The impact of corporate governance systems, economic conditions, and target value ambiguity on bidders' gains

Abstract

The primary objective of this thesis is to investigate the effects of takeover bid announcements on the value of bidders that engage in domestic and cross-border acquisitions. The empirical chapters focus on three major Issues. They are: (a) the Implications of International variations in corporate governance systems, (b) the roles of market valuations, economic conditions and exchange rate changes, and (c) the effects of ambiguity in the valuation of unlisted targets, on the wealth of shareholders of bidding firms. Evidence from all chapters, while revealing that bidders' gains vary significantly with several firm and transaction specific characteristics, strongly confirm the deterministic power of the key Issues examined. Specifically, the findings discussed In chapter 3, not only confirm that bidders tend to enjoy higher short-run gains from acquisitions of (a) listed and subsidiary targets that based In civil-law countries and (b) stock financed acquisitions of targets that based in common-law countries, but they also suggest that bidders perform relatively better In the long-run when the targets are based In common-law countries. The results reported and discussed in chapter 4 show that bidders' shareholders enjoy higher announcement gains from domestic than from foreign takeovers only when the bid is announced during periods of low market valuation, high levels of economic growth, and weak effective exchange rate. On the contrary, acquisitions made during periods of high market valuation and strong effective exchange rate yield higher abnormal returns to shareholders of acquirers of foreign than domestic target firms. The results also confirm that whereas market valuations and the effective exchange rate have similar effects on bidders' post-merger performance, the effects of economic growth tend to reverse after three and five years following the bid announcement. Evidence discussed in the final empirical chapter (chapter 5) suggests that the gains of bidders engaged in acquisitions of unlisted targets are shaped by the degree of difficulty surrounding the valuation of these targets. Bidders' shareholders enjoy higher announcement gains when they acquire less value-ambiguous unlisted targets. Acquisitions of (a) mature and (b) large unlisted targets generate higher (lower) short-run (long-run) returns to shareholders of bidders. In addition, bidders of unlisted targets laden with intangible assets generate low short-run returns but perform better in the long-run. Overall, the findings of this thesis show that the gains of bidders based In the UK are not only affected by transaction and firm specific factors but also by the corporate governance system of the country In which the targets are based, the stock market conditions, economic situations and exchange rate movements at the time of bid announcement, as well as the difficulty Involved in valuing the targets.