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Article
Publication date: 1 July 2021

Xiaogang Bi and Agyenim Boateng

This paper aims to investigate the effects of external sources of finance and ownership type on the value creation of Chinese acquiring firms.

Abstract

Purpose

This paper aims to investigate the effects of external sources of finance and ownership type on the value creation of Chinese acquiring firms.

Design/methodology/approach

The data set consists of domestic-listed mainland Chinese firms engaged in domestic mergers and acquisitions during the period 2004–2012. Standard event study methodology and cross-sectional regression analysis are used to examine the relationship between external finance, ownership type and value creation of the acquiring firms.

Findings

This paper finds that whereas bank financing is positively related to the firm value of privately-owned enterprises (POEs), bank financing has a negative but insignificant influence on the firm value of state-owned enterprises (SOEs). Moreover, equity financing has a negative and significant effect on the value creation of SOE acquirers, however, this appears not to be the case of POEs.

Research limitations/implications

The results suggest that the capital markets in China take into consideration the discriminatory and cheap access to bank loans available to SOEs as negative signals to stock markets, which cause capital markets to punish SOEs through price depreciation. Conversely, capital markets reward POEs in respect of Chinese banks’ discrimination against POEs in bank financing.

Practical implications

The results suggest that the capital markets in China take into account the discriminatory and cheap access to bank loans available to SOEs as negative signals to stock markets, which cause capital markets to punish SOEs through price depreciation. Conversely, capital markets reward POEs in respect of Chinese banks’ discrimination against POEs in bank financing.

Originality/value

The results of this study show that external sources of finance and ownership type influence acquiring firm value in an environment where the corporate governance system is weak and the banking sector is dominated by state banks. Further reforms in the financial sector, particularly, in the corporate governance system appear warranted.

Details

International Journal of Accounting & Information Management, vol. 29 no. 3
Type: Research Article
ISSN: 1834-7649

Keywords

Article
Publication date: 7 September 2015

Reena Kohli

This paper aims to assess the impact of different financing strategies used in the cross-border acquisitions on the shifts in the risk profile of the acquiring companies in India…

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Abstract

Purpose

This paper aims to assess the impact of different financing strategies used in the cross-border acquisitions on the shifts in the risk profile of the acquiring companies in India. The purpose is to discern which of the stated modes of payment, viz., cash, stock and earnout, enables an acquiring company in better hedging the risk of adverse selection in cross-border acquisitions.

Design/methodology/approach

Analysis has been conducted by computing unsystematic (alphas, αs) and the systematic (betas, βs) risk of the acquiring companies, for three different estimation periods, that is the pre-acquisition estimation period, the post-acquisition estimation period and the pooled estimation period. The computations of αs and βs, for each company, have been done by using the market model, whereas further analysis of the average αs and average βs has been done by applying analysis of variance and paired sample t-test.

Findings

It has been found that of the three modes of payment, earnouts provide best hedge to the acquiring companies for minimizing the risk of adverse selection in cross-border acquisitions.

Research limitations/implications

The paper recommends earnouts as a prudent strategy for the acquiring companies from India as well as other emerging markets for their future global acquisitions.

Originality/value

This is the pioneering study on analyzing the impact of the different financing strategies on the shifts in the risk profile of acquiring companies.

Details

International Journal of Commerce and Management, vol. 25 no. 3
Type: Research Article
ISSN: 1056-9219

Keywords

Book part
Publication date: 14 November 2014

Iftekhar Hasan, Jarl G. Kallberg, Crocker H. Liu and Xian Sun

We empirically investigate the hypothesis that the less transparent (more difficult to value) the target’s assets are the more likely it is that the acquiring firm can obtain…

Abstract

We empirically investigate the hypothesis that the less transparent (more difficult to value) the target’s assets are the more likely it is that the acquiring firm can obtain higher short- and long-term returns. We analyze a sample of 1,538 friendly acquisitions partitioned in two separate dimensions: acquisitions of public versus private firms, and acquisitions of a firm’s assets versus acquisitions of a firm’s assets and its management. Using a sample of (nondiversifying) real estate transactions with a public REIT as the acquirer, we find that acquisitions of public firms have insignificant short-term abnormal returns. Acquisitions of private targets have positive and significant short-term abnormal returns. The acquirer’s abnormal returns are higher in both cases when the transactions involve acquisition of the target firm’s management. We find parallel results when analyzing the acquirer’s Q over the merger year and the three following years. Our conclusions are robust to the type of financing (cash, stock, or a combination) used in the acquisition.

Details

Corporate Governance in the US and Global Settings
Type: Book
ISBN: 978-1-78441-292-0

Keywords

Article
Publication date: 23 August 2013

Kenneth Yung, Qian Sun and Hamid Rahman

The purpose of this paper is to investigate the role of acquirer's earnings quality on the choice of payment method in mergers and acquisitions (M&A).

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Abstract

Purpose

The purpose of this paper is to investigate the role of acquirer's earnings quality on the choice of payment method in mergers and acquisitions (M&A).

Design/methodology/approach

The paper applies a simultaneous equations model to address the concern of endogeneity between earnings quality and payment method in corporate acquisitions. In addition, a propensity score matching model is used for robustness purpose.

Findings

Previous studies imply that short‐term accruals have a significant impact on the choice of payment method in M&A. In this study, This paper shows that acquisition financing is not significantly affected by short‐term earnings quality once control variables are considered. Instead, this paper finds that it is the long‐term earnings quality of the acquirer that matters. Acquiring firms with poor (good) long‐term earnings quality prefer lower (higher) cash payment in acquisitions. Their results are robust to different definitions of earnings quality.

Research limitations/implications

Researchers should consider the effect of long‐term earnings quality in their future investigations.

Practical implications

Investors should be aware of this issue when evaluating corporate mergers.

Originality/value

This is the first study to examine the impact of long‐term quality of earnings on the choice of payment method in M&A.

Details

Managerial Finance, vol. 39 no. 10
Type: Research Article
ISSN: 0307-4358

Keywords

Article
Publication date: 2 December 2019

Paul Ordyna

The purpose of this paper is to examine how a firm’s mergers and acquisitions (M&A) goals influence its voluntary disclosure policy. Specifically, this paper examines how a firm’s…

Abstract

Purpose

The purpose of this paper is to examine how a firm’s mergers and acquisitions (M&A) goals influence its voluntary disclosure policy. Specifically, this paper examines how a firm’s M&A financing intentions influence the degree of aggregation in management guidance prior to and after the M&A transaction.

Design/methodology/approach

Using a logistic model, this study tests the relation between M&A financing and the decision to issue disaggregate earnings guidance for 3,929 acquiring firms from 2007 to 2011.

Findings

The logistic regression results show that firms are more likely to provide disaggregate earnings guidance when using mostly stock to finance M&A and that the incentives to disaggregate guidance vary throughout the M&A transactional window. Alternatively, because the value of cash is independent of the true value of the acquirer, the results show that firms offering mostly cash to finance M&A are less likely to issue disaggregate earnings forecasts. Additional analysis reveals that the decision to issue disaggregate earnings guidance also influences post-merger outcomes such as CEO turnover.

Research limitations/implications

The choice to disaggregate earnings guidance and the choice to use stock as a means to finance an acquisition is made by management, thus are endogenous which could introduce bias.

Originality/value

This study provides insights into management’s incentives and attitudes toward the use of management forecasts to effect a potential merger and acquisition. Given the flexibility management has in issuing voluntary forecasts, management can tailor a financial message toward investors and potential targets in attempt to facilitate a merger and acquisition and to further the firm’s goals.

Details

Asian Review of Accounting, vol. 28 no. 2
Type: Research Article
ISSN: 1321-7348

Keywords

Article
Publication date: 1 April 1990

J. Grahame Boocock

Over recent years an increasing amount of funds has been committed to mergers and acquisitions in the UK. Expenditure rose nearly tenfold from £2.3bn in 1983 to £22.1bn in 1988…

Abstract

Over recent years an increasing amount of funds has been committed to mergers and acquisitions in the UK. Expenditure rose nearly tenfold from £2.3bn in 1983 to £22.1bn in 1988. This surge in spending has continued despite fears over economic trends, both domestic and international, and shocks in financial markets, notably the global col lapse in share values of October 1987. This monograph is essentially concerned with the events up to, and including, the first three quarters of 1989, ie, a period of two years after the crash of October 1987. Whilst the financing of mer gers and acquisitons activity is a fast moving arena, it does seem to be an opportune time to review developments to date and, tentatively, to suggest future trends in this sphere.

Details

Managerial Finance, vol. 16 no. 4
Type: Research Article
ISSN: 0307-4358

Article
Publication date: 1 August 2013

Amirhossein Hajbaba and Ray Donnelly

The primary purpose of this paper is to test the prediction that overpricing drives merger waves.

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Abstract

Purpose

The primary purpose of this paper is to test the prediction that overpricing drives merger waves.

Design/methodology/approach

The authors supplement proxies of overpricing from the existing literature such as subsequent under‐performance, the form of consideration/financing and low Book‐to‐Market ratios with an approach based on analysts' earnings forecasts. The authors maintain that over‐pricing is associated with relatively optimistically biased forecasts and use a metric based on subsequent earnings disappointments to represent mispricing.

Findings

It is reported that acquirers in hot markets are overpriced relative to acquirers in cold markets on almost all measures of over‐pricing thus supporting the behavioural theory. However, having controlled for optimistically biased expectations the long‐run BHARs to acquisitions in hot markets exceed those of acquisitions made in cold markets. These results therefore support the neoclassical theory's contention that post‐acquisition returns in merger waves are better than the unobserved alternative without the acquisition. The authors infer that neither the neoclassical nor behavioural theory on its own can provide a complete description of merger waves.

Originality/value

The authors exploit earnings forecasts to establish evidence of overpricing in a manner that is novel to the M&A literature. It is found that financing/consideration is significant in explaining subsequent under‐performance only in hot markets. This result is unaffected by controls for mispricing. The authors infer that the use of equity financing is driven by both behavioural timing and also by a desire to share any shortfall due to the increased potential for overpayment in hot markets.

Details

Review of Accounting and Finance, vol. 12 no. 3
Type: Research Article
ISSN: 1475-7702

Keywords

Article
Publication date: 1 April 2002

Arnold L. Redman, John R. Tanner and Herman Manakyan

This study examines the financing methods used by corporations to acquire real estate for their operations. It also examines the opinion of managers about the factors that they…

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Abstract

This study examines the financing methods used by corporations to acquire real estate for their operations. It also examines the opinion of managers about the factors that they consider in choosing financing methods. The data were provided by a survey questionnaire that was sent to members of the International Association of Corporate Real Estate Executives. It was found that companies rely on internal financing (operating cash flows) and external financing such as long‐term leasing, joint ventures, property mortgages and sale/leaseback arrangements. The top‐ranked methods of finance include operating cash flows, property mortgages, leasing and sales/leasebacks. Use of real estate investment trusts, collateralised mortgage obligations and mortgage‐backed securities were the lowest‐ranked forms of financing. Managers tend to look at tax advantages of debt and availability of cash flows in deciding which financing methods to use, rather than theoretical corporate finance factors such as bankruptcy cost. There were significant differences in opinion by industry and by company size regarding the use of cash flows and the impact of debt financing on common stock prices.

Details

Journal of Corporate Real Estate, vol. 4 no. 2
Type: Research Article
ISSN: 1463-001X

Keywords

Case study
Publication date: 20 January 2017

Susan Chaplinsky and Alex Droznik

This case examines issues surrounding the choice of financing arrangements for the acquisition of Radiologix in July 2006. The case follows Mark Stolper, the CFO of RadNet, as he…

Abstract

This case examines issues surrounding the choice of financing arrangements for the acquisition of Radiologix in July 2006. The case follows Mark Stolper, the CFO of RadNet, as he considers how to raise the $363 million in funds necessary to finance the acquisition. When completed, the combined firms will be the largest private diagnostic-imaging provider in the United States. When Stolper joined RadNet in 2003, he confronted a company with “too much debt, and the wrong kind of debt.” His goal is to finance the acquisition in a way that further enhances the financial strength and operating flexibility of the company. Given the large size of funding required, the firm is unlikely to be able to fund the entire transaction with first-lien or bank debt. His financial advisors differ in their recommendations for how to raise the remaining funds—one suggests using second-lien debt, and the other, high-yield debt.

The purpose of the case is to familiarize students with frequently encountered types of debt financing that are used to finance mergers and acquisitions and other corporate transactions. The case provides information on the distinctions among first-lien, second-lien, and high-yield debt in relation to their price, availability, flexibility of covenants, repayment ease, and composition of likely investors. The case is designed for use in courses that cover corporate financing, M&As, and debt financing.

Details

Darden Business Publishing Cases, vol. no.
Type: Case Study
ISSN: 2474-7890
Published by: University of Virginia Darden School Foundation

Keywords

Article
Publication date: 26 August 2014

Ray Donnelly and Amir Hajbaba

Researchers suspect that the overvaluation of equity issuing acquirers is a major cause of their subsequent post-event underperformance. Definitive conclusions regarding this…

Abstract

Purpose

Researchers suspect that the overvaluation of equity issuing acquirers is a major cause of their subsequent post-event underperformance. Definitive conclusions regarding this overpricing hypothesis have not been possible since indicators of overpricing such as the book-to-market ratio and subsequent underperformance are open to alternative interpretations. The purpose of this paper is to corroborate or refute overvaluation as a driver of equity issuing acquirers’ subsequent underperformance.

Design/methodology/approach

The literature has linked overvaluation of acquirers to over-optimistic expectations. The authors use analysts’ earnings forecasts to reflect the market's expectations. Over-optimism is indicated by subsequent earnings disappointments. The authors examine the relation between acquirers’ choice of payment method and their tendency to report disappointing earnings. The authors also examine the effect of including a more direct measure of over-optimism in a model to explain the long-run post-event buy-and-hold-abnormal returns of acquirers.

Findings

The post-acquisition earnings of equity issuing acquirers disappoint more often than those of acquirers employing alternative financing methods. This relationship is confined to glamour acquirers. The ability of financing method to predict long-run post-acquisition performance is subsumed when direct measures of optimism are included in a model explaining long-run post-acquisition performance. This result is robust to controls for overpayment and other potential explanations of post-acquisition underperformance.

Research limitations/implications

Acquirers’ management exploit their information advantage to exchange overvalued equity for the assets of the target company in accordance with Loughran and Ritter's (2000) behavioural timing hypothesis.

Originality/value

The study provides new and unambiguous evidence that equity-issuing acquirers are optimistically priced at the time of acquisition.

Details

International Journal of Managerial Finance, vol. 10 no. 4
Type: Research Article
ISSN: 1743-9132

Keywords

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