Tag: Merger announcements

Employee Rights and Acquisitions

Anzhela Knyazeva is a Financial Economist at the U.S. Securities and Exchange Commission. This post is based on an article authored by Dr. Knyazeva, Diana Knyazeva, Financial Economist at the Securities and Exchange Commission; and Kose John, Professor in Banking and Finance at New York University. The views expressed in this post are those of Dr. Knyazeva and do not necessarily reflect those of the Securities and Exchange Commission or its Staff.


In our paper, Employee Rights and Acquisitions, which was recently featured in the Journal of Financial Economics, we consider incentive conflicts involving employees, and how they may affect firms in the context of acquisitions. More specifically, we look at the effects of variation in employee protections on shareholder value, the choice of targets, and deal characteristics.  We focus on acquisitions since they are major firm investment decisions with the potential to substantially affect firm value.


The Role of the Media in Corporate Governance

The following post comes to us from Baixiao Liu of the Department of Finance at Florida State University, and John McConnell, Professor of Finance at Purdue University.

In an open capital market economy, guided by market signals, firms (and their managers) play an important role in the allocation of capital. Zingales (2000) proposes that the media may also play a role, perhaps positive, perhaps negative, in guiding firms (and their managers) in making capital allocation decisions. Dyck and Zingales (2002) develop this idea more fully. Given that the media collect, aggregate, disseminate, and amplify information, and to the extent that this information affects managers’ reputations, they propose that managers are sensitive to the way in which the media report and comment upon their decisions. Managers may even be sensitive to whether the media reports on their decisions at all. After all, a bad decision that goes unnoticed may be no worse than a good decision that goes equally unnoticed.

In our paper, The Role of the Media in Corporate Governance: Do the Media Influence Managers’ Capital Allocation Decisions?, forthcoming in the Journal of Financial Economics, we investigate whether, and to what extent, managers of publicly-traded U.S. corporations are sensitive to public news media in making one specific type of capital allocation decision. To wit: the decision of whether to complete or abandon a large proposed corporate acquisition that is accompanied by a negative stock market reaction at the announcement (“value-reducing acquisition attempt”). More specifically, we investigate whether the likelihood that a value-reducing acquisition attempt is abandoned is related to the level of media attention given to the attempt and to the tone of media coverage regarding the acquirer’s attempt at the time of the acquisition announcement.


The Merger Agreement Myth

The following post comes to us from Jeffrey Manns, Associate Professor of Law at The George Washington University Law School, and Robert Anderson IV, Associate Professor of Law at Pepperdine University School of Law.

Practitioners and academics have long assumed that markets value the deal-specific legal terms of merger agreements yet have failed to subject this premise to empirical scrutiny. Mergers are high-stakes events, so it is unsurprising that the conventional wisdom posits that value is at stake in drafting acquisition agreements and negotiating conditions, “fiduciary out” clauses, and deal protection provisions. The question is whether financial markets price the highly negotiated legal terms of acquisition agreements or only value the financial terms forged by management and bankers. The challenge in answering this question is the difficulty in separating the market impact of the merger announcement (and disclosure of financial terms) from the disclosure of the legal terms, since these events occur in close proximity.

We conduct an empirical study that shows that markets do not respond in an economically significant way to the deal-specific legal terms of M&A agreements. We collected a data set of public company cash mergers spanning the decade from 2002 to 2011 and applied a modified event study to test statistically whether the market reacted to the disclosure of merger agreements. We analyze market reactions by exploiting the (small) temporal gap between the announcement of pending mergers (which lays out their financial terms) and the disclosure of acquisition agreements (which delineate the legal terms) typically one to four trading days later. We find that markets react almost exclusively to the initial merger announcement, and there is no economically consequential market reaction to the disclosure of the acquisition agreement. This finding implies that the extensive negotiations over deal-specific legal terms are not priced into financial market valuation.


Insider Trading in Takeover Targets

The following post comes to us from Anup Agrawal, Professor of Finance at the University of Alabama, and Tareque Nasser of the Department of Finance at Kansas State University.

In our paper, Insider Trading in Takeover Targets, forthcoming in the Journal of Corporate Finance, we provide systematic evidence on the level, pattern and prevalence of trading by registered insiders before announcements of takeovers during modern times. We examine insider trading in about 3,700 targets of takeovers announced during 1988-2006 and in a control sample of non-targets, both during an ‘informed’ and a control period. We analyze open-market stock transactions of five groups of corporate insiders: top management, top financial officers, all corporate officers, board members, and large blockholders. We separately examine their purchases, sales and net purchases in target and control firms during the one year period prior to takeover announcement (informed period) and the preceding one year (control) period, using a difference in differences (DID) approach. Using several measures of the level of insider trading, we estimate cross-sectional regressions that control for other determinants of the level of insider trading.


Do Firms Manipulate Their Stock Prices? Causal Evidence from M&A

Editor’s Note: The following post comes to us from Kenneth Ahern and Denis Sosyura, both of the Department of Finance at the University of Michigan.

In the paper, Who Writes the News? Corporate Press Releases During Merger Negotiations, which was recently made publicly available on SSRN, we show that firms manipulate their stock prices during merger negotiations in order to affect the terms of the transaction. We argue that this strategy is made possible by the loose regulation of corporate disclosure. In particular, U.S. federal laws generally do not require firms to publicly disclose all material corporate events when they occur. Instead, firms have significant flexibility with respect to the content and timing of their press releases. We show that firms strategically exploit the flexibility afforded by the law to influence their stock prices precisely when they benefit the most from short-term manipulation.

To identify firms with incentives to manage their stock prices, we focus on stock acquisitions, a setting where a short-term change in firms’ stock prices has a long-term effect on merger outcomes. If an acquirer in a stock acquisition can temporarily raise its stock price during a short time window when the stock exchange ratio is determined (usually several weeks), it can issue fewer of its shares for each target share and reduce the true cost of the takeover. To establish causal evidence of price manipulation, we exploit the difference in the time period when the terms of the merger are determined in fixed-exchange ratio vs. floating-exchange ratio stock acquisitions. These two groups of transactions are very similar along firm and deal characteristics, but have a clear dichotomy in the timing of media management incentives.


Acquirer-Target Social Ties and Merger Outcomes

This post comes to us from Joy Ishii, Assistant Professor of Finance at the Stanford Graduate School of Business, and Yuhai Xuan, Assistant Professor of Business Administration at the Harvard Business School.

In our recent working paper Acquirer-Target Social Ties and Merger Outcomes, we estimate the relationship between merger announcement returns and the extent of social ties between the top managers and directors of the two merging firms. We focus on educational institutions as well as employment history as the basis of the social networks that we use in our analyses.

Using a sample of 539 mergers between publicly-traded U.S. firms between 1999 and 2007, we find that acquirers’ announcement returns associated with a merger tend to be lower in the presence of many social connections. Upon examining the relationship between target announcement returns and social ties, we find no significant relationship that would indicate that targets are overpaid based on social networks. We then consider the acquirer and target weighted average announcement return for the combined entity and confirm that the overall effect of social ties is significantly negative, both statistically and economically. This supports the view that the negative impact of social networks outweighs whatever positive information-based effects might be present.


Earnings management, lawsuits, and stock-for-stock acquirers’ market performance

This post comes from Henock Louis, Guojin Gong, and Amy X. Sun at the Smeal College of Business at Pennsylvania State University.

In a forthcoming Journal of Accounting and Economics paper entitled Earnings management, lawsuits, and stock-for-stock acquirers’ market performance, we analyze whether postmerger announcement lawsuits are associated with pre-merger abnormal accruals and the potential effects of lawsuits on acquirers’ market performance. We posit that, by subjecting stock-for-stock acquirers to lawsuits, pre-merger earnings management can have an indirect effect on acquirers’ performance around and after the merger announcement, in addition to the direct effect associated with post-merger accrual reversals.

After analyzing the association between pre-merger announcement abnormal accruals and post-merger announcement lawsuits, we examine whether the market anticipates the potential lawsuits and their consequences at the merger announcement. It is well documented that the average stock-for-stock acquirer experiences significant market losses at the merger announcement. In a fully efficient market, the probability of a lawsuit should be reflected in the market reaction to the merger announcement. To examine the association between the merger announcement abnormal return and the probability of a lawsuit, we use an instrumental variable approach. In a first step, we estimate the probability that an acquirer would be sued, using ex-ante predictors of lawsuits. In a second step, we analyze the association between the merger announcement abnormal return and the probability of a lawsuit. We use the two-stage estimation process because of the potential endogeneity in the relation between lawsuits and performance.

Consistent with our conjectures, we find that pre-merger abnormal accruals are a strong determinant of post-merger lawsuits. The effect of abnormal accruals is significant even after controlling for the post-merger abnormal return, which suggests that pre-merger earnings management has a first order effect on the likelihood of a lawsuit. We also find evidence that the market anticipates the lawsuits at merger announcements. There is a significantly negative association between the market reaction to a merger announcement and the probability that a stock-for-stock acquirer is subsequently sued. Further analyses suggest, however, that the market reaction to the merger announcement only partially reflects the probability of a lawsuit. First, we find that stock-for-stock acquirers’ long-term market under performance is largely limited to litigated acquisitions. Second, and more importantly, we find a very strong negative association between the likelihood of a lawsuit and the long-term market performance over the four years after the merger announcement. Therefore, post-merger announcement long-term market performance can be predicted using lawsuit-related information that is available at the time of the merger announcement. We do not claim that lawsuits are the only cause of the post-merger announcement long term under performance. The evidence only indicates that lawsuits are a contributing factor to the under performance.

The full paper is available here.

The Geography of Block Acquisitions

This post by Jun-Koo Kang and Jin-Mo Kim is part of the series of posts on corporate governance articles accepted for publication in prominent Finance Journals.

Our forthcoming article in the Journal of Finance entitled The Geography of Block Acquisitions, extends the literature on geographic proximity by studying how corporate governance activities of block acquirers in targets and target announcement returns are affected when the acquirers are located near the targets.

Using a sample of 799 partial acquisitions in the U.S. during the 1990 to 1999 period, we find that:

  • Block acquirers exhibit a strong preference for targets located near them, indicating that geographic proximity plays an important role in determining acquirers’ choice of targets.
  • Geographically proximate block acquirers are more likely to be involved in post-acquisition governance activities in targets than are remote block acquirers. Specifically, we find that these acquirers are more likely to have their representatives on the target’s board and to replace poorly performing target management after block share purchases.
  • Geographically proximate targets experience both higher abnormal announcement returns and better post-acquisition operating performance than those of other acquisitions. The positive valuation effects are more pronounced when there are greater information asymmetries, and when acquirers have their representatives on the targets’ boards.

The full paper is available for download here.

Chancery Weighs in on Disclosure of Projections in Merger Votes

This post is from Robert S. Saunders of Skadden, Arps, Slate, Meagher & Flom LLP. This post is part of the Delaware law series, which is cosponsored by the Forum and Corporation Service Company; links to other posts in the series are available here.

With his November 30 opinion in Globis Partners v. Plumtree Software, Vice Chancellor Parsons weighs in on the evolving standards for merger-related disclosure of projections, as well as investment bankers’ work and compensation. The opinion also importantly confirms that, even where a complaint invokes Revlon‘s reasonableness standard by challenging the directors’ approval of a cash-out merger, it can still be dismissed at the pleading stage if it fails to allege facts sufficient to rebut the presumptions of the business-judgment rule.