The impact of the EU takeover directive on
EU-target acquisitions
Master Thesis MSc Finance
University of Groningen
Faculty of Economics and Business
July, 2012
Author: E.B.M. Stamsnieder
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The impact of the EU takeover directive on EU-target
acquisitions
University of Groningen Faculty of Economics and Business
July, 2012
Edo Stamsnieder Student number: 1678442
Abstract
This paper analyzes the impact of the EU takeover directive on firm performance of target acquisitions, as measured by acquisition announcement abnormal returns. 186 EU-target acquisitions from January 1997 to May 2012 are examined. No significant effects of the implementation of the EU takeover directive on abnormal returns of acquisition
announcements are found. However, this paper find that the directive induced a shift in the differences between private and public targets. In line with prior research, this difference is significant before the implementation of the directive. After the implementation of the directive this difference is not significant anymore.
Keywords: Takeover directive, European Union, EU-target acquisitions, Corporate governance, Cumulative abnormal returns
2 1. Introduction
This paper uses the European Union (EU) takeover directive to examine the impact of increasing managerial entrenchment on abnormal returns of European target acquisition announcements. In April 2004, the EU promulgated the takeover directive which was implemented in May 2006. One aim of the directive is to increase the efficiency of takeover bids. (McCahery and Renneboog, 2003). However the directive’s goal is to encourage value-creation and takeover activity, it received criticism on several grounds. The key theme is that the directive may have entrenched managers in the EU (Humpery-Jenner, 2012).
Increased entrenchment worsens agency conflicts. Increased agency problems lowers firm values for target firms (John et al, 2010). Bebchuck et al. (2009) find significant reductions in firm value as well as large negative abnormal returns for companies with higher levels of entrenchment management.
The directive has an effect on the method of payment of the acquisitions as well (Humphery-Jenner, 2012). The rational beyond this, is that entrenched managers avoid reducing cash holdings (Harford et al., 2008). Cash-financed deals typically have higher abnormal returns (Fuller et al., 2002). The widely accepted rationale for this effect is adverse selection: managers use stock only when that stock is overvalued.
Humpery-Jenner (2012) analyzed acquisitions by acquirers listed in the EU. He focused on acquirers rather than targets. By examining takeover returns, he find supportive evidence that EU-companies make investments that are less profitable and take longer to complete after the directive has been implemented.
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acquirers. Using the Brown and Warner (1985) standard event-study method, abnormal returns as a result of the acquisition announcements are examined. To focus more closely on the method of payment and corporate governance mechanisms, in particular the influence of shareholder rights, creditor rights and accounting standards, an Ordinary Least Square (OLS) regression analysis is conducted. The creditor rights, the anti-director rights and the accounting standards index, developed by La Porta et al. (1998), is used as a proxy for the degree of corporate governance.
This paper will provide additional insights in the discussion about the value of regulatory harmonization and extends the research about the influence of corporate governance mechanisms on firm value.
4 2. Literature
This section provides an overview of the existing theoretical concepts relevant for this paper. First, the impact of mergers and acquisitions on the profitability of companies and the main concepts affecting this relationship is discussed. Second, the influence of corporate
governance on firm performance is discussed. Third, this section provides a discussion regarding the EU-directive, its influence on managerial entrenchment and increasing availability of anti-takeover provisions (ATPs) and the influence of these consequences on firm performance. Finally, the hypotheses are formulated.
Mergers & acquisitions and firm performance
During the last decades, mergers and acquisitions and its profitability are extensively researched in the literature of corporate finance. Bruner (2002) summarized the evidence from 114 studies from 1971 to 2001. Generally, target shareholders earn positive returns and returns to acquiring-firm shareholders are zero or negative. Acquirers and targets combined earn positive returns. However, based on the acquirer and target characteristics, Bruner (2002) find in these studies a large variation on acquirer returns and concludes: “On balance, one should conclude that M&A does pay. But the broad dispersion of findings around a zero return to buyers suggests that executives should approach this activity with caution”. Two important characteristics that lead to dispersion in acquirer returns are the listing status of the target and the method of payment of the acquisition.
Chang (1998), Fuller et al. (2002), Moeller et al. (2004), Faccio et al. (2006) and Officer et al. (2009) all find positive abnormal returns for acquiring firm stockholders when the targets are not publicly listed.
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First, the limited competition hypothesis assumes limited competition in the takeover market. Due to scarcity of public information on privately held targets, costs of obtaining this
information is high. This will limit the competition. If the competition is limited for private targets, the likelihood of underpayment is high and acquiring firms can experience positive stock returns.
Second, the monitoring hypothesis. Firms acquiring private targets through common stock exchanges, tend to create outside blockholders. The creation of new blockholders will lead to increased monitoring of the acquiring firm. As a result, firm value can increase.
Third, the information hypothesis. When acquirers pay with equity, they can suffer from asymmetric information problems. Abnormal returns are significantly negative on average for acquirers when they use equity to acquire publicly traded targets (Travlos, 1987). Inspired by the classic adverse selection model of Myers and Majluf (1984), Travlos (1987) put forward that acquisitions of public firms paid with equity signals to the market that management believes this equity is overvalued. When the acquisition is paid with cash, the market infers that the value of its equity is higher than its market value, which leads to higher abnormal returns. However, when firms offer equity to acquire private targets, the information
asymmetry problem can be mitigated because the target can obtain confidential information directly from the acquirer. The target shareholders have an incentive to thoroughly examine the acquiring firm. Because the acquirer would not expect to benefit by using overpriced equity, an equity financed takeover of a private firm could be a positive signal that the acquirer’s equity is fairly valued.
6 Corporate Governance and Firm Performance
The relation between corporate governance and firm performance is extensively researched in the literature of corporate finance as well. Tirole (2001) describes corporate governance as “the design of institutions that induce or force management to internalize the welfare of stakeholders”. The concept of corporate governance has its foundations in the separation of ownership and control of firms and the presence of agency problems, as formulated by Berle and Means (1932). Managers are appointed to safeguard the interests of stakeholders. The agency theory is based on the belief that managers (agents) might not act in the best interest of the firm’s shareholders (principals) because they are self-interested (Jensen and Mecking, 1976). Due to conflicts of interest between principals and agents, agency costs arise. Agency theorists would expect that bad governed firms have high agency costs. Increased agency costs lower the value of the firm and reduces wealth of shareholders (Jensen and Mecking, 1976).
The empirical evidence for the relation between corporate governance and firm performance is mixed. That corporate governance do influence firm performance shows Gompers et al. (2003). Gompers et al. (2003) developed a proxy for the balance of power between owners and managers: the Governance Index (G-Index). The G-Index consist twenty-four provisions that reduce shareholder rights. 1,500 US-companies during the 1990s are graded on a scale of 1 to 24. A zero-investment strategy that bought firms with the strongest shareholder rights and sold firms with the weakest shareholder rights would have earned abnormal returns of 8.5 percent per year. Moreover, they find that firms with stronger shareholder rights
experienced higher firm value, higher profits, lower capital expenditures, higher sales growth and made fewer corporate acquisitions.
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Entrenchment-Index. This index includes only the six provisions that are negatively correlated with firm performance. However, they find that increases in this index are associated with significant reductions in firm value as well as large negative abnormal returns.
Following the approach of Gompers et al. (2003), Bauer et al. (2004) analyses the effect of corporate governance on stock returns and firm value in Europe. The two currency areas, the UK and the European Monetary Union (EMU) are analyzed separately. A zero-investment strategy that bought firms with the strongest shareholder rights and sold firms with the weakest shareholder rights would have earned an annual return of 7.1 percent for the UK portfolio and 2.1 percent for the EMU portfolio. However, in the UK, no evidence was found of a relationship between corporate governance and firm valuation as measured by Tobin’s Q. In contrast, the EMU sample shows a significant positive relationship. The fact that the EMU sample consists of several countries, could explain the different results. As
documented by La Porta et al. (1998), corporate governance standards differ significantly between countries. After adjusting the sample for country differences, the relationship becomes weaker. In the UK sample, it’s remarkable that while large excess returns were found to the zero-investment strategy, no evidence was found of a relationship between corporate governance and firm value. According to Bauer et al. (2004), this result indicates that the UK market is still adjusting. Higher stock returns should in the long run translate into higher firm valuation. The opposite is going on in the EMU market. While the excess returns of the zero-investment strategy were much smaller, a significant positive relationship
between corporate governance and firm value was found. Contrary to the UK market, this result might imply that current corporate governance standards have already been
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La Porta et al. (1998) studied the role of the legal system on corporate governance. The legal system is an external corporate governance mechanisms that shapes the nature of other mechanisms. Schleifer and Vishny (1997) state that corporate governance “deals with the ways in which suppliers of finance to corporations assure themselves of getting a return on their investment”. This depends on laws and their enforcement. Different law systems provide different rights to owners. There are two legal systems to distinguish: common-law and civil-law. In common-law countries, justice is based on resolving specific disputes. Therefore, common-law is based on precedents from earlier judicial decisions. In civil-law countries, justice is based on statutes and comprehensive codes. There are three types to distinguish: French-, German- and Scandinavian-civil law. La Porta et al. (1998) find that common-law countries generally have the strongest, and French-civil-law countries the weakest legal protection of investors.
La Porta et al. (1999), investigate in a working paper differences in governance standards between 27 countries. Their evidence shows higher valuation of firms incorporated in countries with better governance standards.
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finding can be explained by agency theories. Firms in target countries with high shareholder protection face lower agency costs. Therefore, target-firm values are higher and acquirer returns will be lower. However, no significant difference of this relationship is detected for private targets. Furthermore, John et al. (2010) studied the influence of creditor rights of the target country on acquirer returns and find a significant relationship. The lower the creditor protection in the target country, the higher the acquirer returns. La Porta et al. (1998)
hypothesized that higher creditor protection can increase bank lending to firms. In that case, firms are subject to increased bank monitoring which can lead to higher valuation. As a result, target-firm values are higher and acquirer returns will be lower. John et al. (2010) also studied the influence of the level of accounting standards in the target country on acquirer returns and find significant evidence on this relationship. The higher the accounting
standards in the target country, the higher the acquirer returns. A higher accounting standard ensures less buyer uncertainty because acquirers can value the targets with greater
precision.
The EU takeover directive
In an attempt to harmonize takeover laws in the EU, the EU promulgated a takeover directive in April 2004. The deadline for implementation was in May 2006. One aim of the directive is to increase the efficiency of takeover bids and thus to encourage value-creation and takeover activity (McCahery and Renneboog, 2003). However, it received criticism on several
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minimum price rule. This rule holds that the acquirer must pay all shareholders the highest price paid for the target’s shares over the preceding 12 months.
Summarized, European managers are more entrenched after the directive, mainly due to the vague formulation of the directive and the increased availability of ATPs. Because
entrenched managers pursue private benefits at the expense of shareholders, increased entrenchment worsens agency problems. As discussed above, agency problems lower firm values for target firms. Bebchuck et al. (2009) find significant reductions in firm value as well as large negative abnormal returns for companies with higher levels of entrenched
management.
The effects of ATPs on firm performance is still a debate among researchers. The
management entrenchment hypothesis expects that the main effect of ATPs is to make the manager more entrenched and increase agency problems. Gompers et al. (2003) find supportive evidence for this hypothesis. Measured by stock returns, firms protected by fewer ATPs outperform firms with more ATPs.
The market pressure hypothesis maintain that ATPs shield managers from short-term market pressures and help managers to focus on creating long-run shareholder value (Stein, 1988). With this argument, companies often justify their actions regarding the adoption of ATPs. Google’s co-founder Larry Page made this point clear in a letter to shareholders to explain why the firm issues dual-class shares: “A management team distracted by a series of short-term targets is as pointless as a dieter stepping on a scale every half hour”.
An alternative explanation can be found in de shareholder interest hypothesis. Prior studies suggest that some companies may adopt ATPs with the purpose of improving their
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takeover premia and the acquisition likelihood if ATPs are mainly used to improve the bargaining position and not to prevent the deal (Sokolyk, 2011).
By examining the effect of different ATPs on the companies’ takeover probability and takeover premia, Sokolyk (2011) find strong and conflicting effects on these variables. While staggered boards are associated with no effect on the size of the takeover premia, poison pills are associated with higher takeover premia. Comment and Schwert (1995) find also positive effects on the takeover premia for firms protected by poison pills.
However, Sokolyk (2011) find that the G-Index does not account for the diverse effects of ATPs. Moreover, the G-index is not significant in predicting the size of takeover premia or the firm's takeover probability.
By examining takeover returns of EU listed acquirers, Humpery-Jenner (2012) find
supportive evidence that EU-companies make investments that are less profitable and take longer to complete after the directive was implemented. The directive worsened corporate governance after implementation of the directive.
Humphery-Jenner (2012) find that the directive has an effect on the method of payment of the acquisitions as well. They show that acquirers in the EU induced a shift away from cash payments. The rational beyond this is that entrenched managers might prefer to not use cash because this would increase the need to raise debt. As a consequence, this will impose additional capital constraints and monitoring (Harford et al., 2008). As discussed above, cash-financed deals typically have higher abnormal returns.
Hypotheses
The main core of this paper is to provide additional insights in the discussion about the value of regulatory harmonization. Humpery-Jenner (2012) find significant results on this topic for EU acquirers. Because the EU takeover directive may have entrenched managers in the EU, acquisitions by EU companies make investments that are less profitable. This paper
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non-EU acquirers. Mainly due to the vague formulation of the directive and the increased availability of ATPs, European managers are more entrenched. Increased managerial entrenchment worsens agency problems and agency costs are higher. Takeover premia will be consequently lower. The management entrenchment hypotheses for ATPs predicts this as well. Conversely, according to the market pressure hypothesis and the shareholder interests hypothesis, ATPs may increase shareholder value. Because ATPs can shield managers from short-term market pressures and improves the bargaining position of the company respectively. The directive increases the availability of poison pills. Comment and Schwert (1995) and Sokolyk (2011) find positive effects on the takeover premia for firms protected by poison pills. These findings suggest positive effects on takeover premia for European targets. However, hypotheses and effects of ATPs in general show conflicting results. Because the findings of Humphery-Jenner (2012) are more in line with hypothesis’ concerning management entrenchment, the following hypothesis is formulated as follows:
Hypothesis 1: Abnormal returns of acquisition announcements of EU-target acquisitions by non EU acquirers are higher after the implementation of the EU directive.
Due to increased managerial entrenchment, agency costs are higher. Takeover premia will be consequently lower for EU targets. As a result, abnormal returns will be higher for acquirers.
Agency problems arise mainly as a consequence of separation of ownership and control of firms. Therefore, increased management entrenchment and the increased availability of ATPs is mainly relevant for public companies. This results in the formulation of the following hypothesis:
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With respect to the relation between corporate governance and firm performance, the following hypothesis’ are formulated:
Hypothesis 3: Abnormal returns of acquisition announcements of EU-target acquisitions by non EU acquirers will decrease with the level of shareholder rights.
Companies with high shareholder protection face lower agency costs. Takeover premia will be consequently higher. As a result, abnormal returns will be lower for acquirers.
Hypothesis 4: Abnormal returns of acquisition announcements of EU-target acquisitions by non EU acquirers will decrease with the level of creditor rights.
Higher creditor protection can increase bank lending to firms. Due to increased bank monitoring, minority shareholder are better protected (La Porta et al., 1998). Consequently, target firm values are higher and takeover premia will be consequently lower. As a result, abnormal returns will be higher for acquirers.
Hypothesis 5: Abnormal returns of acquisition announcements of EU-target acquisitions by non EU acquirers will increase with the level of accounting standards.
14 3. Data and methodology
Methodology
To examine the effects of the directive and the influence of corporate governance on
abnormal acquirer returns, Ordinary Least Square (OLS) regression analysis’ are conducted in the following form:
CAR = α + β1 LISTING STATUSt + β2 DIRECTIVEt + β3 INTERACTIONt + β4 CREDITOR
RIGHTSt + β5 SHAREHOLDER RIGHTSt + β6 ACCOUNTING STANDARDSt + β7 CASH + β8
EQUITY + εt
where α and β are parameters, t denotes the observation number and εt denotes the error
term.
Dependent variable
To measure the stock price reaction to the acquisition announcements, cumulative abnormal returns (CAR) are calculated. Daily abnormal returns are calculated using the Brown and Warner (1985) market adjusted return model. The stock market index on which the acquirer is listed, is used for the market index. In line with John et al. (2010) three-day cumulative abnormal returns are calculated by summing the abnormal returns over a three-day period from day -1 to day 1, where day 0 represents the day when the merger or acquisition is announced:
∑
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where Rit is the rate of return on the share price of firm i on day t and Rmt is the rate of return
on the market index. In order to improve the comparability of the different stock returns, continuously compounded returns are used since these returns are time additive:
1 ln it it P P
where Pit denotes the stock price of firm i on day t. Thomson Financial’s Datastream is used
for obtaining daily stock prices and market indices of the acquiring firms.
Independent variables
To measure target shareholder rights, target creditor rights and target accounting standards, respectively the anti-director rights index, the creditor-rights index and the accounting index in La Porta et al. (1998) are used.
The anti-director rights index measures how strongly the legal system favors minority shareholders against managers or dominant shareholders in the corporate decision-making process (La Porta et al, 1998). By summing seven component variables, the anti-director rights index is formed. Each variable can increase the index by one if: (1) voting by mail is allowed; (2) ordinary shares carry one vote per share; (3) the shares are not blocked prior to a shareholder meeting. (4) cumulative voting for directors is allowed; (5) an oppressed minority mechanism is in place; (6) if shareholders are granted with preemptive rights to buy new issues of stock; and (7) when the minimum percentage of share capital that enables a shareholder to call for an extraordinary meeting is 10 percent or less.
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secured creditors are ranked first in the distribution of proceeds of the assets in case of bankruptcy; and (4) when the management does not automatically stay after reorganization. To control for accounting transparency across countries, the accounting standards index of La Porta et al. (1998) is used. The index is based on examination of company reports from different countries and includes information from accounting statements, accounting standards and stock data.
For the method of payment, cash and equity, a dummy variable is used that equals one if the acquirer only used cash to pay for the deal, respectively equals one if the acquirer only used equity to pay for the deal.
With regard to the listing status, a dummy variable is used that equals one if the target is a public quoted company. For the directive, a dummy variable is used that equals one if the acquisition is announced after the implementation of the directive. To measure the combined effect of the listing status and the implementation of the directive, an interaction variable is used and equals one if the target is an public quoted company whereby the acquisition is announced after the directive.
Sample description
Bureau van Dijk’s Zephyr database is used to extract data of acquisition characteristics. The firms in the sample meet the following criteria:
- The acquirer is a non EU publicly traded company - The target firm is an EU publicly traded or private firm
- The acquirer acquires at least 50 % of the shares of the target
- Stock return data must be available in the Thomson Financial’s Datastream database - The target countries must be covered by the anti-director rights index, the
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- The sample comprises 101 acquisitions of private targets, separated in two groups. The first group contains 50 acquisitions with the highest deal value, announced and completed before the implementation of the directive, between January 1997 and May 2006. The second group contains 51 acquisitions with the highest deal value, announced and completed after the implementation of the directive, between July 2006 and May 2012. The sample also comprises all public target acquisitions that comply with the criteria above. The sample includes 37 public target acquisitions announced and completed before and 48 after the implementation of the directive. The total sample covers 186 mergers or acquisitions
18 Table I. Descriptive statistics dataset
This table shows the descriptive statistics of the sample. The sample consists of 186 EU-target acquisitions made from January 1997 to May 2012. The table is partitioned by announcement-date, before and after the implementation of the EU takeover directive and listing status, public and private-target acquisitions. For the corporate governance variables, shareholder rights, creditor rights and accounting standards respectively, the anti-director rights index, the creditor-rights index and the accounting index in La Porta et al. (1998) are used.
Public Before Private Before Total Before Public After Private After Total After Total Public Total Private All Acquisitions Acquisition price ($ x 1,000)
Target anti-director rights index
Target creditor rights index
Target accounting standards index
Frequency and percentage of firms acquired with shares
Frequency and percentage of firms acquired with cash
19 4. Results
Abnormal Returns
Table II shows the mean three-day cumulative abnormal returns (CAR). In panel A, the total sample is partitioned by announcement-date, before and after the implementation of the EU takeover directive and listing status, public and private-target acquisitions. The mean CAR of the overall sample is 1.05% and is statistically significant at the 0.05 level. The subset of private-target acquisitions have a mean CAR of 1.91% and is significant at the 0.01 level, while for public-target acquisitions the mean CAR is an insignificant 0.03%. The higher returns for private-target acquisitions are in line with Chang (1998), Fuller et al. (2002), Moeller et al. (2004), Faccio et al. (2006) and Officer et al. (2009).
For acquisitions announced before the implementation of the EU takeover directive, the mean CAR is 0.55% and is not significant, while acquisitions after the implementation of the directive have a mean CAR of 1.49% and is significant at the 0.05 level.
In panel B of table II the differences of the mean CARs are reported and tested on equality. For all acquisitions, the mean CAR is 0.95% higher after the implementation of the directive and is statistically insignificant. The differences between before and after implementation of the directive are higher for public-target acquisitions. The mean CAR of public-target acquisitions is an insignificant 1.89% higher after the implementation of the directive, while private-target acquisitions shows an insignificant 0.38% difference.
20 Table II. Cumulative abnormal returns (CAR)
This table presents the mean three-day cumulative abnormal returns for 186 EU-target acquisitions made from January 1997 to May 2012. In panel A, the results are partitioned into public and target-acquisitions as before and after the implementation of the directive. In Panel B, the different CARs are tested on equality.
Panel A: Mean CARs
Before After Overall Public-target acquisitions Private-targets acquisitions All Acquisitions CAR t N CAR t N CAR t N -1.04% -1.080 37 1.72%** 2.150 51 0.55% 0.869 88 0.86% 0.795 48 2.10%** 2.110 50 1.49%** 2.048 98 0.03% 0.042 85 1.91%*** 3.002 101 1.05%** 2.157 186
Panel B: CAR mean differences
∆ CAR t Public Before minus Public After
Private Before minus Private After Public Before minus Private Before Public After minus Private After All Before minus All After Public-target minus Private-target
1.89% 0.38% - 2.76%** -1.24% - 0.95% -1.88%* 1.272 0.295 - 2.217 - 0.848 - 0.971 -1.934
21 Corporate Governance variables
Table III shows the correlations between the main variables used in the OLS regression analysis. With regard to the independent variables, all the corporate governance variables are highly correlated with each other and all are significant at the 0.01 level. This suggests the presence of multicollinearity. With a correlation of 0.816, the relation between accounting standards and shareholder rights is the highest. The correlation between the dependent variable CAR and the independent variables do not show highly correlated values. The relation between listing status and CAR is the highest with -0,136 and is significant at the 0.01 level. This indicates that public-target acquisitions have lower CARs compared to private-target acquisitions and is in line with the results in table II. While Humphery-Jenner (2012) find that the directive has an effect on the method of payment, the correlations of the sample in this paper does not support this finding. The relation between either cash
payments and the directive as equity payments and the directive, show very weak negative correlations.
In Table IV the results from the OLS regression analyses’ are presented. All analyses have a very low R-squared value which indicates a poor fit of the data with the model. It appears that the influence on CARs is mainly driven by listing status. In line with table II, the coefficients on listing status are negative and significant at the 0.05 level in four regressions and significant at the 0.1 level in two regressions. The negative sign show that CARs for public firms acquisitions are lower compared to private firms.
The positive sign on the coefficients of the directive show that CARs are higher after the implementation of the directive. However, all coefficients are insignificant. The interaction variable to measure the combined effect of listing status and the implementation of the directive show insignificant coefficients as well.
22 Table III. Correlation matrix
This table shows the correlations between the main variables used in the OLS regression analysis. The dependent variable is the three-day cumulative abnormal return (CAR). For the corporate governance variables, shareholder rights, creditor rights and accounting standards respectively, the anti-director rights index, the creditor-rights index and the accounting index in La Porta et al. (1998) are used. For the method of payment, cash and equity, a dummy variable is used that equals one if the acquirer only used cash to pay for the deal, respectively equals one if the acquirer only used equity to pay for the deal. With regard to the listing status, a dummy variable is used that equals one if the target is a public quoted company. For the directive, a dummy variable is used that equals one if the acquisition is announced after the implementation of the directive. The t-values of the coefficients are in parentheses.
Variable Listing Directive Shareholder Rights
Creditor Rights
Accounting Standards
Cash Equity CAR
Listing Directive Shareholder Rights Creditor Rights Accounting Standards Cash Equity CAR 1.000 ( - ) 0.061 (0.827) 0.052 (0.709) 0.026 (0.345) 0.134 (1.831) -0.165** (-2.251) 0.168** (2.296) -0.136* (-1.854) 1.000 ( - ) 0.067 (0.908) 0.046 (0.617) 0.046 (0.623) -0.019 (-0.260) -0.025 (-0.342) 0.075 (1.010) 1.000 ( - ) 0.541*** (8.685) 0.816*** (19.056) -0.004 (-0.054) 0.106 (1.432) -0.019 (-0.251) 1.000 ( - ) 0.412*** (6.093) -0.012 (-0.167) 0.113 (1.538) 0.060 (0.813) 1.000 ( - ) -0.045 (-0.611) 0.167** (2.291) -0.035 (-0.472) 1.000 ( - ) -0.518** (-8.167) -0.031 (-0.413) 1.000 ( - ) 0.075 (1.008) 1.000 ( - )
23 Table IV. OLS Regression Results of CAR
This table shows the results of the OLS regressions. The dependent variable is the three-day cumulative abnormal return (CAR). For the corporate governance variables, shareholder rights, creditor rights and accounting standards respectively, the anti-director rights index, the creditor-rights index and the accounting index in La Porta et al. (1998) are used. For the method of payment, cash and equity, a dummy variable is used that equals one if the acquirer only used cash to pay for the deal, respectively equals one if the acquirer only used equity to pay for the deal. With regard to the listing status, a dummy variable is used that equals one if the target is a public quoted company. For the directive, a dummy variable is used that equals one if the acquisition is announced after the implementation of the directive. To measure the combined effect of the listing status and the implementation of the directive, an interaction variable is used and equals one if the target is an public quoted company whereby the acquisition is announced after the directive. The t-values of the coefficients are in parentheses.
Independent variable
Listing status Directive
Interaction (listing status x directive Shareholder Rights Creditor Rights Accounting Standards Cash Equity R-squared -2.095** (-2.111) -0.073 (-0.062) 1.700 (1.019) 0.028 0.961 (0.981) 0.214 (0.180) 1.384 (0.825) 0.009 -2.162** (-2.175) 1.088 (1.119) -0.046 (-0.039) 1.753 (1.051) 0.035 -2.855* (-1.964) 0.497 (0.374) 1.298 (0.655) -0.144 (-0.121) 1.578 (0.932) 0.037 -3.054** (-2.047) 0.348 (0.258) 1.718 (0.818) -0.199 (-0.611) -0.129 (-0.108) 1.650 (0.971) 0.039 -2.738* (-1.868) 0.561 (0.421) 1.084 (0.540) 0.253 (0.685) -0.183 (-0.153) 1.472 (0.865) 0.039 -3.006** (-2.033) 0.382 (0.283) 1.798 (0.868) -0.047 (-0.696) -0.102 (-0.085) 2.001 (1.150) 0.041
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the level of these variables. Creditor rights have a positive coefficient, which indicates that CARs are increasing with the level of this variable.
The method of payment variables have also insignificant coefficients. The cash coefficients are mainly negative whereas the equity coefficients are all positive. This indicates that cash financed deals typically have lower abnormal returns.
Summarized, the OLS regression in table IV indicates that the influence on CARs are mainly driven by listing status. The influence of the directive, the method of payment and de
25 5. Conclusion
The main core of this paper is to provide additional insights in the discussion about the value of regulatory harmonization. This paper hypothesizes that abnormal returns of acquisition announcements of EU-target acquisitions by non EU acquirers are higher after the implementation of the EU directive. Consistent with this hypothesis, this paper finds that these abnormal returns are 0.95% higher. However, this finding is not significant. The higher abnormal returns supports the hypothesis that the directive may increase managerial
entrenchment and as a result increase agency problems. This is consistent with the findings of Humpery-Jenner (2012) as well.
Consistent with prior studies, this paper finds highly significant positive abnormal returns of 1.91% for acquisition announcements of private targets and an insignificant 0.03% for public targets. While this paper does not find significant effects of the implementation of the EU takeover directive on abnormal returns of acquisition announcements, the directive induced a shift in the differences between private and public targets. The difference between public and private targets before the implementation of the directive is a significant 2.76% and after the directive this difference is decreased to an insignificant 1.24%. Acquisition of public targets shows an insignificant 1.89% increase in abnormal returns after the implementation of the directive, whereas the acquisition of private target shows only an insignificant 0.38% increase. This supports the hypothesis that the EU-directive has no significant effect on abnormal returns of acquisition announcements of EU private target acquisitions.
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public firms in the sample used in this paper and the fact that corporate governance variables mainly affects public firms can explain this outcome.
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