Hot and cold merger markets

Chidambaran, N.K.; John, Kose; Shangguan, Zhaoyun; Vasudevan, Gopala K.

doi:10.1007/s11156-009-0133-z

Cited by 35 publications

(13 citation statements)

References 24 publications

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“…In this context, small (large) bidding firms are more likely to engage in M&As during the hot (cold) market timing. Chidambaran et al (2010) provide evidence that acquisitions premium are larger in the hot merger markets. 1 Regarding the behaviour of managers related to acquisitions, Roll (1986) states that managers are influenced by their pride and overconfidence in making their acquisition decisions.…”

Section: Behavioural Finance and Acquisitions: International Evidencementioning

confidence: 89%

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Market valuation and acquiring firm performance in the short and long term: Out-of-sample evidence from Spain

Viñas

Herrero

Latorre

2020

BRQ Business Research Quarterly

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We investigate bidder’s short- and long-term performance in periods of high and low valuation market in response to announcements of acquisitions carried out by Spanish listed firms over the period 1991–2016. We find that acquirers of unlisted targets fully react at the announcement date in high valuation periods, meanwhile the underreaction of listed target bidders at the moment of the announcement in low valuation markets is the result of return continuations. In addition, we find that the market reaction do not depend on recent merger history. Therefore, we provide evidence that bidder reaction to acquisitions is not consistent with the predictions of market sentiment (optimism) after controlling for the listing status of the target firm, not supporting, for a thinner market as the Spanish one, the evidence observed in US and UK markets. JEL CLASSIFICATION G14; G34; L33; D81

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Section: Behavioural Finance and Acquisitions: International Evidencementioning

confidence: 89%

“…Their results are most consistent with the underreaction model. In hot markets, acquirer returns are lower for stock financed mergers (Chidambaran et al, 2010). These firms are also more likely to have more access to debt markets and would more likely finance with cash or debt.…”

Section: Behavioural Finance and Acquisitions: International Evidencementioning

confidence: 99%

Market valuation and acquiring firm performance in the short and long term: Out-of-sample evidence from Spain

Viñas

Herrero

Latorre

2020

BRQ Business Research Quarterly

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“…Chidambaran, John, Shangguan and 1 See also Shih and Hsu (2009) for how different combinations of payment methods and acquirer valuation suggest different motives behind acquisitions 2 Jovanovic and Rousseau (2002) posit a slightly different motivation through the reallocation of capital. Vasudevan (2010) find that bidders are more likely to use stock financing following stock price run-ups and in hot merger markets. In particular, Alexandridis et al (2012) compare the mid-2000s merger wave to the earlier 1990s merger wave and find both less acquirer overvaluation (relative to targets) and more pronounced use of cash as payment.…”

Section: Introductionmentioning

confidence: 88%

Stock mergers and acquirers’ subsequent stock price crash risk

Jory

Ngo

Susnjara

2019

Rev Quant Finan Acc

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We examine the changes in acquirers' stock price crash risk following mergers and acquisitions (M&As). We employ the three measures of crash risk most commonly used in the literature: the negative conditional skewness of acquirer-specific stock returns, a down-toup volatility measure, and the excess of extreme negative stock returns over extreme positive returns. We find that stock acquirers experience significantly higher stock price crash risk as compared to cash acquirers. The change in risk is positively correlated with the percent of stock used as a payment method. The findings are confined to acquirers with overvalued stock, lower profitability and more financial constraints, as well as to acquisitions of public targets. We confirm that the financial crisis 2007-2009 period does not drive our findings. Furthermore, our results are robust to endogeneity concerns, controlling for non-acquirers and post-merger acquirer changes. JEL classification: G14; G34The possible sources of negative skewness following M&A are multiple. First, it could be due to bidder firm managerial hubris leading them to unintentionally overestimate gains from M&A. Second, it could be due to agency conflicts. Parvinen and Tikkanen (2007) examine the sources of incentive asymmetries in M&As. They include the motivations of empire-building managers, dealmakers, investment bankers and M&A consultants, which often lead to the selection of targets that maximize these parties' interests (for instance, managers' compensation) as opposed to shareholders' interests (also see Allen, Jagtiani, Peristiani and Saunders, 2004) 3 . Such agency conflicts often lead managers and their advisers to intentionally overestimate the strategic fit and the gains from their preferred M&A targets.Subsequently, the failure of the expected synergies to materialize increases the bidder's stock price crash risk.Third, to minimize losses associated with unsuccessful M&As, it would be more prudent for an acquirer to fund the M&A deal using stock. Should the deal turn out to be less than successful, the potential losses are shared by both acquirer and target shareholders. As such, a stock acquisition might convey a negative signal about the acquisition's prospects.There exists ample evidence that investors interpret a stock issuance as a sign that the company's managers believe the stock to be overvalued (see Spiess and Affleck-Graves, 1995). This overvaluation is corrected over time through a downward adjustment in the stock price. We therefore hypothesize that a stock bid signals to investors that the acquirer's shares are overvalued and that its management does not share the same level of confidence in the acquisition as in a cash offer. In the long run, following the M&A, these signals add to the bidder's large negative stock returns and stock price crashes.3 In the context of incentives that go beyond shareholder wealth maximization, Lee and Wang (2017) find that having politically connected directors increases crash risk.

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“…Whited (2001) argues that the replication of some of the previous studies using better investment opportunity measures show no evidence of cross-subsidization (Erickson and Whited 2000). Chevalier (2000), Campa and Kedia (2002), Mansi and Reeb (2002), and Villalonga (2004) cast additional doubt on the validity of the diversification discount and its potential sources. As a result of these critiques, recent studies have overcome some of these biases by analyzing changes in investment policy and diversification discount around a corporate restructuring event.…”

Section: Literature Reviewmentioning

confidence: 97%