Merger and Acquisition: the Effect of Financial Constraint and Security Analysts on Bidder Abnormal Return

Abstract

This thesis investigates to what extent financial constraint and financial disparity influence bidder merger performance, how analyst recommendation consensus relates to bidder announcement return, and whether divergence opinion and information asymmetry affect M&A abnormal returns.

First, this thesis examines the impact of financial constraint and the financial constraint disparity between bidder and target on bidder abnormal return. I find that a constrained acquirer outperforms an unconstrained bidder in both the long and short run; target financial constraint is significantly negatively related to bidder announcement return. Acquiring a financially constrained target tends to positively influence an acquirer’s abnormal returns in the long run. In addition, disparity between acquirer target financial constraints (ATDKZ) is negatively related to bid premium.

Second, this paper investigates whether analyst recommendations affect merger and acquisition performance: whether recommendation consensus has the predicting power on acquisition performance, and if so, which type of recommendation consensus is more accurate than the others. The results suggest that recommendation consensus is positively related to acquirers’ announcement return; acquirers with high recommendation consensus before announcement day outperform acquirers with low recommendation consensus in the short run; analysts can successfully predict the incoming M&A deals and adjust their recommendation accordingly; and the recommendation consensus estimated 90 days preceding deal announcement has the strongest predicting power. It suggests that analysts do have the superior skill.

Finally, this study estimates how the combination of analyst divergence opinion and information asymmetry influences bidder abnormal return by controlling bidder pre-merger performance. A low divergence opinion bidder outperforms a high divergence opinion bidder in both the long and short run. This effect is much stronger in the sample of poorly performed bidders than well-performed bidders. For bidders with poor pre-merger performance, analyst divergence opinion has negative impact on announcement return. For bidders with good pre-merger performance, a positive relation has been found between information asymmetry and announcement return. These empirical results strongly support that bidder pre-merger performance is an important conditioning variable that we should take into consideration in examining the impact of divergence opinion and information asymmetry on bidder merger and acquisition performance.

Overall, this thesis provides new empirical evidence on how bidder M&A performance is related to financial constraint, financial constraint disparity, recommendation consensus, divergence opinion and information asymmetry. The results suggest that constrained bidders outperform unconstrained bidders, financial analyst do have superior skills, and pre-merger performance is an important controlling variable when we study divergence opinion and information asymmetry in the context of M&A abnormal return.