There was a tidal current of amalgamations and acquisitions ( M & A ; A ) which use equity as their payment methods in 1990s ( Andrade, Mitchell, and Stafford ( 2001 ) ) . In the paper “ Do Stock Mergers Create Value for Acquirers? “ , Savor and Lu ( 2008 ) did some theoretical analysis and empirical probes on whether the acquisition which use a company ‘s equity will profit the long-run involvement of the stockholders and whether there is any difference between the stock net incomes of successful acquirers and the unsuccessful 1s every bit good as between the hard currency acquirer and equity acquirer. Through their research, they find that the acquisition failure of companies whose stock is overvalued is costlier, and the mark company will hold a higher return. Besides, the unsuccessful companies tend to surpass the successful 1s.
First, Martin ( 1996 ) and Verter ( 2002 ) mentioned that there is a positive correlativity between the companies ‘ stock rating and their acquisition activity. Sheleifer and Vishny ( 2003 ) besides observe that overvalued house are more inclined to take a amalgamation and acquisition activity by utilizing its overvalued equity. Second, Savor and Lu intend to prove Shleifer and Vishny ( 2003 ) and Rhodes-Kropf and Viswanathan’si??2004i?‰market timing theoretical account which predicts that the acquisition will profit the long-run stockholders of the valuation-driven acquirer. Third, Savor and Lu want to prove Mitchell and Mulherin ( 1996 ) , Maksimovie and Phillips ( 2001 ) , Jovanovic and Rousseau ‘s ( 2002 ) neoclassical theory of amalgamations which says that the amalgamations are efficiency-motivated responses to the ethnological, regulative or economic dazes. Last, Savor and Lu intend to happen some grounds about whether there is any difference between unnatural returns of equity bidders and hard currency bidders, every bit good as whether there is any difference between the successful acquirers and unsuccessful 1s.
Data and Research Methods
This paper uses a sample from the Centre for Research in Security Prices ( CRSP ) Merger Database and SDC Platinum and unite them together. The writer picks the stock return, house size and portion type from CRSP and uses the factor returns and the NYSE size breakpoint from Kenneth French ‘s web site to construct a sample of 1773 US public companies through the period from 1978 to 2003. There are 1050 successful equity bidders and 723 hard currency bidders, and the unsuccessful sample consisted of 187 equity bidders and 168 hard currency bidders. The paper uses the company whose payment manner is all-cash or all-equity to take advantage of market-timing hypothesis. It is deserving detecting that the paper chooses the mark companies whose pre-announcement market value is non rather little because the really little company will convey merely noise. In order to do certain no company will be include in the sample more than one time, the sample excludes the companies which engage in another M & A ; A activity in the old three old ages by utilizing the same consideration.
3.2. Research Method
Since the chief undertaking of this paper is to research whether the M & A ; A activities which use the equity payment will profit the stockholder ‘s long-run involvement. The first method is to take a expression at long-run unnatural returns of these bidder companies and comparison with the non-acquiring houses. In order to avoid the prejudice brought by the endogeneity of the acquisition determination, the writers take an attack, which is based on the premise that the rating of a company is unrelated to its acquisition consequence. By distinguishing the successful acquirers from the unsuccessful 1s, if the M & A ; A activities truly provide for the involvement of stockholders, the unsuccessful 1s should underachieve the successful 1s.
The analysis relies on that they use the public presentation of the unsuccessful acquirers as a measuring to the successful 1s. There are two premises for the attack: First, the determination of geting does non act upon the acquirer ‘s stand-along cardinal value. Second, if the amalgamation fails, it can non prosecute in another acquisition activity.
In the definitions of the variables, the writer assumes that market can acquire the fiscal statement four months after the financial twelvemonth ends. The writer uses an attack which is composed by two methodological analysiss to analyzing the long-run unnatural returns. One is to utilize the buy-and-hold unnatural returns, and the other 1 is to utilize the calendar-time portfolio attack raised by Fama ( 1998 ) .
In the buy-and-hold unnatural returns analysis, the writer uses the returns by book-to-market ratio, house size, and industry. They foremost find companies with the same two-digit SIC codification every bit good as the market value between 50 % and 150 % of the sample company. Then they choose 10 acquirer companies which have the close book-to-market ratio with the sample house. After that, they build the matching portfolio. In the calendar-time portfolio attack, they build the portfolio in the keeping period with all companies that have an eligible acquisition command. Every month the portfolio will be rebalanced, if a house is delisted before the terminal of the keeping period, the writer will pick the delisted return of the stock. When it comes to the job that there is few of failed geting, the writer builds the portfolio by utilizing the 25 % weight of each stock and utilize the leaden least square ( WLS ) arrested developments, where the weight is the figure of the stock in the portfolio.
From the result tabular array, the writer finds that the significantly negative return of the equity acquirer and the significantly positive preannouncement return straight back up Shleifer and Vishny ‘s ( 2003 ) market-timing theoretical account which predicts that the acquirers are more overvalued than the mark companies. As for the successful acquirers and the unsuccessful 1s, one is that larger 1s and those who attempt to make dig trades are ever unsuccessful because of the antimonopoly authorization issues. In footings of the hard currency payment 1s, both acquirers and marks get a higher proclamation returns than the failed 1s.
To be more specific, in footings of the long-run buy-and-hold unnatural returns, both the successful 1s and the failed 1s perform a negative return and go steadily worse in the three old ages after the acquisition. However, in malice of the negative returns, the successful 1s still outperform the failed 1s. In the sample of All Failed Sample and Restricted Exogenous Failed Sample, the consequences hold the same.
In contrast, as the same anticipation of the market-timing theoretical account, failed cash-payment acquires do non ted to endure worse abnormal returns than the successful 1s, because the negative impact tends to be more important with the equity-payment acquirers.
As for the calendar-time methodological analysis, successful equity payment acquirers show a noticeable negative calendar-time return, but as the old findings, the failed 1s suffer much lower unnatural returns. In footings of the hard currency -payment houses, the failed 1s don non hold underperformance with the successful 1s.
The proclamation returns around the expiration proclamation clip are positive for the acquirers because investors like the wantonness of the trade, although the trade will convey them long-run benefits. However, after the proclamation of command expiration, the failed houses show a significantly negative long-run return. Unsuccessful stock acquirers continue to underachieve after the command expiration proclamation.
With peculiar attending, the glamor acquirers tend to underachieve their valued opposite numbers, and the failure of the M & A ; A is more dearly-won for extremely overvalued stock houses.
This paper supported the market-timing theoretical account ‘s anticipation that overvalued houses benefit long-run stockholders through stock amalgamations because they convert their overvalued equities into the less overvalued difficult assets. This phenomenon will make a strong inducement for the companies to raise their stock monetary value, even though the procedure is dearly-won. The manages might peruses the M & A ; A activities even though the cardinal value of the two companies will cut down by uniting them into one house, every bit long as the addition will be big than the cost of the M & A ; A activities.
There will be more negative post-event returns for stock acquirers because there is a positive correlativity between the house ‘s rating and the inclination to do the command. The failed acquirers will underachieve the successful 1s, and so the tendency will prevail with the length of the keeping period. The market will give a positive reaction to the command expiration because they view it like a negative signal about the acquirer ‘s position.
From my position, if the amalgamations and acquisitions can so convey its long-run stockholders involvement by the converting of the overvalued stock to difficult assets, why investors can non acquire the overvalue information when the M & A ; A proclamation is released? If the market can gain the chance of get unnatural net incomes, the arbitrage activities would convey the monetary value up in progress, which means the monetary value should reflect all the information. Overall, I think the consequence of this paper does non consistent with the efficient market hypothesis, so possibly we should make more research on whether the M & A ; A activities will convey benefits and whether it is the anomalousness of the efficient market hypothesis.