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Essays on Mergers and Acquisitions and Event Studies
Stockholm University, Faculty of Social Sciences, Stockholm Business School.
2016 (English)Doctoral thesis, comprehensive summary (Other academic)
Abstract [en]

This dissertation consists of three studies on the anticipation of mergers and acquisitions (M&As) and its impact on takeover event studies.

 Article I investigates whether the market can anticipate both takeovers and their payment forms prior to their announcement dates. This article also proposes a new time-series approach for detecting the ex-ante deal-anticipation and payment-form anticipation dates. The results indicate that the majority of deals and their payment forms are anticipated much earlier than has been documented in previous takeover studies. Moreover, controlling for the anticipation dates matters for explaining the choice of payment method in M&As.

Article II studies how assuming that M&As are unpredictable during the estimation window affects the measurement of abnormal returns. The results show that a part of takeover synergy is indeed incorporated into the stock prices during the estimation window of previous studies, around the deal-anticipation dates. This article estimates the parameters of the expected return model from the pre-anticipation period to control the consequences of ex-ante anticipation on the estimates of abnormal returns. Using the anticipation-adjusted approach significantly improves the estimation of the event-window abnormal returns, and provides new insights into some well-documented takeover results.

Article III examines how the abnormal returns are affected when a standard event study assumes that the parameters of the expected return model are stable. Using a sample of firm takeovers, the results indicate that the parameters are indeed unstable. This article introduces a time-varying market model to account for the dynamics of merging likelihood when it estimates the abnormal returns. The findings show that the stability assumption causes a standard event study to overestimate significantly the abnormal returns to the target and acquirer shareholders.

Place, publisher, year, edition, pages
Stockholm: Stockholm Business School, Stockholm University , 2016. , p. 21
Keywords [en]
mergers and acquisitions, event study, prediction, payment method, conditional CAPM, time-varying parameters, structural change methodology, variance, covariance
National Category
Business Administration
Research subject
Business Administration
Identifiers
URN: urn:nbn:se:su:diva-130260ISBN: 978-91-7649-447-9 (print)OAI: oai:DiVA.org:su-130260DiVA, id: diva2:927729
Public defence
2016-06-13, Gröjersalen, hus 3, Kräftriket, Roslagsvägen 101, Stockholm, 10:00 (English)
Opponent
Supervisors
Note

At the time of the doctoral defense, the following papers were unpublished and had a status as follows: Paper 1: Manuscript. Paper 2: Manuscript. Paper 3: Manuscript.

Available from: 2016-05-23 Created: 2016-05-13 Last updated: 2017-02-20Bibliographically approved
List of papers
1. Anticipating Takeovers and their Payment Methods: A New Approach Using U.S. Acquisitions
Open this publication in new window or tab >>Anticipating Takeovers and their Payment Methods: A New Approach Using U.S. Acquisitions
(English)Manuscript (preprint) (Other academic)
Abstract [en]

This paper introduces a new approach for identifying the ex-ante dates on which the market anticipates both takeovers and their payment forms. This approach predicts when the market receives informative signals about potential takeovers, the variance-covariance of the stock returns shifts. Using a sample of U.S. acquisitions, I find that 86% of takeovers (62% of payment forms) are anticipated on average nine (six) months in advance. This is much earlier than reported by previous studies (two months). Moreover, this paper documents that employing the anticipation dates can improve the identification of takeover studies. Previous findings report that the return correlation (as a proxy of the relatedness) of merging firms is one of the important cross-sectional determinants of the choice between cash and equity payments. However, it loses its explanatory power when I control for the anticipation effects. The evidence indicates that the likelihood of a takeover being anticipated is related to the firm characteristics, so the anticipation variables should be included in the choice-of-payment-method regressions. The return correlation and other price-related variables should also be estimated from the pre-deal-anticipation period to prevent them from being contaminated by the anticipation effects.

Keywords
mergers and acquisitions, payment method, prediction, structural breaks, variance, covariance
National Category
Business Administration
Research subject
Business Administration
Identifiers
urn:nbn:se:su:diva-130257 (URN)
Available from: 2016-05-12 Created: 2016-05-12 Last updated: 2016-05-17Bibliographically approved
2. Takeover Anticipation and Abnormal Returns
Open this publication in new window or tab >>Takeover Anticipation and Abnormal Returns
(English)Manuscript (preprint) (Other academic)
Abstract [en]

This paper documents that a part of takeover synergy is incorporated in the target and acquirer stock prices prior to the event window of previous studies, around the takeover anticipation date. This result suggests that those studies might quantify only a partial wealth effect of acquisitions. This paper introduces a new approach, which estimates the parameters of the expected return model from the pre-anticipation period, to control the consequences of early anticipation for the measurement of abnormal returns. Contrary to a benchmark event study, this approach finds that the daily average abnormal returns to the target (acquirer) shareholders are smaller by 3.06 (1.71) basis points in the cash acquisitions, and greater by 4.4 (2.12) basis points in the equity deals. These improvements are economically important, as daily returns of the U.S. treasury notes range from 1.13 to 1.78 basis points in the sample period. Overall, using an anticipation-adjusted event study in this paper sheds light on the magnitude of acquisition returns, and so on some well-documented takeover results.

Keywords
mergers and acquisitions, event study, prediction, abnormal returns, payment method
National Category
Business Administration
Research subject
Business Administration
Identifiers
urn:nbn:se:su:diva-130258 (URN)
Available from: 2016-05-12 Created: 2016-05-12 Last updated: 2016-05-17Bibliographically approved
3. Event Study Analysis with Time-Varying Alphas, Betas and Variances: The Case of M&As
Open this publication in new window or tab >>Event Study Analysis with Time-Varying Alphas, Betas and Variances: The Case of M&As
(English)Manuscript (preprint) (Other academic)
Abstract [en]

This paper proposes a new approach to control the effects of time-varying parameters on the estimates of abnormal returns. Event studies usually assume that the parameters of the market model are stable. Using a sample of firm takeovers, however, I find that this assumption is indeed rejected. The beta remains stable while the alpha and the idiosyncratic variance change significantly. The ex-ante merging likelihood is updated, which in turn shifts the parameters in the pre-announcement period. Furthermore, this paper documents that a benchmark event study, which assumes that the parameters are constant, overestimates significantly the abnormal returns around the announcement date. The size of the average annual bias for the target firms is 23.81%, while for the acquirer firms it is 4.13%. The main source of the bias is an upward shift in the alpha in the pre-announcement period. The benchmark approach hence underestimates the alpha and so estimates lower expected returns in the event window, which in turn boosts the abnormal returns.

Keywords
event study, mergers and acquisitions, conditional CAPM, time-varying parameters, structural change methodology
National Category
Business Administration
Research subject
Business Administration
Identifiers
urn:nbn:se:su:diva-130259 (URN)
Available from: 2016-05-12 Created: 2016-05-12 Last updated: 2016-05-17Bibliographically approved

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