal and before the deal. The Wilcoxon signed-rank test is used in Panel A, whereas in panel B the Wilcoxon rank-sum test is used.