In todays globalized environment, merger and acquisition is a powerful tool for external expansion in the capital market, which has significant impact on company development. Merger and acquisition activities offer companies the opportunity to achieve growth, gain access to strategic intangible assets and rapidly improve their sustainable competitive advantage. Since the 1990s the M&A market has experienced four merger waves, while a fifth M&A wave is underway, with mergers characterized by larger size and a more global tendency. In particular, cross-border M&A transactions play a more important role in the fifth M&A wave. Based on global M&A statistics, the value of cross-border acquisitions maintained an increasing trend, from $745 million in 1987 to $48000 million in 2007. [1] Therefore, in the case of recent M&A, scholars have focused particularly on evaluating motivation and value effect.
M&A activities in China
In the context of the rapid economic development and competition pressure in China, many companies desire to use M&A to achieve the expected synergy effect and market power, to reduce costs and to enhance their sustainable competitive advantage. The first M&A deal among Chinese companies took place in 1993. In 2004, China attracted world-wide attention when Lenovo engaged in the acquisition of IBM's PC division for $1.25 billion. This demonstrated that China has ambitions to acquire Western firms (Chen and Young, 2010). In the years since then, in an effort to break out of the growth bottleneck and enhance market power, several Chinese companies have engaged in a series of M&A transactions, especially cross-border transactions. For Chinese firms, the 2008 global financial crisis provided an opportunity for rapid expansion by acquiring foreign companies (Chen and Yong, 2010). [2] The data from Figure 1 and Figure 2 reveal that in 2009, the Chinese M&A market completed 294 mergers with 38 cross-border acquisitions, while annual growth was 61.2%. In that year, Geely acquired Volvo for $1.8 billion. [3] In 2010, the number of merger deals increased to 626. Overall, the data show that Chinese M&A deals are typically larger in value and size, and tend to be cross-border.
Source: Pedaily and ZeroIPO (2012)
Not surprisingly therefore, the impact and performance of Chinese M&A deals have attracted business and academic attention. The majority of empirical studies have focused on the issue of value creation as the measurement criterion of success. Other important factors in M&A value creation include the acquirer characteristics, payment method, and type of merger. Uddin and Boateng (2009) indicate that large M&A transactions generate a number of issues, related to payment method, agency problem, merger type and synergy effect, which impact on acquirers' value creation. Consequently, during the merger process, Chinese acquirers should consider how to achieve better performance and which factors determine the shareholders' value creation.
Research objective
Motivated by Wansley et al. (1983), Goergen and Renneboog (2004) and Uddin and Boateng (2009), this study seeks to determine the short-term value influence of M&A according to different factors.
Most of the Chinese studies in this area focus on the impact of M&A on long-term financial performance. There are far fewer short-term event studies for China than for Western contexts. Therefore, this paper seeks to evaluate the short-term abnormal return of 187 Chinese acquirers listed in the Shanghai and Shenzhen stock exchanges over 2002-2012, and to investigate the shareholders' value effect of M&A based on various acquisition factors. Finally, through analyzing the motivation and comparing the value effects across M&A factors, this paper will provide some recommendations for future M&A transactions.
Structure of the dissertation
This dissertation is organized as follows: Chapter two reviews prior literatures on the impact of M&A motivation on value, and the value effect of M&A activities based on various factors. Chapter three presents the sample collection and methodology. Chapter four analyzes empirical evidence on whether the recent Chinese M&As create abnormal returns for acquirers' shareholders, and the impact of each factor on the short-run return. Chapter five summarizes the analysis results and provides comprehensive recommendations for valuation by investigating those factors.
Chapter 2: Literature Review
Merger and Acquisition definition
A merger is a transaction in which acquirers assume assets and liabilities of the target. In a merger transaction, two or more companies combine to form one new company in which one corporation will be larger and more powerful (Gaughan, 2007).
According to Sudarsanam (1995), an acquisition is a transaction in which "assets or shares for one inefficient company are absorbed by another company, and the target shareholders cease to being as owners of that firm". The acquiring company desires to acquire the majority of shares or assets from the target firm, so that the target becomes a subsidiary within its group and the acquirer gains controlling rights in the acquired firm's ownership structure (Hill and Jones, 1998; Hitt et al., 2009).
Underlying motivation theories of M&A
In order to assess the impact of M&A on shareholders' value, it is necessary to investigate the drivers of M&A. Generally, motivations encompass the operating efficiency gains and financial benefits brought about by synergy effects, the increased market power and greater market size through the monopoly effect, and risk reduction and access to new markets through the diversification effect. According to Trautwein (1990), various motivation theories, including efficiency theory and monopoly theory, explain why companies prefer to take advantage of M&A to gain growth. Different theories will each focus on a different actor's interest. Following Wubben (2007), motivations of M&A can be categorized into two main types: shareholder related, and management related. This section will investigate these two aspects to review how the motivation impacts on the value creation of acquiring firms.
Shareholder related motivation
Here, we review three theories of motivation driven by value creation for shareholders.
Synergy gains
Seth et al. (2000) propose that synergy effect is related to efficiency theory, which states that the combination of two firms is associated with more value compared to that of the independent firms. Hence:
"Value (A+B)> Value (A) +Value (B)"
Andrade et al. (2001) state that synergy benefits are caused by cost saving, greater scale economies, enhancing management efficiency by combining management skills and increasing production efficiency by matching complementary resources. Some researchers believe that the synergy effect is the source of value creation (Seth et al., 2002; Dennis and Mcconnel, 1986). Therefore, efficiency gain through synergy effect is one of the most important motivations for M&A activities.
According to Trautwein (1990), synergy benefits are of three types:
Operational synergy
Trautwein (1990) points out that the operating synergy enables companies to realize long-term value-enhancing and cost reduction of the business unit and R&D by achieving economies of scope or scale. Moreover, M&A activities lead to enhanced use of underutilized assets (Robert, 2002). Consequently, economies of scope or scale and operational knowledge transfers are major sources of operational synergy (Porter, 1985).
Financial synergy
Financial synergy represents the improvement of financial capacity and reduction of cost of capital by pooling financial resources and external cash inflow. According to Trautwein (1990), the systematic financial risk of the firm's investment portfolio and transaction cost can be reduced by engaging in M&A in unrelated business fields. In the light of Lewellen's (1971) "Co-insurance" theory, because of the greater debt capacity after merger, financial risk and cost of capital can be significantly reduced, while value is created for the acquirer from potential tax savings. Moreover, if bidders have sufficient capital and low levels of debt, both target and bidder may obtain the financial benefit from the debt co-insurance effect.
Managerial synergy
Most companies engage in M&A to improve managerial efficiency through transferring unequal managerial capabilities across two firms. In addition, according to Chatterjee (1986), the acquiring firm may enhance monitoring and planning abilities through pooling of the management resource. Consequently, through M&A, managers' abilities may be enhanced, so increasing operational efficiency and creating more value.
Market power
According to Seth (1990), the market power effect is related to monopoly theory, whereby the larger the market share owned by a company, the more capability it has for controlling the market, preventing access to competitors and influencing the market price. Hence, market power effect is a main M&A motivation, because the acquirer may achieve an expansion of market scale and increased market power, so gaining stronger competitive ability and greater profit (Ghosh, 2004). The market power effect comes from horizontal M&A, because it can improve the degree of industry concentration and profitability level, as well as shareholders' value (Trautwein, 1990).
Diversification
Diversification is another essential M&A motivation, since it helps the acquirer company to expand in a much broader field and enter new capital markets through engaging in conglomerate M&A and cross-border acquisitions (Berger and Ofeck, 1995). Moreover, many companies desire to reduce systematic risk and improve investors' return by portfolio and geographic market diversification (Wang et al., 2007). Mandelker (1974) proposes that diversification has a positive impact on the shareholder value. However, Graham et al. (2002) argue that sources of firms' wealth destruction, such as those associated with overinvestment and misallocation of resources, are also elements of the diversification effect, and weigh against its benefits. Therefore, diversification has no clear impact on the shareholders' value.
Managerial motivation
There are two main theories of managerial motivation, both of which involve shareholders' value destruction.
Hubris Hypothesis
According to the hubris hypothesis (Roll, 1986) bidders may pay a premium price to the target because many managers inadvertently overestimate the future potential synergy effect and value of the target. Based on the hubris hypothesis, Seth et al. (2000) suggest that managers engage in M&A for their own personal benefits rather than for pure economic gains. Moreover, managers' hubris can explain their irrational behaviour that leads to overpayment. As a result, if managerial factors drive the M&A transaction, the motivation of maximizing shareholders' value will be lost.
Agency Theory
Agency theory is also related to the managerial motivation. Separation of ownership and control causes the agency problem whereby the managers' interest conflicts with shareholders' best interests (Jensen and Meckling, 1976). In general, managers act as the agents of shareholders, but focus on pursuing their own benefits and power rather than shareholders' interest. Kroll et al. (1986) and Morck (1990) report that managers seek to expand firms' size by M&A because their compensations are associated with company size. Therefore, M&A is motivated by empire building that maximizes managers' interest rather than shareholders' value (Shleifer and Vishney, 1989).
In summary, there is a consensus that the main factors of shareholders' value loss in the context of M&A are related to managerial hubris and pursuit of managerial benefits, while several sources of synergy benefits, market power and diversification will help the company to create value and achieve growth (Berkovitch and Narayanan, 1993; Weston and Weaver, 19).
Empirical evidence on value effects of M&A
Empirical evidence from Western event studies
In the Western market, the majority of studies agree that target firms earn overwhelmingly positive abnormal returns, while others propose that most acquirers experience significant value destruction in the event window. Firth (1980) concentrates on 642 successful acquisitions in the UK from 1969 to 1975, and finds that the abnormal return of the acquiring firms was significantly reduced by -4.5% on announcement day, while there is no evidence of value creation effect for the acquiring firm. These findings are consistent with Smith and Kim's research (1994), since their empirical evidence from 177 samples selected from 1980 to 1986 in the US market indicates significant abnormal returns of -0.23% with event windows (-1, 0) on the bidder side, rising steadily to -1.26%. Mitchell and Lehn (1990) focus on 232 bidders from 1980 and 1988. They find that M&As generate significantly negative impact on acquirers' shareholder value, with abnormal returns of -1.66% over (-1, +1), compared to returns of 0.70% for acquiring firms that do not engage in M&A. This phenomenon is confirmed by Sundarsansam and Mahate (2003), whose study of 519 samples listed in the UK from 1983 to 1985 shows that acquirers experienced significantly abnormal returns of between -1.39% and -1.47% across (-1, +1). A more comprehensive research by Lang et al. (1991) looks at 87 targets and bidders from successful tender offers in the US, and finds significant negative returns ranging from -6% to -7% with (-5, +5). Meanwhile, Gregory (1997) examines the long-term value creation of 420 UK firms, and reports that acquirers failed to achieve the expected valuation and potential benefit after 24 months of merger. This finding is broadly similar with that of Limmack (1991) for the same investigation period. Furthermore, Agrawal et al. (1992) find negative performance of 937 acquirers in the US after 5 years, and cite failure to integrate companies' resources as the main reason.
However, other studies find that acquirers' shareholders can gain significantly positive excess returns. For example, Franks and Harris (1989) assess a sample of 1058 bidders and 1898 targets listed in the UK from 1955 to 1985, and find that acquirers achieved between 2.4% and 7.9% over the period -4 to +1 month, while earning around 1% average abnormal returns at announcement month. In addition, in their research of 138 Canadian bidders across (-1, +1) days, Ben-Amar and Andre (2006) argue that M&A has a significantly positive impact on acquirer value. Similar findings are confirmed by Franks et al. (1991) and Song & Walking (2004).
Empirical evidence from Chinese event studies
In the Chinese market, Chen and Zhang (1999) analyze short-term stock return of firms listed in the Shanghai stock exchange across (-10, +20) days. Their study reports that both bidder and target have insignificant positive trend for return, and the stock market reaction to M&A shows no remarkable fluctuation. The same phenomenon is found by Liang (2002). Li and Zhu (2005) study 1672 firms from 1998 to 2003, and find that acquiring firms have negative performance after 2-3 years but earn positive returns in the short-term. Conversely, Zhang (2003) uses 1216 merger samples from 1993 to 2002 in the A-share market to examine the effects of M&A on abnormal returns, and confirms that acquirers can realize 4.5% expected benefits. Similarly, in their study of 349 samples from 1999 to 2000, Li and Chen (2002) find that M&A enables acquirers to achieve statistically positive value. The finding on acquirer value creation in the short run is confirmed by Lei and Zhang (2002) and Bi (2011).
In summary, there are inconsistent results on the short-term shareholder value. Consequently, this paper generates the first hypothesis as follows:
Hypothesis 1: In the Chinese M&A transactions, the acquirers' shareholders will obtain negative abnormal returns in the short term.
The value effect of M&A factors
This section will review key studies on the value effect of various factors in M&A, including method of payment, industrial relatedness, and geographic diversification.
Method of payment effect
The methods of payment can be categorized into three types: cash only, stock only and a combination of the two. Many previous studies debate whether payment method has significant impact on value maximization.
In the context of the information asymmetry, the bidders choose the payment method based on the expected performance. Moreover, the method of payment serves as a signal to the market, passing on information about the acquirer's forthcoming performance to investors. Based on information and signal theory, cash payment implies that the acquirer expects to have improved cash flow, increased value and better financing capacity in the future, and reflects that the acquirer's stock price is undervalued (Myers and Maijluf, 1984). In contrast, payment by stock acts as a signal to the market that the bidder's share price is overvalued. Moreover, acquisition financed by stock will result in the dilution of shareholders' equity post-acquisition, because of an increase in the number of outstanding shares and the change in the bidder's equity structure, while the original shareholders' value will remain unchanged before achieving the expected synergy benefits (Mitchell et al., 2004). Consequently, based on the information and signalling effects, numerous scholars argue that cash transactions tend to create more value than acquisitions financed by equity (e.g. Dong et al. 2005; Travlos 1987). Table 1 shows these researchers' findings in more detail.
Table 1: superior performance for cash payment
Author
M&A transaction
Empirical findings
Tralvos (1987)
167 US M&A transactions
1973-1982
A significant -2.09% excess return in stock denominated transactions and insignificant returns of 0.37% with cash deals across (-1, +1) days.
Dong et al. (2005)
2922 successful US M&As 1978-2000
Transactions with cash payment can outperform acquisitions with stock payment.
Stock payment has a negative impact and cash payment a positive impact.
Linn and Switzer (2001)
413 bidders in US 1967-1987
Significantly increased abnormal returns of 3.14% in cash acquisitions across (-5, +5) days.
Walker (2000)
508 M&As in US 1980-1996
Acquisitions paid by cash show significantly positive returns of +2.38%, but payment by equity earns insignificant abnormal returns.
Moeller et al. (2004)
9712 M&As in US 1980-2001
Bidders with cash gain significant 0.693% returns while bidders with equity tend to lose return by -0.96% over (-1, +1) in acquiring both public and private firms.
Cash acquisition is significantly associated with superior performance compared to stock bid.
Antoniou and Zhao (2004)
179 successful UK acquirers 1991-1998
Bidders that are paid by equity tend to significantly underperform in the year of the bid.
Boateng and Bi (2010)
1267 M&As in China 1998-2008
Acquisitions by cash are positively associated with superior performance compared to M&As financed by equity in the pre-event period.
Cash acquisitions underperform in the long run 12 months after bids compared to the short run.
However, there are also conflicting views. Jensen (1986) points out that, according to the free cash flow hypothesis, stock denominated mergers are associated with higher return compared to cash payment, since some bidders' risks can be shared by transferring them to the target. This finding is consistent with Chatterjee and Kuenzi (2001) and Fuller et al. (2002). The tax effect hypothesis serves as another explanation of value creation in stock acquisition. First, the capital gains tax in the cash acquisition must be paid in the current year, whereas with stock acquisition capital gains may be deferred until the sale of new securities (Wansley et al., 1983). Second, the tax effect premium in cash acquisition is higher compared to stock payment. Hence, these two hypotheses support the idea that stock payment is associated with better performance compared to cash acquisition.
Although method of payment does have value effect, Martin (1996) proposes that the main factors in M&A return are related to managerial decision and integration management level. Hence, there is no significant evidence on the relationship between the method of payment and shareholders' value.
There are relatively few Chinese studies in this field. Based on the contradictory findings outlined above, the question of differential value effect between cash payment and stock payment remains unresolved. However, according to signalling theory, the balance of opinion and evidence is in favour of better performance for cash payment. Consequently the second hypothesis is formed as follows:
Hypothesis 2: The Chinese acquisitions paid by cash will create superior value compared to acquisitions financed by stock.
Type of merger effect
Mergers can be broadly classified into two types: related merger [4] and unrelated diversify merger, [5] depending on the degree of relatedness between target and acquirer and the extent of activity.
The synergy effect is an important motivation of M&A, since it is expected to result in efficiency gains which will generate value creation for shareholders (Tuch and O'Sullivan, 2007). The benefits of synergy effects are more widespread in related acquisitions, where bidders may achieve larger economies of scale and scope (Singh and Montgomery, 1987). Another main source of value creation from related acquisitions is stronger market power, which helps acquirers to increase firm size, achieve more market share, and enhance competition power (Seth, 1990). In unrelated acquisitions, sources of value creation may arise from the diversification effect that enables the bidder to reduce risk, improve debt capacity and create an internal capital market (Uddin and Boateng, 2009). However, unrelated diversifying acquisitions may serve management interests rather than shareholders, by improving managers' compensation owing to the growth in firm size, and by decreasing risks to managerial employment (Kroll et al., 1990; Amihud and Lev, 1981). Moreover, pursuit of expansion through unrelated diversifying acquisition will result in overinvestment costs and increased total stock risk that may generate a detrimental influence on the acquirer's wealth (Uddin and Boateng, 2009). It is also argued that unrelated M&As require bidders to spend more in managing the post-merger integration of two different businesses (Malmendier and Tate, 2004). Hence, there exist numerous factors of value loss in unrelated M&A transactions compared to related M&A transactions. Not surprisingly, some researchers have been attracted to investigate the value effect of industry relatedness between acquirer and target in M&As. However, findings remain inconclusive. For instance, Sudarasnam et al. (1996) examine 424 UK acquisitions from 1980 to 1990 and conclude that related acquisitions may yield significant positive abnormal returns of 4% across (-20, +40) days. In contrast, using 326 US transaction from 1975 to 1987, Morck et al. (1990) find that difference between related and unrelated acquisitions tend to perform significant negative return of 6.97% across (-1,+1) days. Meanwhile, Datta and Puia (1995) propose that there is unclear evidence for the influence of relatedness on the abnormal return of bidders in cross-border transactions. The various findings are summarized in Table 2 and Table 3 below.
Table 2: better performance for related acquisition
Author
M&A transactions
Empirical findings
Walker (2000)
278 US acquisitions 1980-to 1996
Acquirers are likely to gain positive excess return of 1.59% in related bids and significant losses of -1.6% from unrelated acquisitions with (-2,+2) days.
Unrelated mergers have detrimental effect on acquirers' value.
Maquieira et al. (1998)
135 unrelated and 125 related deals in US 1963-1996
Unrelated acquisitions exhibit significantly excess returns of -4.79% while related acquisitions show significantly positive abnormal returns of 6.14% across -2 to +2 months.
Healy et al. (1992)
50 US acquisitions 1979-1984
Median annual cash-flow improves by 5.1% in acquisitions with high industry relatedness across 5 years pre- and post- M&A.
Pan and Chen (2004 & 2005)
153 Chinese acquirers in year 2000
All Chinese acquisitions 1999-2002
Related acquisitions have superior performance compared to unrelated acquisitions in Chinese M&A transactions.
Table 3: better performance for unrelated acquisition
Author
M&A transactions
Empirical findings
Matsusaka (1993)
All US M&A in 1980 and 1987
Acquirers in diversifying M&As can gain significant CAR of 1.2% around announcement periods.
Lei and Zhang (2002)
47 Chinese acquirers listed in Shanghai in 2000
Related acquisitions exhibit insignificant impact on acquirers' value. Unrelated acquisitions earn abnormal returns of 0.946% in the announcement days and CAR of 3.758% across (-40, +40) days.
Cheng and Wu
(2007)
37 related acquisitions 1998-2005
Using factor analysis, they find that returns from related acquisition do not improve financial performance in the short-term.
Based on the above discussions, the majority of Western studies report that shareholders of related acquisitions tend to earn more return because of the benefit of synergy gains. Therefore, this study hypothesizes that:
Hypothesis 3: Chinese related acquisitions tend to have a greater return compared to unrelated diversifying acquisitions in the short run.
Geographic M&A effect
M&As can be categorized geographically into two types: cross-border and domestic. In the context of the fifth M&A wave, cross-border transactions are more common, as a means of strategic expansion in the globalized environment. According to FDI theories, [6] the main shareholders' benefits in international M&A arise from geographic diversification, which gives rapid access to innovative technologies and valuable intangible assets, the enhancement of competitive position in the global market, and the expansion of market power in the foreign market (Kiymaz and Mukherjee, 2000). Nevertheless, according to internationalization theory, factors such as tax regulation, imperfect capital information, government intervention and regulation, and integration level will impact on the benefits gained from cross-border M&A (Conn et al., 2003). As a result, the choice of target firm's country may be an important determining factor of M&A. Not surprisingly, in the fifth M&A wave, the difference in value effect between domestic and cross-border acquisitions has attracted academic attention. However, the results are inconsistent. Some empirical studies find that domestic acquisitions tend to create more short-term value for the acquiring firm than cross-border acquisitions (Moeller et al., 2003; Conn et al., 2003; Campa and Hernando, 2004). This might be because in domestic acquisitions it is much easier to achieve integration to gain better performance and the expected synergy, but cross-border acquisitions will face issues due to different culture and financial structure (Wang and Boateng, 2007). Other studies find that cross-border acquisition is overwhelmingly significantly associated with superior performance compared to domestic acquisition (Lowinski et al., 2004; Georgen and Renneboog, 2003), while a third group of researchers point out that there is no significant evidence for different value effects between cross-border and domestic acquisitions (Fatemi and Furtado, 1988; Yook and McCabe, 1996). These findings are summarized in Table 4 and Table 5.
Hence, the results for geographic M&A effect are inconsistent. Based on the FDI theories, it is expected that benefits from foreign capital markets are more likely to help bidders to generate more gains (Kiymaz and Mukherjee, 2000). Therefore, the following hypothesis can be generated:
Hypothesis 4: The Chinese bidders engaged in cross-border bids are associated with superior performance compared to domestic acquisitions.
Table 4: superior performance for domestic acquisition
Author
M&A transaction
Empirical findings
Moeller et al. (2003)
12,023 US acquisitions 1980-2001
There is a significantly positive return of 1.1% for domestic acquisition with (-1, +1) days.
Campa and Hernando (2004)
262 EU takeovers 1998-2000
Domestic acquisitions earn 0.61% short-term return while cross-border acquisitions gain just 0.05% abnormal return with (-1,+1) days. (both significant).
Returns for cross-border M&A are significantly lower compared to domestic M&A in the short term.
Conn et al.
(2003)
4344 UK bids
1984-1998
Significantly positive 0.68% return in domestic acquisitions is slightly higher than return of 0.33% for cross-border bids around announcement days.
Table 5: superior performance for cross-border acquisition
Author
M&A transaction
Empirical findings
Lowinski et al. (2004)
114 European acquisitions 1990-2001
Acquirers in cross-border transactions are significantly associated with positive return of 1.26% while domestic acquisitions earn significantly positive return of just 0.32% in the short-term.
Returns in cross-border acquisitions are significantly higher compared to domestic M&A at 1% level.
Georgen and Renneboog (2003)
228 EU M&A transactions
1993-2000
Empirical evidence indicates significant return of -0.1% for bidders in domestic takeovers. Surprisingly, acquirers in cross-border transactions gain overwhelmingly higher returns of 3.09% between -2 and +2 days.
Cross-border bids create more short-term value than domestic bids.
Chapter 3: Methodology and Data Collection
Methodology
There are two main methodologies to analyze acquirers' value: accounting studies and event studies. According to Bruner (2002, p.4) an event study measures "the short-run abnormal returns to shareholders in the period around the announcement of a transaction". Meanwhile, long-term financial performance is usually evaluated by an accounting study, which uses financial ratios to compare pre- and post-merger performance. However, based on Boateng and Bi (2010), financial indicators of Chinese public companies do not fully reflect the real firms' performance, so that there is huge difficulty in evaluating the performance and valuation of public companies.
This dissertation measures the value effect of M&A around announcement day. Therefore, to determine the short-run abnormal return, this research will take advantage of event study to evaluate acquirers' CAR.
An event study is a powerful tool to examine the impact of an event on a company's value and stock price change. Most of the prior studies on value effects of M&A return are conducted using event studies (Brown and Warner, 1985; Cave, 1989; Franks and Harris, 1989). According to Fama's efficient market hypothesis (1970), it is assumed that the stock market must efficiently evaluate the expected share price. Li and Zhu (2005) point out that the Chinese stock market corresponds to this hypothesis, which provides the basis to use event study.
In this methodology, many researches apply the market model. However, the market model is restricted in that the estimation periods before the event must be available. Furthermore, Firth (1980) believes that the market-adjusted model, market model and mean return model can produce similar results. Therefore, in assessing the short-run abnormal return, this dissertation will follow the guidelines of Mackinlay (1997), Fuller et al. (2002) and Seiler (2004) in adopting the market-adjusted model as the benchmark model with event windows of three-days, five-days, and twenty-one days around the announcement date of M&A deals.
First, this report calculates the daily normal returns of market and firm using the daily close price of the Shanghai and Shenzhen composite indices and acquirers' close stock price respectively. Therefore, daily market and firm return can be displayed as:
R m, t =ln (Pi, t / Pi, t-1 )
R i, t =ln (Pi, t / Pi, t-1 )
where R m, t is the daily market return and R i, t is the daily firm return; Pi, t is the close price of market index and firm stock price in day t; Pi, t-1 is the close price in day t-1.
For estimating the abnormal return using a market-adjusted model, most of the abnormal return-generating process is based on Brown and Warner (1980, pp.207-209). In addition, according to Seiler (2004, p.220), the expected return of a stock is earned from the market and abnormal returns are the excess stock return modified for the market. With this in mind, the abnormal return (AR) is generated by the firm return minus the market index return, which is computed using the conventional equation:
ARi,t = Ri,t- Rm, t
Where it is assumed that AR is based on the risk-free rate for market-adjusted model (= 0 and = 1), we can get:
ARi,t = Ri,t- Rm, t
where the R i, t is the observed firm return in day t and R m, t is equally value-weighted market index return at day t around the event window.
Then we get the cumulative abnormal return (CAR) for each acquirer by cumulating AR for all acquirers at day t in the event period, which is performed in the equation
In terms of the descriptive statistics, each portfolio of M&A deals will be based on univariate mean analysis and mean difference on two-factors analysis. The t-statistics are shown in the following formula:
Sample collection
The sample collection is guided by the aim to analyze the Chinese acquiring firms' short-term abnormal return and market reaction to the M&A around announcement day.
In this study, samples must be listed in the Shanghai and Shenzhen stock exchanges. Samples are mainly selected from the Thomson One Banker database, while secondary data (the daily stock price of acquiring firms, daily Shanghai market index) are collected from Thomson Financial Datastream. The search information of samples includes the industry code, acquirer, deal value, announcement and effective date, and deal status.
Following Uddin and Boateng (2009) and Dimitris (2008), the sample is restricted by the following search criteria:
The acquirers must be publicly-limited Chinese companies in the Shanghai and Shenzhen Stock Exchanges. Daily stock price of these acquirers must be available in the Datastream database.
The samples are restricted to those acquisitions announced and completed between 2002 and 2012. Mergers must have completed status; those with withdrawn or pending status are excluded.
To avoid insignificant impact, acquisitions in the financial industry (SIC: 6000-6499 and 6700-6799) are removed from the sample because of the higher transaction value and frequency.
Acquisition values are more than US$1 million.
After the transaction, the percentage of acquirers' share in the target firm must be at least 50%.
To avoid overlapping events effect, firms that engage in any acquisition deals within 90 days are also removed from the sample.
The payment method must be known.
The samples are categorized according to payment method, type of merger, and geographic merger.
The stock price of samples are stopping at announcement day that are excluded
Samples with extreme value are removed, as are those for which announcement day is the transaction day.
After imposing the above restrictions, 187 samples are generated from the Shenzhen and Shanghai stock exchanges for evaluating the short-run return of Chinese acquirers' shareholders.
All Samples
187 acquiring companies in M&A announced and completed between 01/01/2002 and 01/05/2012, 97 listed in Shanghai and 90 listed in Shenzhen.
