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In cross-border acquisitions, the differences between the bidder and target corporate governance (measured by newly constructed indices capturing shareholder, minority shareholder, and creditor protection) have an important impact on the takeover returns. Our country-level corporate governance indices capture the changes in the quality of the national corporate governance regulations over the past 15 years. When the bidder is from a country with a strong shareholder orientation (relative to the target), part of the total synergy value of the takeover may result from the improvement in the governance of the target assets. In full takeovers, the corporate governance regulation of the bidder is imposed on the target (the positive spillover by law hypothesis). In partial takeovers, the improvement in the target corporate governance may occur on voluntary basis (the spillover by control hypothesis). Our empirical analysis corroborates both spillover effects. In contrast, when the bidder is from a country with poorer shareholder protection, the negative spillover by law hypothesis states that the anticipated takeover gains will be lower as the poorer corporate governance regime of the bidder will be imposed on the target. The alternative bootstrapping hypothesis argues that poorgovernance bidders voluntarily bootstrap to the better-governance regime of the target. We do find support for the bootstrapping effect.

How is a takeover bid financed and what is its impact on the expected value creation of the takeover? An analysis of the sources of transaction financing has been largely ignored in the takeover literature. Using a unique dataset, we show that external sources of financing (debt and equity) are frequently employed in takeovers involving cash payments. Acquisitions with the same means of payment but different sources of transaction funding are in fact quite distinct. Acquisitions financed with internally generated funds significantly underperform those financed with debt. The takeover financing decision is influenced by the bidder's pecking order preferences, its growth potential, and its corporate governance environment, all of which are related to the cost of external capital. The choice of equity versus internal cash or debt financing also depends on the bidder's strategic preferences with respect to the means of payment.

This paper presents an in-depth analysis of the performance of large, mediumsized, and small corporate takeovers involving Continental European and UK firms during the fifth takeover wave. We find that takeovers are expected to create takeover synergies as their announcements trigger statistically significant abnormal returns of 9.13% for the target and of 0.53% for bidding firms. The characteristics of the target and bidding firms and of the bid itself are able to explain a significant part of these returns: (i) deal hostility increases the target's but decreases bidder's returns; (ii) the private status of the target is associated with higher bidder's returns; and (iii) an equity payment leads to a decrease in both bidder's and target's returns. The takeover wealth effect is however not limited to the bid announcement day but is also visible prior and subsequent to the bid. The analysis of pre-announcement returns reveals that hostile takeovers are largely anticipated and associated with a significant increase in the bidder's and target's share prices. Bidders that accumulate a toehold stake in the target experience higher post-announcement returns. A comparison of the UK andWe acknowledge support from Rolf Visser for allowing us to use the databases of Deloitte Corporate Finance. We are grateful for valuable comments from an anonymous referee, 209Continental European M&A markets reveals that: (i) the takeover returns of UK targets substantially exceed those of Continental European firms. (ii) The presence of a large shareholder in the bidding firm has a significantly positive effect on takeover returns in the UK and a negative one in Continental Europe. (iii) Weak investor protection and low disclosure in Continental Europe allow bidding firms to adopt takeover strategies enabling them to act opportunistically towards the target's incumbent shareholders.

The Long-Term Operating Performance of European Mergers and AcquisitionsMartynova, M.; Oosting, S.; Renneboog, Luc General rightsCopyright and moral rights for the publications made accessible in the public portal are retained by the authors and/or other copyright owners and it is a condition of accessing publications that users recognise and abide by the legal requirements associated with these rights.-Users may download and print one copy of any publication from the public portal for the purpose of private study or research -You may not further distribute the material or use it for any profit-making activity or commercial gain -You may freely distribute the URL identifying the publication in the public portal Take down policyIf you believe that this document breaches copyright, please contact us providing details, and we will remove access to the work immediately and investigate your claim. Abstract:We investigate the long-term profitability of corporate takeovers of which both the acquiring and target companies are from Continental Europe or the UK. We employ four different measures of operating performance that allow us to overcome a number of measurement limitations of the previous literature, which yielded inconsistent conclusions. Both acquiring and target companies significantly outperform the median peers in their industry prior to the takeovers, but the raw profitability of the combined firm decreases significantly following the takeover. However, this decrease becomes insignificant after we control for the performance of the peer companies which are chosen in order to control for industry, size and pre-event performance. None of the takeover characteristics (such as means of payment, geographical scope, and industry-relatedness) explain the post-acquisition operating performance. Still, we find an economically significant difference in the long-term performance of hostile versus friendly takeovers, and of tender offers versus negotiated deals: the performance deteriorates following hostile bids and tender offers. The acquirer's leverage prior takeover seems to have no impact on the post-merger performance of the combined firm, whereas the acquirer's cash holdings are negatively related to performance. This suggests that companies with excessive cash holdings suffer from free cash flow problems and are more likely to make poor acquisitions. Acquisitions of relatively large targets result in better profitability of the combined firm subsequent to the takeover, whereas acquisitions of a small target lead to a profitability decline. JEL codes: G34