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Article
Publication date: 1 June 1991

Robert L Conn, Karen E. Lahey and Michael Lahey

This paper extends the merger pricing model associated with Larson‐Gonedes to the general question: how well does the premium developed from the pricing model forecast the…

Abstract

This paper extends the merger pricing model associated with Larson‐Gonedes to the general question: how well does the premium developed from the pricing model forecast the securities market reaction of the actual merger? Based on a sample of 91 common stock mergers, shareholders in participating firms incur wealth losses about half the time but the magnitude of the gains outweighs the losses such that statistically significant gains are reported for both buyers and sellers. Removal of market wide price movements further increases the gains to shareholders. However, the premium consistently overstates the gain obtained by acquired firms and bears no systematic relationship to the gains registered by shareholders of acquiring firms. Financial analyses of mergers have focused almost exclusively on mergers as “events” with resultant measurements in abnormal returns surrounding the merger announcement/consummation to shareholders, and occasionally bondholders, in both buying and selling firms. Recent reviews of these studies by Halpern (1983), Jensen and Ruback (1983), and especially Roll (1986) stress the tentativeness of the findings and the ambiguity of their interpretation. The common feature of all this analysis has been on the ex post valuation of the merger event by the securities market from an informational content perspective. Alternatively, these studies have evaluated indirectly whether the price premium paid in an acquisition exceeds, equals, or is less than the market's valuation of the net present value of the merger, and how the spoils/losses are distributed between acquirers and acquirees. But never is the bid premium itself determined and then compared to the market's reaction upon public announcement. As Roll argues, the merger process involves three steps: “First, the bidding firm identifies a potential target firm; second, a ‘valuation’ of the equity of the target is undertaken…; third, the ‘value’ is compared to current market price… If value exceeds price, a bid is made…” Roil (1986, p. 198). This paper links the price premium offered in mergers to the market's reaction to the news of the merger, or alternatively, it compares Roll's steps two and three. The merger pricing model used is the exchange ratio determination model developed by Larson and Gonedes (1969) and applied to mergers by Conn and Nielsen (1977). The pricing model, commonly cited in finance texts (eg. Copeland and Weston (1988, pp. 757–763), has the advantage of being deterministic and thus provides a direct measure of the bid premium subject to a pareto optimal wealth constraint for shareholders in both buying and selling firms. The principal question this paper asks is: Does the price premium provide a consistent, unbiased forecast of the market's reaction? This is an important question from both the bidding firms' and target firms' perspectives for several reasons. First, the terms of the negotiated merger may signal important information to the securities market regarding the degree of agency costs in the merging firms. For example, an excessively high negotiated price for the target may indicate either the bidder has inept management or management insulated from shareholder interests. Thus, the terms of a merger may reflect not only the participants' expectations regarding the merger itself, but also be influenced by existing — although previously unknown — agency costs. The signalling information contained in merger announcement may obviously mask the expectational information, creating ambiguity in interpretation of market reaction. Second, distribution of the market reaction for buyers and sellers is important not only to participating firms' shareholders, but also to the effectiveness of the market for corporate control. A perfectly competitive merger market assures that merger premiums equal the expected value of the increased market values of merging firms. Thus, divergences between premiums and subsequent market reactions may have important implications for assessing the degree of competitiveness in the merger market, and hence, the effectiveness of mergers as a disciplinary force in the market for corporate control. Finally, the adequacy of ex ante merger pricing models remains an unexplored issue. Using an improved methodology, the Larson and Gonedes (LG) model is expanded to adjust for market wide movements in PE ratios; thus, merger specific influences on wealth positions are more clearly focused upon in contrast to the earlier work by Conn and Nielsen (1977). The earlier finding by Conn and Nielsen that approximately one half of mergers sampled in the 1960s failed to meet the pareto wealth constraint for participating firms is therefore re‐examined with an improved methodology and more recent sample of mergers occurring through 1979. The paper is organised as follows. Section I reviews and critiques the Larson‐Gonedes merger pricing model. Section II describes the empirical methodology and sample. Section III presents the empirical results and Section IV concludes with a summary.

Details

Managerial Finance, vol. 17 no. 6
Type: Research Article
ISSN: 0307-4358

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Article
Publication date: 1 January 1991

Jacobus T. Severiens

The pace of international mergers and acquisitions activity has quickened dramatically in the past few years. European companies have continued their spending spree in the…

Abstract

The pace of international mergers and acquisitions activity has quickened dramatically in the past few years. European companies have continued their spending spree in the United States, while Europe, especially the United Kingdom, has become a corporate battleground. In addition, Japan has become a major buyer in Europe as well as in the United States.

Details

Managerial Finance, vol. 17 no. 1
Type: Research Article
ISSN: 0307-4358

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Article
Publication date: 24 October 2008

Karen Staib Duffy

This paper aims to focus on an ontological approach to executive coaching and transformational learning.

Abstract

Purpose

This paper aims to focus on an ontological approach to executive coaching and transformational learning.

Design/methodology/approach

The paper is largely drawn from the methodology for ontological coaching designed by Newfield Network. Concepts are applied in actual coaching examples.

Findings

The paper finds that through a transformational process of reflection and deliberate change, we can create a new coherence of self to meet and transcend challenging circumstances. This is consistent with double‐loop learning.

Originality/value

This work explains in concrete terms and examples how the ontological approach can be applied to expand knowledge and engage in transformational learning.

Details

VINE, vol. 38 no. 4
Type: Research Article
ISSN: 0305-5728

Keywords

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Article
Publication date: 21 August 2007

James R. Van Scotter, Karen Moustafa, Jennifer R. Burnett and Paul G. Michael

The purpose of this paper is to examine the effect of acquaintance on performance rating accuracy and halo.

Abstract

Purpose

The purpose of this paper is to examine the effect of acquaintance on performance rating accuracy and halo.

Design/methodology/approach

After expert ratings were obtained, US Air Force Officers (n=104) with an average of six years experience rated the performance of four officers who delivered 6‐7 minute briefings on their research projects; 26 raters reported being acquainted with one or more of the briefers. Raters were randomly assigned to use a rating format designed to encourage between‐ratee comparisons on each dimension or a format in which each ratee was separately rated on all dimensions.

Findings

Ratings made by acquainted raters were more accurate than ratings by unacquainted raters. Accuracy was positively correlated with halo for both sets of ratings. Rating format had no discernible effect on accuracy or halo.

Research limitations/implications

One limitation of this study is that the measure of acquaintance was not designed as a surrogate for familiarity. Development of a multi‐item, psychometrically‐valid measure of acquaintance should be the first step in pursuing this research. The use of a laboratory design where only a small percentage of the sample was acquainted with those being rated also limits the study's generalizability.

Practical implications

The results show that prior acquaintance with the ratee results in more accurate ratings. Ratings were also more positive when raters had prior contact with the person they rated.

Originality/value

The hypothesis is that the cognitive processes used to produce ratings are different for raters who have had no prior contact with a ratee and raters who are in some manner acquainted with a ratee. In the past, a positive halo effect from acquaintance between raters and ratees has been a concern. However, this limited study indicates that acquaintance may actually result in more accurate ratings.

Details

Journal of Management Development, vol. 26 no. 8
Type: Research Article
ISSN: 0262-1711

Keywords

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