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1 – 10 of over 7000Edward Jones, Bing Xu and Konstantin Kamp
This paper aims to examine whether agency costs predict disciplinary takeover likelihood for the UK listed companies between 1986 and 2015.
Abstract
Purpose
This paper aims to examine whether agency costs predict disciplinary takeover likelihood for the UK listed companies between 1986 and 2015.
Design/methodology/approach
Using survival analysis, the approach is to identify candidates for disciplinary takeover on the basis of Tobin’s Q (TQ), which is consistent with the approach advocated by Manne (1965). This study then examines how indicators of agency costs affect takeover likelihood within the set of disciplinary candidates.
Findings
This paper provides evidence of the effectiveness of TQ, rather than excess return, in identifying disciplinary takeover candidates. Takeover hazard for disciplinary candidates is higher for companies with higher levels of asset utilization and sales growth in particular. Companies with stronger agency problems are relatively less susceptible to disciplinary takeover.
Practical implications
Given the UK context of the study, where anti-takeover provisions are disallowed and when compared to findings of US studies, the results imply some support for the effectiveness of an open merger policy.
Originality/value
While the connection between takeover likelihood and the market for corporate control has been made in previous studies, the study adopts a more explicit agency theory framework than previous studies of takeover likelihood. A key component of the contribution follows from differentiating candidates for disciplinary takeovers from other forms of mergers and acquisitions.
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Pattanaporn Chatjuthamard, Pornsit Jiraporn, Sang Mook Lee, Ali Uyar and Merve Kilic
Theory suggests that the market for corporate control, which constitutes an important external governance mechanism, may substitute for internal governance. Consistent with this…
Abstract
Purpose
Theory suggests that the market for corporate control, which constitutes an important external governance mechanism, may substitute for internal governance. Consistent with this notion, using a novel measure of takeover vulnerability primarily based on state legislation, this paper aims to investigate the effect of the takeover market on board characteristics with special emphasis on board gender diversity.
Design/methodology/approach
This paper exploits a novel measure of takeover vulnerability based on state legislation. This novel measure is likely exogenous as the legislation was imposed from outside the firm. By using an exogenous measure, the analysis is less vulnerable to endogeneity and is thus more likely to show a causal effect.
Findings
The results show that a more active takeover market leads to lower board gender diversity. Specifically, a rise in takeover vulnerability by one standard deviation results in a decline in board gender diversity by 10.01%. Moreover, stronger takeover market susceptibility also brings about larger board size and less board independence, corroborating the substitution effect. Additional analysis confirms the results, including propensity score matching, generalized method of moments dynamic panel data analysis and instrumental variable analysis.
Originality/value
The study is the first to explore the effect of the takeover market on board gender diversity. Unlike most of the previous research in this area, which suffers from endogeneity, this paper uses a novel measure of takeover vulnerability that is probably exogenous. The results are thus much more likely to demonstrate causality.
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Because systemically important banks' takeovers in the US were expected to contain the 2008 global financial crisis (GFC) but were found to have imposed large cost on…
Abstract
Purpose
Because systemically important banks' takeovers in the US were expected to contain the 2008 global financial crisis (GFC) but were found to have imposed large cost on shareholders, this paper examines the effectiveness of these acquisitions during the GFC and investigates what went wrong with the market for corporate control of large banks.
Design/methodology/approach
This paper presents a model of the disciplinary takeover based on the efficient market hypothesis which provides appropriate measures for it to examine the financial performance of acquiring banks after takeover.
Findings
The results indicate that the takeover market for large banks was ineffective in two aspects: the market did not distinguish strong banks from weak banks before the crisis and acquirers performed worse after takeover. Such ineffectiveness reflects the fundamental deficiencies of large bank takeovers arising from some key distinguishing characteristics of large banks.
Research limitations/implications
The sample size of systemically important banks' takeovers is small so large-sample standard statistical inferences cannot be used.
Practical implications
The deficiencies of large bank takeovers need to be rectified in order to aid in resolving future crises.
Originality/value
This paper provides rare and detailed insight based on case studies of large US bank takeovers during the GFC.
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Jyoti Dixit, Poonam Singh and Arunima Haldar
Takeovers play a critical role as an external corporate governance mechanism to ensure investor protection. There is a long-standing debate on whether the convergence of corporate…
Abstract
Purpose
Takeovers play a critical role as an external corporate governance mechanism to ensure investor protection. There is a long-standing debate on whether the convergence of corporate governance to global standards can enable emerging economies to ensure investor protection. This paper aims to analyse the evolution of the takeover code, namely, Securities Exchange Board of India’s Substantial Acquisition of Shares and Takeovers (2011) in India from the lens of investor protection. It then compares the takeover provisions in India, the USA, the UK, Singapore and Australia to examine the extent of convergence and its implications for investor protection.
Design/methodology/approach
Using a cross-national comparative analysis of takeover mechanisms in common law countries, the study analyses the extent and relevance of convergence in form. The focus of the comparison is on regulations governing offer size, offer price, creeping acquisition and initial trigger limit for the mandatory open offer.
Findings
The findings suggest that certain provisions such as the initial trigger threshold for the mandatory offer and the offer prices of the Indian takeover code are converging with the standards in common law countries. However, the offer price determination based on market prices may not reflect true market value in an inefficient market like India. Other provisions such as creeping acquisition and offer size are not only diverging from the international standards but are also inconsistent with the key objective of investor protections of the Indian regulator.
Research limitations/implications
Indian takeover regulation needs to converge to higher global standards to ensure adherence to improved investor protection. This needs to be done for the initial trigger limit for mandatory bid and offer prices, after accounting for the differences in institutional structure. The Indian regulators need to revisit provisions on the initial trigger, creeping acquisition to converge to the broader principle of investor protection.
Originality/value
This technical paper provides a comprehensive depiction of takeover mechanisms in an emerging economy context as a means of investor protection. Further using a comparative lens, it analyses the relevance of convergence of takeover laws. Thus, advances the theoretical knowledge of limited extant work on external corporate governance mechanism in an emerging economy context.
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Corporate governance has attracted enormous attention both in the area of law and in the area of financial economics. In comparative corporate governance studies, many people have…
Abstract
Corporate governance has attracted enormous attention both in the area of law and in the area of financial economics. In comparative corporate governance studies, many people have devoted their energy to find a best corporate governance model. I argue that a functional analysis does not support the view that there is a single best corporate governance model in the world. I further use the transplantation of an English style takeover law into China to show that the importation of foreign law is not always based on careful analysis whether the imported foreign law is the best in the world. Furthermore, I use the subsequent adjustment of the transplanted English takeover law in China to show that the imported foreign law is subject to local political and economic conditions. If there is no best corporate govern model and the transplantation of foreign law into other countries with different social and political background does not achieve similar objectives, the search for a best corporate governance model is misguided. Just as tort law or constitutional law regimes may have diversified models, so do corporate governance regimes in countries with different historical, social and political backgrounds.
Christopher K. Ma, David A. Lindsley and Ramesh P. Rao
Extant literature identifies board composition and the market for takeovers as two important measures for controlling the agency problem associated with top management. This study…
Abstract
Extant literature identifies board composition and the market for takeovers as two important measures for controlling the agency problem associated with top management. This study tests the substitution hypothesis that outside directors on the board and the effectiveness of takeover markets are substitutes for each other. This is done by first identifying a group of states that are characterized as weak takeover markets on the basis of their state takeover statutes. It is then shown that for a sample of firms in these states the stock markets react negatively to the election of an insider to the board, while no significant reaction is noted when an outsider is elected to the board. These results suggest that the election of an insider to the board signals a reduction in the monitoring power of the board over top management. We interpret this result as consistent with the substitution hypothesis.
The firm size hypothesis – takeover likelihood (TALI) decreases with target firm size (SIZE) – has enjoyed little traction in the TALI modelling literature; hence, this paper aims…
Abstract
Purpose
The firm size hypothesis – takeover likelihood (TALI) decreases with target firm size (SIZE) – has enjoyed little traction in the TALI modelling literature; hence, this paper aims to redevelop this hypothesis while taking account of prevailing market conditions – capital liquidity and market performance.
Design/methodology/approach
The study uses a logit modelling framework to model TALI. Model performance is assessed using receiver operating characteristic (ROC) curve analysis. The empirical analysis is based on a UK sample of 34,661 firm-year observations drawn from 3,105 firms and 1,396 M&A deals over a 30-year period (1987-2016).
Findings
While acquirers generally seek smaller targets because of transaction cost constraints, the paper shows that the documented negative relation between SIZE and TALI arises from sampling bias. Over a full sample, mid-sized firms are most at risk of takeovers. Additionally, market conditions moderate the SIZE–TALI relationship, with acquirers more inclined to pursue comparatively larger targets when financing costs are low and market growth or sentiment is high. The results are generally robust to endogeneity.
Research limitations/implications
Sample truncation on the basis of SIZE leads to empirical misspecification of the TALI–SIZE relation. In an unbiased sample, an inverse U-shaped specification between TALI and SIZE sufficiently models the underlying relation and leads to improvements in the predictive ability of TALI models.
Originality/value
This study advances a new firm size hypothesis which is consistent with classic M&A theories. The study also evidences market conditions as a moderator of the acquirer’s choice of target SIZE. A new model specification which recognises the non-linear relation between TALI and SIZE and accounts for the moderating effect of market conditions on the SIZE-TALI relationship leads to improvements in the performance of TALI prediction models.
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This paper aims to review prior studies and presents a synthesis of the takeover prediction literature spanning the period 1968–2018.
Abstract
Purpose
This paper aims to review prior studies and presents a synthesis of the takeover prediction literature spanning the period 1968–2018.
Design/methodology/approach
The paper adopts a narrative review approach. It explores prior studies on takeover target prediction from a historical perspective, focusing on the evolution and development of the literature over the 50-year period.
Findings
From a historical development perspective, prior studies in the area can be partitioned into four distinct eras. Studies in the first era (1968–1985) mainly established that takeover targets share common characteristics which can be captured with financial ratios. Studies in the second era (1986–2002) developed and extended formal target prediction hypotheses. These studies concluded that it was impossible to build a successful investment strategy around takeover target prediction. Studies in the third era (2003–2009) explored similar questions using alternative modelling techniques but arrive at similar results – targets can be predicted with limited accuracy and target prediction is unlikely to lead to abnormal returns. Studies in the fourth era (2010–2018) explore implications of M&A predictability on share valuation, governance and bond prices (amongst others), but most importantly, provide some evidence that takeover prediction can lead to abnormal returns when combined with appropriate screening strategies.
Originality/value
This presents the first in-depth review of the literature on takeover target prediction. It highlights the development of the literature over four distinct eras and identifies several limitations, research gaps and opportunities for future research. Given the recent decline in the literature (i.e. fourth era), this study may stimulate new research in the area.
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Michael Nankervis and Harminder Singh
The purpose of this paper is to examine the existence of a diversification discount in the Australian takeover market. A sample of 446 Australian publicly‐listed firms involved in…
Abstract
Purpose
The purpose of this paper is to examine the existence of a diversification discount in the Australian takeover market. A sample of 446 Australian publicly‐listed firms involved in the market for corporate control was observed between 2000 and 2007. The authors examined two pre‐announcement and four post‐announcement periods, predominantly around the immediate event date, but also examined activity out to one year following the announcement.Design/methodology/approach – An event study, in this case, is used to examine abnormal returns around the announcement of a merger or acquisition. The timeframe this study intends to focus on is the period from announcement date to a time one year down the track which, although some studies may deem it “long‐term”, is still a relatively short‐term measure of performance. While many variables in acquisitions have been looked at in depth over the years, such as outcome, nature, payment method and size of deal, one area which has had considerably less attention is the area of specialisation and diversification. That is, do focus increasing (or non‐diversification) deals have different return patterns relative to focus decreasing (or diversification) deals?
Findings
The overall findings of this paper are fairly mixed, barring a few exceptions, and there does not appear to be a great deal of variation in return patterns based purely on whether the announced acquisition is non‐diversifying or diversifying in nature.
Originality/value
The paper is of particular value in Australia. Most of the research of diversification to date has taken place in the USA. Australia is similar to the USA in that it has a well‐developed economy based on common law principles and an active equity market, however, the existence of institutional and regulatory differences suggests that US results may not hold in Australia.
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Poison pill adoption is often considered as the most effective tactic to fend off an unsolicited takeover bid. However, it is difficult to identify the deterrent effect because…
Abstract
Purpose
Poison pill adoption is often considered as the most effective tactic to fend off an unsolicited takeover bid. However, it is difficult to identify the deterrent effect because the adoption is naturally endogenous. The purpose of this paper is to use plausibly exogenous instruments to mitigate the endogeneity problem.
Design/methodology/approach
The author employs two econometric models: the linear probability model and the bivariate probit model to examine the effect of poison pills on the outcome of a takeover.
Findings
Using a sample of 655 unsolicited takeovers, the author finds that poison pills substantially reduce the likelihood that a takeover bid, once undesirably placed, is completed. This negative impact strongly supports the manager entrenchment hypothesis in that managers adopt poison pills to ensure the continuation of their private benefits. However, the author finds no strong evidence consistent with the shareholder interest hypothesis that poison pills enhance the management’s ability to negotiate higher premiums or reject inadequate offers.
Research limitations/implications
The demise of the market for unsolicited takeovers with the disappearance of poison pills can be explained by the fact that poison pills, if adopted, will have an absolute deterrent effect on the takeover likelihood of success, and targets always have the power to adopt them instantly.
Practical implications
There should be policies to limit the power of managers to adopt poison pills because it causes the entrenchment problem which will negatively affect the firm value.
Originality/value
The author tackles the problem of the endogeneity of poison pill adoptions. The author shows that poison pills have a strong negative effect on the takeover outcome and the result can explain the decreasing number of unsolicited takeovers.
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