2022-10-25 11:31:00 Tue ET
mergers acquisitions corporate finance baker and wurgler managerial entrenchment jarrad harford corporate governance corporate investment corporate social responsibility rent protection ceo overconfidence board connections capital expenditures david hirshleifer ronald masulis andrei shelifer lucian bebchuk ulrike malmendier
Relative market misvaluation between the bidder and target firms drives most waves of mergers and acquisitions (Loughran and Vijh, JF 1997; Shleifer and Vishny, JFE 2003). Highly valued bidder firms are more inclined to use stock rather than cash as consideration in mergers and acquisitions (Dong, Hirshleifer, Richardson, and Wong, JFE 2006).
Acquisition announcements by firms with more anti-takeover provisions in place yield significantly lower abnormal bidder returns than acquisition announcements by firms with fewer anti-takeover provisions (Masulis, Wang, and Xie, JF 2007). In addition to the market for corporate control, Masulis et al also consider several other internal and external corporate governance mechanisms such as product market competition, CEO-chairman duality, and management quality in the form of industry-adjusted operating performance (Hart, 1983; Shleifer and Vishny, 1997; Core et al, JFE 1999; Hermalin and Weisbach, FRBNY 2003, JEL 2010; Morck, Shleifer, and Vishny, JF 1990). Firms that operate in more competitive industries make better acquisitions with greater abnormal bidder returns, as do firms that separate the positions of CEO and chairman of the board. Both Dong, Hirshleifer, Richardson, and Wong (JFE 2006) and Masulis, Wang, and Xie (JF 2007) affirm Loughran and Vijh's (JF 1997) central thesis that cash tender offers attract significantly positive abnormal bidder returns around the takeover announcement date while stock acquisitions attract significantly negative abnormal bidder returns around the takeover announcement date.
Harford, Humphery-Jenner, and Powell (JFE 2012) extend this logic and empirically find that both overpayment and deliberate target selection account for a large fraction of merger value destruction. Harford et al apply the Heckman (1979) sample selection model to find that the anti-takeover dictatorship dummy variable has a material negative impact on the probability of acquiring private targets, acquiring private targets entirely with stock, or acquiring private and even public targets with at least 5% blockholder ownership. Harford et al apply the Officer (JFE 2007) proxy premium regressions of abnormal bidder returns on the anti-takeover dictatorship dummy variable, its interaction with the proxy premium, the dummy variable for each all-stock takeover, and a unique set of control variables. All of these dummy variables and interaction term carry significantly negative coefficients, thus overpayment is another plausible explanation for merger value destruction. Harford et al apply the Healy-Palepu-Ruback (JFE 2002) regressions of industry-adjusted ROAs on the governance or entrenchment index of takeover defenses and a unique set of control variables. Ceteris paribus, greater managerial entrenchment significantly correlates with subpar operating performance. Substandard target selection, rather than mere overpayment, explains most of the shareholder value loss in mergers and acquisitions. Incumbents that are secure with more takeover defenses often seek to preserve their managerial entrenchment through deliberate target selection.
Baker, Pan, and Wurgler (JFE 2012) empirically find that the 52-week high stock prices serve as salient reference points for senior managers, executive directors, and other stakeholders in the M&A announcement period (Tversky and Kahneman, SCI 1974; Kahneman and Tversky, ECMT 1979). Ceteris paribus, a 10% increase in the 52-week high stock price correlates with a 3% increase in the takeover premium. Target-firm boards that discourage an M&A deal often emphasize that the bid is below the 52-week high stock price, while target-firm boards that encourage an M&A deal note when the bid compares favorably with the 52-week high stock price. Merger waves coincide with higher recent stock returns and stock market values. The market's 52-week high stock price relative to its current value is inversely related to the number of mergers and acquisitions. The preponderance of Baker, Pan, and Wurgler's (JFE 2012) results echoes the market-timing thesis first proposed by Shleifer and Vishny (JFE 2003).
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