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Master Thesis for Finance 2013-2014

The Influence of Merger and

Acquisition Activities of Chinese Listed

Companies on the Stock Price

Student Number: S2331128 Name: Meng Zhu Email: m.zhu.2@student.rug.nl

Study Program: MSC Finance Supervisor: Yun Dai

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2 Content Abstract ... 3 1. Introduction ... 4 2. Literature Review ... 7

3. Methodology and Data... 11

3.1 Methodology... 11

3.1.1 Event Study ... 11

3.1.2 Statistical Test Methods... 13

3.1.3 Cross-sectional Regression ... 15

3.2 Data ... 17

3.2.1 Sample Data ... 17

3.2.2 Event Window Design... 19

3.2.3 Hypotheses ... 20

4. Results and Analysis... 21

4.1 Abnormal Return and Cumulative Average Abnormal Return ... 21

4.2 Normality Test ... 25

4.3 Nonparametric Test ... 26

4.4 Cross-sectional Regression analysis ... 27

5. Conclusion... 29

Acknowledgement ... 32

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Abstract

This paper primarily investigates acquiring firm’s stock returns on the acquisition announcement in Chinese Hushen300 market and CGEM from 2009 to 2014, using the data consisted of 112 M&A deals announced by 89 firms. The M&A transactions here are especially aimed at acquirers who hold bigger than 50% stake of targets’ companies. Three performance models are employed to measure acquirers’ wealth effects by means of event study methodology. Besides, a cross-sectional analysis is performed to examine the association between some characteristics specific to the event observations. The result is insignificant that the stock value gains surrounding the announcement date and the outcomes also demonstrate that there is no typical difference in two markets. Furthermore, the payment method test statistic is only significantly negative in the CGEM. In contrast, it is insignificant in Hushen300 market. The coefficients of acquirer’s firm size, how much stake the acquiring firm takes over and the transaction value are insignificant. There is neither a significant deviation in the influence on AR and CAR in Hushen300 market and CGEM.

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1. Introduction

In recently globalized economy, mergers and acquisitions (M&A) play a significant role as an expansionary strategy for companies. According to Lajoux, Nesvold and Reed (2007), a merger can be defined an action that one firm is legally combined with and absorbed into another firm. In another words, a merger occurs when two firms willingly agree to combine with each other. An acquisition can be specified as the process by which the stocks or assets of a firm are owned by a buyer that means acquisition occurs when one firm buys and takes over the operations of another firm. Deepa and Shobhana (2012) state that reasons for firms’ adopting M&A tactics are increasing the size, expanding branch network, enlarging business operations, raising the earning capacity, and so forth. Consequently, the acquisition activity to some great extent is supposed to be a necessary corporate strategy for staying competitive.

After the world had experienced five merger tides, the world markets began to set off the new round of M&A tides in the year of 2004. As M&A deals become more and more popular in corporate strategy, M&A activities have drawn many scholars’ attentions and a lot of papers have reached the conclusion that M&A activities have implications on regional and local economic development. However, the most of theoretical and practical studies concentrate on the western and developed countries, with less attention on developing countries. Kroustalis et al. (2011) discuss wealth effects of acquiring and acquired companies’ shareholders in the U.S. stock market during 2005 and Goergen & Renneboog (2003) point out, in terms of European market, different properties of acquisitions could influence the stock reactions on acquirer firms.

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stock market. Up till now there are two exchanges in the mainland of China. O ne is Shanghai stock exchange which is the world’s 6th largest stock market by market capitalization at 2.3 trillion dollars in 2011. The other is Shenzhen stock exchange and the market capitalization of its listed firms is about one trillion dollars in 2011. The two stock exchanges offer different securities transaction and operate independently with a fair circumstance. However, the two exchanges are still not entirely open to foreign investors because of the tight capital account controls exercised by the Chinese mainland authorities. There are many markets in the two exchanges. One of them is known as Hushen market that is the main-board market for the companies that own large registered capitalization. Such as coal mine companies, gas and electric firms. There are two types of stocks in Hushen market. Type A is for domestic finance and type B opens for absorbing foreign investment. Hushen300 Index is a capitalization-weighted stock market index designed to replicate the performance of 300 stocks traded in the Hushen market. It has been calculated since April 8, 2005.

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Simultaneously, the shareholders of the acquirer companies and target companies care about the returns on the investment in M&A activities. Only when the returns are positive, the investors are more likely to get involved in M&A events. Institutions and individuals are confused about the following questions: If the stock price increases, how can they catch these opportunities? Does a generality of trading strategy exist in the stock markets? Therefore, a number of experts and scholars have discussed and explored whether the M&A activities can create value for the companies in China so as to solve the perplexing problems above. Many of the researches have examined an empirical study of the effects of M&A activities of Chinese listed companies on the stock price only in Hushen market. But I will research the observations not only in Hushen market but also in CGEM. In addition, others focus on the return of acquirer companies and target companies together or only focus on the return of target companies. However, in this paper, I will explore the impact of the acquisition announcement on the stock returns only of the acquirer companies that are listed on the markets. According to Mackinlay (1997), my paper will be employed event study methodology. To be specific, it will be investigated that the association between the market reaction surrounding the event day and the firm size of the acquiring companies, the methods of acquisition payment, how much stake the bidder firms will take over, the value of the acquisition transaction. Consequently, my research question is that whether the Chinese acquisition announcement has a positive impact on stock return in two markets?

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2. Literature Review

Nowadays the majority of research papers on short-run wealth effect of acquisition announcements are dominated by event study methodology and basically reach a consensus: the stock returns reaction to the acquisition announcement could be positive or neutral, and the results vary with detailed conditions of each acquisition, i.e. payment methods, different sectors and status of target firms. Chang and Suk (1998) disclose acquiring- firm equity returns response to the announced takeover terminations. Based on 184 observations listed on the New York and American Stock Exchange and 95 firms traded over-the-counter (O TC), they find that the stock financed acquirer enjoys a positive share return of 1.48%, but the cash financed bidder experiences a negative share return of -0.50% when acquirers initiate the announcement of takeover terminations. Nevertheless, when terminations are initiated by target firms, acquiring firms that offer stock experience an insignificant return as target firms do. They attribute their findings to the asymmetric information hypothesis. When acquirers refuse a stock financed takeover, it conveys favourable information that their stock is undervalued. By comparison, when acquirers withdraw a cash- financed merger, acquirers believe that whose stock is overvalued. In addition, they conclude that there is no information revealed about the bidding firms’ value when the termination is driven by target firms.

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the acquirers’ management and their shareholders, or the high acquisition cost due to the acquiring competitions among other potential acquirers.

As Goergen and Renneboog (2003) point out, in terms of European market, different properties of acquisitions could influence the stock reactions on acquirer firms. They reported that hostile takeovers will destroy acquirer firms’ value whereas friendly acquisitions will gain wealth for acquirer firms. They also found strong evidence to support that all-cash financed acquisitions can gain more wealth than all-equity financed or mix financed acquisitions. However, the research of Ebneth and Theuvsen (2007) yields another result in European brewing industry. They find a neutral stock reaction to M&A deals. In addition, there is evidence from European banking industry, Cybo-Ottone and Murgia (2000) conclude that a significant increase in acquirer firms’ stock returns will achieve at the acquisition announcement date. In comparison to empirical results mentioned above, the various outcomes are due to the diversity of conditions.

Chu et al. (2009) explore acquiring- firm shareholders’ wealth effects in emerging markets. They show that acquirers achieve positive cumulative abnormal returns around the time of the announced bids in ten emerging markets: Indian, mainland of China, Taiwan, Hong Kong, Indonesia, Malaysia, the Philippines, Singapore, South Korea and Thailand. They show that their findings are not consistent with conclusions of most U.S. and European studies, which are either negative or neutral returns. They indicate that the agency theory is not suitable to illustrate M&A activities in emerging markets partly because they have a more concentrated corporate ownership structure. Therefore, it is implied that the takeover announcement is “good news” for investors in Asian emerging markets.

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company after M&A is far higher than that of the acquiring company before M&A and the achievement of the acquirer company will become more salient because of the outstanding assets. The status of the acquirers in their own industries will be more obvious. The return of the stock will be positive. In a word, mergers and acquisitions are expected to increase the firm value by operation synergies. Even though, she investigated 108 companies in China and found the average abnormal return, which did not regularly change, could be positive or negative in the event window. Special treatment stock and non-special treatment stock have an opposite influence on the bidder and target companies. The days of significant effect of special treatment target companies are bigger than those of non-special treatment target companies. M&A deals are not significant to both acquirer and target companies. Therefore, there is no obvious evidence to reveal that the M&A announcements affect the stock price of different companies.

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that M&A activities increase the value of an investment for both the acquiring companies and the target companies.

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3. Methodology and Data

3.1 Methodology

3.1.1 Event Study

3.1.1.1 Daily Return

The daily closing equity return is defined as,

(1)

Where is the actual return of stock on day and denotes the relevant stock return of stock on day .

3.1.1.2 Expected Returns

The expected return should be formulated so as to determine the abnormal return. Therefore, three alternative performance models are employed to make sure robustness of the final results in the case of misspecification of the normal performance model.

3.1.1.2.1 Constant Mean Returns Model

The mean model is the simplest model, the expected return of stock on day is assumed to equal to:

(2)

Where n denotes the number of the days, is the actual return of stock on day .

3.1.1.2.2 Market Model

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follow a linear regression of a particular market portfolio, in this case, the Hushen300 index and Chinext price Index. The expected return of stock on day can be algebraically formulated as follow:

(3) ( ) ( )

Where denotes the Hushen300 Index and the Chinext price Index on day separately. are market-adjusted model parameters, representing the Ordinary Least Squares estimates of the intercept and the slope coefficient for the security , respectively, is the zero mean disturbance term.

3.1.1.2.3 Market and Risk Adjusted Returns Model (CAPM)

I employ the daily return of the Chinese 10-year government bond as a minimum variance portfolio of risky assets which is uncorrelated with the market portfolio. The expected return of stock i for time period t can be algebraically formulated as follow:

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Where denotes the Hushen300 Index and the Chinext price Index on day separately. are market adjusted model parameters, representing the regression’s intercept and the slope coefficient for the security , respectively, is the daily return of the Chinese 10-year government bond in time t, is the zero mean disturbance term.

3.1.1.3 Abnormal Return

The abnormal return is equal to the difference between the observed return and the predicted ex post return on security i on day is equal to

𝐴 (5)

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13 3.1.1.4 Average Abnormal Return

The average abnormal returns at day can be written as: 𝐴𝐴 ∑ 𝐴 (6)

Where N denotes the number of securities and 𝐴 denotes the abnormal return of stock on day .

3.1.1.5 Cumulative Average Abnormal Return

Finally, during the interval of the event window and post event window (-1, +13), the cumulative average abnormal return would be:

𝐴𝐴 𝐴𝐴 (7)

Where 𝐴𝐴 denotes the average abnormal return on day .

3.1.2 Statistical Test Methods

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consists of multiple days, the Corrado (1989) rank test is not appropriate. Hence, a modified non-parametric rank test made by Cowan (1992) has to be employed.

3.1.2.1 Test for Normality

I employ the Jarque-Bera test to measure the distribution of the abnormal return from both the event window and the estimation window. The Jarque-Bera (1980) equation is defined as,

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Where N is the number of observations (or degrees of freedom), S is the sample skewness and K is the sample kurtosis. The skewness examines whether the distribution is symmetric around its mean value and the kurtosis measures the fatness of the tails of the distribution, compared to the normal distribution.

3.1.2.2 Parametric t-test on the Average Abnormal Return

The t- test for the average abnormal return is defined as,

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Where 𝐴𝐴 √ ∑ 𝐴 𝐴𝐴 , n is the number of security, 𝐴 is the abnormal return of securities i during the estimation window, and 𝐴𝐴 is the average abnormal return across all securities on the single day in the estimation window.

3.1.2.3 Nonparametric Test on the Mean Ranked Abnormal Return

Cowan (1992) nonparametric rank test

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(𝐴 ), (10)

Where 𝐴 𝐴 implies , . Therefore, the average rank is one-half plus half the number of observed returns. The rank statistic substitutes ( ) for the abnormal return𝐴 , generating this day 0 ( )

test

The equation of test statistics over the multiple-day (2 to 11 days) event window is defined as. ̅̅̅̅̅ √∑ ̅̅̅̅̅ , (11) , ,

Where ̅̅̅̅ is the average rank across n stocks and d days of the event window ( ̅̅̅̅ ) and ̅̅̅ is the average rank across n stocks at day t over the event and the estimation window. Rank one signifies the smallest abnormal return, rank 204, the largest. The median rank is 102.5.

3.1.3 Cross-sectional Regression

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private firms. If the private firms are more profitable than public firms, the size of the acquirers will be an important effect. When paying by cash in an M&A deal, the shareholder of the bidder companies bear all the risk of synergies. Alternatively, if paid by equity, the targets firms can carry some proportion of the risk. As Chang and Suk (1998) report, the methods of payment can result in different outcomes. It is more complicated and less transparent for larger transactions in capital markets. The wealth in larger transactions is supposed to be lower than that in small or medium sized transactions, which means a restricted risk for acquiring firms. Then the deal value can be a factor. Therefore, in this paper, I will explore the relationship between the market reaction surrounding the event day and the firm size of the acquiring companies, the methods of acquisition payment, how much stake the bidder firms will take over, the value of the acquisition transaction. The formulation is defined as follows: 𝐴 𝐴 𝐴 𝐴 𝐴 𝐴 𝐴 𝐴 𝐴 𝐴 𝐴 𝐴 𝐴 𝐴

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3.2 Data

3.2.1 Sample Data

The primary data utilized in this paper are the daily stock price for acquiring companies and market index. To be specific, the M&A transactions derive from two portfolios. One is composed of 300 stocks based on Hushen300 Index and the other is combined of 352 stocks based on Chinext price Index. In order to be included in the final sample, I employ the criteria as follows:

(1) The acquiring companies are listed in Chinese Hushen300 stock market in which the acquirer companies have big capitalization and China Growth Enterprises Market (CGEM) where acquirer firms own small capitalization (2) The announcement of that acquisition is the first one from 2009 to 2014

(3) The proportion of the acquisition transaction is equal or bigger than 50%, which means that acquirers can control the majority stake of the target companies and insure a definitive shift in hierarchical power

(4) The return of acquiring companies must be available for 200 days (estimation window) prior to the announcement date.

(5) The information with regards to the M&A, such as announcement date and transaction method was publicly revealed.

(6) To avoid further potential puzzled effects, multiple M&A deals announced by the same company need to be selected at least four days to make sure no overlapping the event windows. If the event windows overlap, both of the deals are excluded from the sample.

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M&A transaction value is 120.8 million dollars and the median value is 14 million dollars. The largest transaction is 2569.4 million dollars and the smallest transaction value is 0.3 million dollars. Sequentially, the mean market capital the acquirers have is 3.1 billion dollars and the largest value of acquirers’ market capital is 17.1 billion dollars. All of the data are obtained from Dazhihui, a database that concentrates on mergers and acquisitions deals in China. The overview of the variables explored and the description is displayed in Table 1.

Figure 1a: The number of acquisitions proportion in Hushen300 Market

Figure 1b: The number of acquisitions proportion in CGEM

Table 1: Overview of the explored factors

Proxy Description Postscript

Var 1 Acquirer's firm size Market capitalization Var 2 Payment method Only cash vs others

Var 3 The proportion of acquisition How much stake the acquirers take over Var 4 Deal size Transaction value

Var 5 Market diversification Hushen300 market vs CGEM

0 5 10 15 20 25 30

The number of the acquisition in Hushen300 Market

0 5 10 15 20 25 30

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3.2.2 Event Window Design

The short-run stock reactions to acquisition announcements are measured by calculating cumulative abnormal returns during the event window. First of all, based on the event study methodology of Mackinlay(1997), one would verify a benchmark of normal returns in order to measure the abnormal returns around the event date.

The event window is the period over which security prices are examined. In an information efficient market, the event window, in practice, includes at least the day of the announcement and the day after the announcement (Mackinlay, 1997). Likewise, Peterson (1989) points out that the dissemination of firm-specific information may extend over one day. He thinks that a company may release information one day, and the financial press may report it the following day. Hence, to capture market reactions when the dissemination is unclear, it requires that the event window consist of multiple days. In addition, Dyckman et al. (1984) conclude that a short event window can effectively identify any abnormal return. As a result, in this paper, I define the day 0 as the date of the announcement, and select the event window of 4 [-1, +2] days.

The most common choice for the estimation window is to use the period prior to the event window (Mackinlay, 1997). He states that the estimation period should not overlap the event window, in case that estimates of the normal return model are influenced by the returns around the announcement date. Armitage (1995) points out that the estimation window should range from 100 to 300 trading days. Therefore, I choose the estimation window of 200[-201, -2] days in my paper.

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Figure 2: Event day and Estimation Window Event window and Post event Window

[Estimation window] [Event window] [Post-event window]

T0=-201 T1=-1 0 T2=+2 T3=+13

L1=T1-T0=200 L2=T2-T1+1=4 L3=T3-T2=11

3.2.3 Hypotheses

The event study methodology is intensively utilized in the financial research to examine market reactions to a specific kind of event. Before applying the methodology, the corresponding null hypothesis and hypothesis one associated with the research question are as follow:

H0: there is no impact on the stock returns of acquirer companies in China after the

announcements of acquisition deals in the short run.

H1: the stock returns of acquirer companies in China are significantly positive affected

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4. Results and Analysis

4.1 Abnormal Return and Cumulative Average Abnormal

Return

Figure 3a illustrates the average abnormal returns of the whole samples composed of 112 acquirer deals across the event and post-event window (-1, +13). The average abnormal returns on the event day are approximately +0.015 in the constant mean model and +0.013 in the market model and CAPM, after the event period (-1, +2), the average abnormal returns on Day +3 decrease to -0.001,-0.003 and -0.004 separately in three models. As indicating below, the magnitude and trend of average abnormal returns in three models basically resemble, which is consistent with the empirical results from Brown & Warner (1980). Even though the three models tend to achieve similar conclusions, the market model offers a better measure for abnormal performance given adjusting daily stock returns.

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found significant wealth loss for acquirer firms over more than five years after acquisition deals.

Figure 3a: The average abnormal return of the event window and the post-event

window

Figure 3b: The cumulative average abnormal return of the event window and the

post-event window -0.01 -0.005 0 0.005 0.01 0.015 0.02 -2 0 2 4 6 8 10 12 14

AAR of Hushen300 Market and CGEM using the Constant Mean Model AAR of Hushen300 Market and CGEM using the Market Model AAR of Hushen300 Market and CGEM using CAPM

0 0.005 0.01 0.015 0.02 0.025 0.03 -2 0 2 4 6 8 10 12 14

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Mackinlay(1997) states that the market adjusted model is superior to the constant mean return model because it eliminates the part of return that is associated with the market’s return and the variance of the abnormal return is reduced. This leads to increased ability to detect event effects. In addition, because t he potential for sensitivity can be avoided at little cost by using the market adjusted model and CAPM model has some limitations on statistical techniques. In the context of this paper, as a consequence, the average abnormal return and cumulative average abnormal return of the observations in Hushen300 market and CGEM are evaluated by means of the market adjusted model.

Figure 4a depicts the average abnormal returns of the individual sample and the whole sample across the event and post-event window (-1, +13). The average abnormal returns on event day are approximately +0.004 in the Hushen300 portfolio and +0.019 in CGEM portfolio. It has positive returns in the event period and after the event period (-1, +2), the average abnormal returns present fluctuated curves. The value of +0.006 and +0.003 arrives at the peak separately in Hushen300 on day +7 and in CGEM on day +13.The returns decrease to the bottom -0.006 and -0.004 separately in Hushen300 on day +10 and in CGEM on day +6.

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Figure 4a: The average abnormal return of the event window and the post-event

window in the market model

Figure 4b: The cumulative average abnormal return of the event window and the post

event window in the market model

-0.01 -0.005 0 0.005 0.01 0.015 0.02 0.025 -2 0 2 4 6 8 10 12 14

AAR of Hushen300 Market using the Market Model AAR of CGEM using the Market Model

AAR of Hushen300 and CGEM using the Market Model

-0.005 0 0.005 0.01 0.015 0.02 0.025 0.03 -2 0 2 4 6 8 10 12 14

CAAR of Hushen300 Market using the Market Model CAAR of CGEM using the Market Model

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4.2 Normality Test

The Jarque-Bera test is a goodness-of- fit test, which effectively detects the normality of the sample data. The observations from Table 2 incorporate the four-day event window across three samples in three models.

Table 2: Descriptive statistics of abnormal returns performance

Whole Sample Hushen 300 CGEM

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For two degrees of freedom along with 5% significance level in Table 2, all three Jarque-bera values are bigger than the crucial 5.99 so it shows no evidence that the abnormal returns display a normal distribution for the whole sample, Hushen300 market and CGEM in three models. Therefore, the outcomes suggest that the nonparametric rank test need to be employed. However, because the event day consists of multiple days in my paper, the Cowan (1992) nonparametric rank test should be utilized instead of the Corrado (1989) nonparametric rank test.

4.3 Nonparametric Test

The final test results are presented below.

Table 3: Cowan test statistics

Whole Sample Hushen300 CGEM

Mean Model 3.2446 1.2542 3.2472

Market Model 1.5360 0.9494 1.2728

CAPM 1.4841 0.9165 1.2498

Firstly, I examine acquiring- firm shareholders’ wealth effects by using the whole sample. Using the Cowan (1992) nonparametric rank test with 5% significance level, In the mean model, the z value is 3.2446 which is bigger than 1.96. Hence, it has sufficient evidence to demonstrate that that acquirers company in China has a positive impact on the stock returns after the acquisition announcement in the short run. However, in the market model, the z-value shown in Table 3 reveals around 1.5360, which is smaller than 1.96. As a consequence, there is no sufficient evidence to reject the null hypotheses that acquirers companies in China in the short run has no impact on the stock returns after the acquisition announcement. This result is consistent with the previous literature reported by Kroustali, et al. (2011). In CAPM, the z-value shown in Table 3 is around 1.4841, which is smaller than 1.96. Therefore, there is also no sufficient evidence to reject the null hypotheses that acquirers companies in China in the short run has no impact on the stock returns after the announcement of the acquisition event.

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In the mean model, the z-value in Hushen300 market is 1.2542. Hence, there is not sufficient evidence to infer that their share price reacts to the acquisition announcement. Nevertheless, the z-value in CGEM shows 3.2472 for the small sized acquirers, which means the M&A announcement has a positive impact on the returns of the acquiring firms. In the market model, the big sized acquirers experience the average abnormal return of 0.4%, and the small sized acquirers experience the average abnormal return of 1.9%. For the big cap sized bidder firms, the z-value in Hushen300 market is 0.9494. Hence, there is not sufficient evidence to infer that their share price reacts to the acquisition announcement. Similarly, the z-value in CGEM shows 1.2728 for the small cap sized acquirers. For this reason, I have adequate reasons to draw conclusions that the announcement return to small cap acquirers does not change. In CAPM, the z-value in Hushen300 is 0.9165. Hence, there is not sufficient evidence to infer that their share price reacts to the acquisition announcement. Sequentially, the z-value in CGEM shows 1.2498 for small sized acquirers, which means it is insignificant that the M&A announcement has a positive impact on the returns of the acquiring firms.

4.4 Cross-sectional Regression analysis

The mean model lack of sensitivity to the model can be driven by the fact that the variance of the abnormal return is frequently not reduced much by choosing a more sophisticated model. Besides, The CAPM has deviations and the results of the research may be sensitive to the specific CAPM restrictions. So I use the market model to examine the cross-sectional regression outcomes.

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Table 4: The summary of the test statistics of the OLS s cross-sectional results for the

total sample using the market model

AR CAR(-1,+2)

Coefficient Prob. Coefficient Prob.

Constant 0.0598 0.0972 0.1477 0.0095 SIZE 0.0000 0.4039 0.0000 0.1213 CASH -0.0489* 0.0790 -0.1380* 0.0018 PROPORTION 0.0079 0.7405 -0.0030 0.9362 DEALVALUE -0.0001 0.2985 -0.0001 0.4801 HUSHEN -0.0537 0.2761 -0.0701 0.3632 HUSHEN*SIZE 0.0000 0.3391 0.0000 0.1161 HUSHEN*CASH 0.0378 0.2647 0.0555 0.2956 HUSHEN*PROPORTION 0.0109 0.7818 0.0215 0.7266 HUSHEN*DEALVALUE 0.0001 0.3229 0.0001 0.5399

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5. Conclusion

In this paper, I research acquiring- firm equity returns around the acquisition announcement in Chinese stock market. Employing the event study methodology, I find that the change of the acquirers’ stock returns is insignificant around the event day. On the announcement day, the stock returns increase in both Hushen market and CGEM. From the perspective of the average abnormal return, some of the values are positive and some of the values are negative in the event window. In another words, the values are fluctuated and irregularly change, which demonstrates that the M&A announcement has no continuous impacts on the stock price of acquiring enterprises and it is not possible that the M&A activities determine the primary trends of the stock price. From the non-parametric test, it can be concluded that there is no typical impact on the stock returns of the acquirer companies in China after the announcements of large acquisition deals in the short run. Comparing Hushen market with CGEM, it is diverse from the capitalization but the changes of the average abnormal return influenced by the M&A deals are the same. The days of the substantial influence in Hushen market are less than thoes in CGEM. However, the implication of the M&A activities on the stock price in both markets is not significant. As a consequence, it cannot be drawn the conclusion that the M&A deals have distinct effects in different markets.

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investors to grab the good news and buy the stock. Then investors hold the stock in a short run and they will earn some profits. The fourth one is that the payment method test statistic is only significantly negative in the CGEM. In contrast, it is insignificant in Hushen300 market. The coefficients of acquirer’s firm size, how much stake the acquirers take over and the transaction value are insignificant. There is neither a significant deviation in the influence on AR and CAR in Hushen300 market and CGEM. The final conclusion is that the abundant funds financed on the announcement date should be anticipated for listed companies in China to explore the profound and lasting development.

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cross-country acquisitions or domestic acquisitions. The price paid for the target firms in cross-border acquisitions will be lower due to the liberalization of merger laws. O n the other hand, it is more possible for domestic acquisitions to concentrate on the acquirer’s existing market power or goodwill and allow for greater cost efficiency (Cornett et al. 2003). Another factor could be the listing effect. It is definitely different that whether the information about the target firms is available to the bidder companies. Capron et al. (2007) discuss that the risk of overvaluation for a public firm is lower because of the information available, which in turn increases the offer price. In acquisitions involving a public target, the acquiring firm can capture less of the wealth gains that are created in the acquisition, because the acquiring firm can take over a public firm more than the acquisition of a private firm. Lacking bargaining power, private firms can take a discount and lower publicity in M&A transaction, and then it is possible for the acquirers to absorb a larger percentage of the wealth gains. Therefore, acquisitions involving private firms are supposed to create higher returns for the acquiring firm’s shareholders.

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Acknowledgement

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