Determinants of Bidders' Abnormal Returns in Chinese Domestic and Cross-Border M&As

Abstract

The main objective of this thesis is to provide a comprehensive understanding of Chinese domestic and cross-border mergers and acquisitions (M&As), including the merger motives of acquiring firms, stock performance, and key determinants of performance. The key issues and empirical findings are summarised below. Chapter 2 focuses on merger momentum and motives under various market valuation periods for domestic M&As. We demonstrate that there is a form of merger momentum at the market level. The primary motive of mergers and the source of merger momentum is synergy creation, as predicted by neoclassical theory. However, the effect of merger momentum may be less important when market valuation deviates from its neutral level. Our results suggest that in high-valuation markets, bidding firms’ managers are more likely to be overconfident and to favour the market-timing strategy, but overly optimistic investors are not evident. In contrast, these managerial incentives are not indicated during low-valuation markets, but investors are found to be overly pessimistic towards any merger announcement. Chapter 3 provides new evidence on the role of investment banks in domestic M&As. Based on a modified reputational measurement, which accounts for the difference between the abilities of small and large bidders to select advisors, we find support for the “superior deal” hypothesis. The overall reputational effect of an investment bank is reflected by an increase in the stock price of the bidding firm in the short term with no long-term reversal. We further find that the deal duration is significantly greater for top-tier investment banks, which supports the “diligent advisor” hypothesis. Additionally, we find that the deal completion rates differ insignificantly between the two tiers of investment banks and that this difference can be explained by the trade-off between the “preventing poor deals” and “better deal completion skills” hypotheses. Overall, our results indicate that the short-term improvement associated with top-tier investment banks stems from their skills, diligence, and trustworthiness. Chapter 4 studies the wealth effects of acquirers that are engaged in cross-border M&As (CBMAs). Specifically, we examine both the short- and long-term abnormal returns of CBMAs that were undertaken after the RMB exchange rate reforms or during the financial crisis period, stratified according to whether the transaction was resource-related. We show that although resource-related CBMAs promote national interests, they are not value-destroying for shareholders. Indeed, such deals are especially welcomed by the market around the deal announcement if they are focussed. Furthermore, currency appreciation increases the relative wealth and decreases the cost of capital for acquirers, which allows them to gain significantly higher abnormal returns in both the short and long terms. Finally, the wealth destruction associated with higher managerial risk taking significantly outweighs the benefit of the lower cost of acquisition for acquirers during the financial crisis period, which leads to significant underperformance over the long term.