Effect Of Targets Listing Status On Acquirers Returns
The term “listing effect” was firstly brought up by Faccio, McConnell, and Stolin (2006). They use this phrase to describe the previous research results which states that when acquiring publicly held targets, bidders achieve zero or negative average cumulative abnormal returns (CARs) in the announcement period, while when acquiring privately held targets, bidders achieve positive CARs. The privately held targets include both stand-alone companies and subsidiaries of other firms (Chang (1998), Fuller et al. (2002), Hansen and Lott (1996), and Moller et al. (2004)). The relevant issues have been examined by a large amount of literature in the finance area. In most of these studies, the samples which have been chosen were based on the U.S., U.K., and other European countries.
The empirical researches have been drawn a variety of conclusions in this field. The common view is that the listing effect exists across countries. Moreover, several outspread conclusions have been reached. Specifically, founded on the premise that the listing effect is existent lots of literature explored the possible explanatory variables of this effect, which include the method of payment, the size of the bidder, the acquirers’ ownership structure, the target attitude, etc. The literature review section will explain these evidences in details.
Since the previous researches are mainly based on the data collected from the U.S., U.K., and other European countries, the conclusions which have been drawn based on their research data is not robust enough to improve that the listing effect exists all over the world. Motivated by the empirical evidences, the purpose of this study is to examine whether the listing status of target firms affects the returns of acquirers in the Chinese market. In another word, this research aims to test whether the listing effect exists in China. If the effect is existent, whether the explanatory variables are inconsistent with the previous studies or not. If the listing effect is not existent in the Chinese market, what is the reason that can be attributed?
The outcomes of this study will fill in the gap of research the listing effect based on the data collected from the Asian countries. It is anticipated that listing status of target firms will affect the returns of acquirers in the Chinese market. If the study confirms the prediction, the result of the research will reach the conclusion that the listing effect exists all over the world more convinced. Besides, exploring the factors that will affect the listing effect will make the study more comprehensive and deeply. What’s more, the outcome of this study will be important and useful to the Chinese acquirers, because the result will provide some guidance and criterion to the bidders on choosing the target firms which can enhance the acquirers’ returns. However, if the prediction is rejected after several tests, it will also become a contribution to this filed.
There is an extensive amount of literature in the finance area study the effect of target firms’ listing status on acquirers’ returns and some relevant topics. Most of the researches are based on the data collected from the U.S, U.K, and other European countries.
Initially, the listing effect is described as that the abnormal return of bidders acquiring a private target is positive, while the abnormal return of bidders acquiring a public target is negative (Chang, 1998). In other words, when the acquirers buy an unlisted firm or a listed firms’ subsidiary, the shareholders of bidding firm will gain (Fuller et al., 2002).
In 2006, the term “listing effect” was created by Faccio et al. Founded on some prior studies, they define the listing effect as that when acquiring publicly held targets bidders achieve zero or negative average cumulative abnormal returns (CARs) in the announcement period, while when acquiring privately held targets bidders achieve positive CARs. The privately held targets include both stand-alone companies and subsidiaries of other firms. According to their research outcomes the listing effect exists through times and across all the countries. In their studies, they also examined the possible factors that can explain the listing effect such as the method of payment, the size of the bidder, shareholder overlap and cross-border transactions, predictability of acquisitions, and so on. However, none of them was improved to be the explanatory variable of the listing effect.
Nevertheless, other literature mentioned several possible factors that can explain why acquirers’ returns in private acquisitions are higher than in public deals.
The first factor is the bargaining power. The bargaining power is influenced by the amount of uncertainty and the ownership structure of the target firms. Because of the level of uncertainty and agency problems, the private targets have relatively lower bargaining power than the public targets. Thus, the bidders will gain from acquiring private firms (Mantecon, 2008).
The second factor is liquidity. The acquirers are purchasing assets in a comparatively illiquid market when they acquire privately held firms. Therefore, the acquirers’ shareholders will get a higher return since “the valuation of the assets reflects a liquidity discount” (Fuller et al., 2002). Besides, the illiquid of unlisted targets also decrease the bargaining power of the targets firms, which lead to underpayment by acquirers (Draper and Paudyal, 2006).
The third factor is managerial incentive. The possible motivations of bidding firms’ managers are either to improve their own benefit, or to enhance the shareholder’s wealth. Managers’ own benefit has a positive correlation with the size and reputation of their own firm and the amount of resources they control. Therefore, they intend to pay a high premium for large and well-known targets, which will decrease the stock price of the bidder firm. Since the listed targets are generally larger and more prestigious than the unlisted targets, “The acquisition of smaller and less well-known private firms will be motivated less by a desire to improve managers’ private benefit and more by the potential synergies from the acquisition and a desire to maximize shareholders’ wealth.” (Draper and Paudyal, 2006)
The fourth factor is the method of payment. There are considerable amount of literature mentioned the relationship between acquirers shareholder’s wealth and the method of payment. In general, acquirers use shares as the method of payment when the values of the target firms are difficult to assess. This could diminish the worry about the overpayment by the acquirers. Acquirers gain positive returns when they using stock to pay for the acquisitions, whereas the acquisitions paying with cash are worse (Officer et al., 2008).
In some degree, the listing effect can be explained by the method of payment. When acquiring listed targets, acquirers paying with cash usually breakeven while acquirers paying with shares loss significantly. When acquiring unlisted targets, acquirers obtain significantly high positive excess returns when paying with cash. This situation can be attributed to the asymmetric information. The information asymmetry increase when the number of shareholders increases. The shareholder of listed targets do not have powerful motive to inspect the potential acquirer directly. Adversely, the unlisted targets have more concentrated ownership. Hence, their shareholders will be strongly motivated to inspect the acquirers closely especially when they are paid in shares. Through this way, the information asymmetry is reduced. Moreover, acquirers of unlisted targets obtain the highest excess return when paying with shares. This is related to the corporate monitoring issue. Because in the bidding of private firms, if the acquirer is paying in shares the previous shareholders of the target firm may end up holding a percentage of shares of the united firm. Thus, they may monitor the managerial activities more strictly, which can reduce other shareholders’ agency costs related to monitoring the activities of the acquiring firm (Draper and Paudyal, 2006).
In addition, the worse performance of listed targets in noncash acquisition is the main difference between listed and unlisted targets acquisitions. Specifically, when the acquirer is overvalued they offer stocks to acquire listed targets. However, this problem is diminished in the takeovers of unlisted targets, because acquirers can reveal private information to the concentrated target shareholders (Conn et al., 2005).
The fifth factor could be the tax consideration. For the owners of privately held firms, if the method of payment is in stocks, the owners will delay their tax liability until the liquidation. Therefore, they would like to accept a lower price for their assets (Fuller et al., 2002). However, this will not happen in the bidding of publicly held firms.
Furthermore, the acquirers’ wealth is associated with the level of target countries shareholder protection as well. In the bidding of listed targets, when the shareholder protection in the target countries is high the acquirers will suffer a significant loss, whereas if the shareholder protection is low the acquirers will gain significantly positive returns. However, in the bidding of unlisted targets, there is no significant difference between acquirers’ returns in the target countries with either high or low shareholder protection. The shareholder protection in the target countries only influences the target values and acquirers returns of listed targets. The high shareholder protection countries have higher valuation and higher premiums for listed targets because of the lower agency costs of these firms (John et al., 2010).
This study of the effect of target firms’ listing status on acquirers’ returns in China will fill in the gap of research the listing effect founded on the data collected from the Asian countries. Thus, it will make the outcomes of previous studies more convinced and robust. What’s more, this study will examine whether the factors mentioned above are significant based on the data collected from Chinese market, and explore some additional factors that can explain the listing effect.
According to Faccio et al.’s research outcomes acquiring unlisted targets can create significantly greater wealth for the acquirers’ shareholders around announcements of acquisitions than acquiring listed targets. Moreover, the listing effect persists through time and across countries. There are three research questions for this study stated below:
Does the listing status of target firms affect the returns of acquirers in the Chinese market?
If the listing effect is existent in China, what are the factors that can explain this effect? (Whether the explanatory variables are inconsistent with the previous studies.)
If the listing effect is not existent in the Chinese market, what is the reason that can be attributed?
Founded on the research questions listed above, the research objective of this paper are as follow:
To examine whether the listing status of target firms affect the returns of acquirers in the Chinese market.
If the listing effect is existent in China, to identify the explanatory variables that can explain the listing effect in China.
If the listing effect is not existent in China, to discover the possible reasons which can be attributed.
The sample selected in this study is the secondary data collected from the Thomason ONE Banker database. The sample includes the acquisitions of which the acquirers are domiciled in China. The time period is from January 1, 1999 to December 31, 2010. The reason why to choose January 1, 1999 as the starting point is because this is the first year after the Asian crisis. The economic condition in China is more mature and stable than before. Thus, the analysis based on this starting point is relatively convinced. Moreover, choosing December 31, 2010 as the ending point is to update the previous studies. As Fuller et al. (2002), Faccio et al. (2006), and others’ sample requirements the acquisition should be completed, and after the acquisition, the acquirers should own at least 50% of the shares. It is also required that the value of the acquisition should be more than $5.0 million. Besides, the stock price for the acquirers should be available around the announcement date, as well.
In general, this study includes two main parts. The first part is to analyze whether the listing status of target firms affects the returns of acquirers in the China. In this part, the nonparametric test can be used, because the nonparametric test has less strict demands of the data and sometimes it can be used to get an answer quickly with little calculation. The basic idea of this part is to calculate the mean and median of cumulative abnormal returns (CARs) of private targets and public targets for each year respectively, and use t-test and Mann-Whitney test to check whether they are significant.
In this study, I intend to use Brown and Warner’s (1985) methodology of event study to calculate the CARs. The announcement period covers 3 days (-1 to +1) surrounding the day of announcement. According to Andrade et al. (2001), the 3-day window is one of the most frequently used event windows for merger and acquisition studies. By using the market-adjusted model, the abnormal returns can be estimated. Then as Cheung and Shum (1993) did the CARs can be calculated as:
CARt = ARt + CARt-1
In this way, the mean and median of all the CARs including both the acquisition of listed and unlisted targets in each year can be worked out. In addition, since the unlisted targets can be divided into subsidiary targets and stand-alone targets, the CARs of them should be calculated separately so that I can check whether there are significant differences between these two types of unlisted targets. Therefore, the conclusion can be more detail and forceful. After that, the t-test can be used to check whether the mean of each CAR is significant. While the Mann-Whitney test is used to test the median of each CAR. By comparing the CARs with the p-value, I can get the results based on which I can improve whether the listing effect is existent in China through times or not.
If in the first part, it can be improved that the listing effect is existent in the Chinese market, then the second part of this study is to explore the possible factors which can explain this listing effect. The methods I intend to use in this part are univariate tests and multivariate tests. The variables that I assume which can explain the listing effect are mainly based on the previous studies (Doukas and Travlos (1998), Draper and Paudyal (2005), Faccio et al. (2006), Moeller et al. (2004)). Specifically, the variables include the method of payment (cash, shares, or mixed); the size of acquirers, for instance, the market value of the bidder firms’ equity (small or large); whether the acquisition is cross-border (domestic or cross-border); the relative size of takeover partners (small or large); and the acquirers’ ownership structure (dispersed or concentrated).
When the data set is ready, the univariate test is the first step of data analysis (Park, 2008). In this test, the nonparametric analysis can be used, as well. By comparing the mean and median of CARs in each category with the p-value respectively, the significance of each variable can be analyzed. What’s more, to controlling the cross-sectional dependence of CARs, the calendar-time portfolio approach, which is produced by Mandelker (1974), can be used. In this way, it can be ensured that the listing effect is not owing to the cross-sectional dependence in abnormal returns.
In the multivariate test, I intend to use the cross-sectional regression to examine whether some variables can explain the listing effect altogether. Thus, the dependent variable in this regression is the three-day CAR. The independent variables are several dummy variables. The first two is whether the target firm was a subsidiary (1) or not (0) and whether the target firm was a stand-alone company (1) or not (0). The third is whether the payment was paying in cash (1) or not (0). The fourth is whether the payment was mixed (stock and cash) (1) or not (0). The fifth is whether the bidder firm was domiciled in China (1) or not (0). Besides, the acquirers’ Tobin’s Q can be used as a control variable. Because according to the studies of Lang et al. (1989, 1991) and Servaes (1991), there is a positive correlation between the acquirers’ CARs and Tobin’s Q. Moreover, the variable of whether the acquirer and target firm are in the same industry (1) or not (0) can be used as a control variable, as well. Because in the acquisitions within the industry, the abnormal return of acquirers are higher than those acquisitions in two different industries (Maquieira, 1998). Furthermore, in 1991, Servaes reported that the hostile bids lead to low returns to the bidders, whereas, in 2000, Schwert reported that there is no influence of hostility on the acquirer’s returns. Therefore, whether the acquisition is hostile (1) or not (0) should also be included in the variables.
After running the cross-sectional regression, the significance of all the variables can be worked out. Then the conclusion is reached.
However, if at the first part of this study, it is improved that the listing effect does not existent in China, then I will analyze the possible reasons of this situation. And why there are the different results from the previous studies which based on the data of U.S., U.K. and other European countries? Moreover, I will find that is there any factors that can affect acquirers’ returns in China.
Prepare draft proposal 01 April, 2011 ~ 01 May, 2011
Obtain supervisor’s approval 01 May, 2011 ~ 05 June, 2011
Literature review 05 June, 2011 ~ 20 July, 2011
Data collection 05 June, 2011 ~ 25 July, 2011
Data analysis 25 July, 2011 ~ 20 August, 2011
Finding interpretation 25 July, 2011 ~ 20 August, 2011
Reach conclusions 20 August, 2011 ~ 24 August, 2011
Complete final draft 24 August, 2011~ 28 August, 2011
Final Formatting 28 August, 2011 ~ 29 August, 2011
Printing 29 August, 2011 ~ 31 August, 2011
Submission 01 September, 2011
The main resources that can be used to support this research are based on the computing and library facilities in the University of Leeds. Specifically, the previous literature in this field can be found in the key business database (e.g. Business Source Premier, ABI Global, Web of Science, etc.). The data used in this research is collected from the Thomson ONE Banker database. All the facilities and database are accessible freely to students. Besides, in case of unanticipated contingencies, a total £300 has been set aside to meet the needs.
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