Long-term bidder returns analysis by subsample

Table 7.3 presents the results of the short-term bidder returns analysis by different data panels. Panel A presents the distribution of returns by the listing status of the target firm. Panel B presents the distribution of returns by bidder firm size. Panel C presents the distribution of returns by bidder firm size. Lastly, Panel D presents the distribution of returns by the method of payment.

7.2.2.1Listing status of the target firm

There is evidence from prior research that bidder firms that acquire private target firms earn higher returns than those that acquire public target firms (Masulis et al., 2007; Moeller et al., 2004). To test for this, the sample was divided into two sub-groups: listed (public)

152 Table 7.3: Long-term distribution of bidder returns by subsamples

Panel A: Distribution of bidder returns by target status

No of Obs. % of sample SMTBVBAHR [+1, +24] p-value Private target 1412 97.04 -0.248 0.000 Public target 43 2.96 -0.284 0.000 Total 1455 100.00 -0.249 0.000

Panel B: Distribution of bidder returns by industry

No of Obs. % of sample SMTBVBAHR [+1, +24] p-value Agriculture 24 1.65 -0.210 0.391 Mining 58 3.99 -0.449 0.085 Manufacturing 756 51.96 -0.200 0.000 Utility 102 7.01 -0.222 0.052 Construction 31 2.13 -0.314 0.104 Transportation 65 4.47 -0.737 0.002 Information technology 62 4.26 -0.273 0.044

Retail and wholesale 136 9.35 -0.238 0.007

Real estate 139 9.55 -0.162 0.107

Service 44 3.02 -0.227 0.134

News and media 14 0.96 -0.373 0.514

Miscellaneous 24 1.65 -0.534 0.066

Total 1455 100.00 -0.249 0.000

Panel C: Distribution of bidder returns by firm size

No of Obs. % of sample SMTBVBAHR [+1, +24] p-value Small firm 586 40.27 -0.372 0.000 Large firm 869 59.73 -0.166 0.000 Total 1455 100.00 -0.249 0.000

Panel D: Distribution of bidder returns by payment method

No of Obs. % of sample SMTBVBAHR [+1, +24] p-value All cash 1311 90.10 -0.253 0.000 All stock 87 5.98 -0.030 0.675 Other 57 3.92 -0.485 0.006 Total 1455 100.00 -0.249 0.000

targets and unlisted (private) targets. As identified in Panel A, bidder firms that acquire listed or non-listed target firms earn negative abnormal returns with those bidding for public targets losing more. This may suggest that the listing status of target firms matter in M&A deals and that acquirers may have difficulties integrating public targets than private targets (S. P. Lee & Isa, 2012; Moeller et al., 2004).Thus, private firm bidders outperform public targets in the long-term.

153 7.2.2.2Bidder firm industry

M&A are known to cluster by industry. In China, the clustering of M&A by industry tend to be driven by government policy. The current policy is to consolidate defragmented manufacturing industry to increase international competitiveness and bail out SOEs in financial distress. In that case, M&A are not driven by economic but political or social objectives, meaning not much attention is paid due diligence. In this study, bidder returns were analysed into twelve industry subgroups (finance industry is excluded).

As can be identified in Panel B, all bidder industry classes earn negative and significant abnormal returns at 10% level or better. However, agriculture, construction, real estate, services and, news and media industries report insignificant returns. High and significant shareholder value losses are reported by transportation (-0.737), Miscellaneous (-0.534) and Mining (-0.449). Overall, the results are consistent with the sample findings.

7.2.2.3Bidder firm size

An analysis of the abnormal returns by the size of the bidder firm shows that both large and small, report significantly negative returns. Panel C shows that large firms record abnormal returns of -0.166 while small firms recorded returns of -0.372 suggesting large firms outperform small firms in the long-term. This is inconsistent with prior studies (Boateng & Bi, 2013; Moeller et al., 2004). This may suggest that in the long-term, large firms are better at integrating targets following acquisitions because of abundant financial resources.

7.2.2.4Payment method

Further analysis of the long-term abnormal returns indicates that bidder shareholders earn negative returns regardless of the payment method used to pay for the acquisition. Stock paid for acquisitions yield the least albeit, insignificant abnormal returns of -0.030. Acquisitions paid for by cash report a significant loss of -0.253. Our results are inconsistent with the findings of Travlos (1987) that cash-paid acquisitions yield higher returns than stock paid acquisitions. Our results, however, indicate that the M&A market in China welcomes stock acquisitions more favourably than cash paid announcements. This may suggest that cash payments subject the bidder to adverse selection, which, in turn, results in an overpayment to the target (Boateng & Bi, 2013).

154 Overall, the long-term results indicate that bidder firms’ shareholders lose wealth regardless of the listing status of the acquired firms, bidder industry, the method of payment or size of the firm. Finally, but not least, most bidder firm industries’ shareholders lose value in the long-term.

7.3 Multivariate analysis

Table 7.4 presents the results from the long-term OLS and instrumental variables (IV) results. Model 1 presents the OLS regression results. The OLS results show that there is strong evidence that state and legal-person ownership are associated with low abnormal returns while independent director has a significant negative effect on bidder returns. Executive ownership has insignificant effect on bidder returns. Similarly, board size and CEO role duality have no influence on bidder returns. However, it is clear from literature that corporate governance is endogenously determined due to omitted variables bias. Consequently, the parameter estimates may be inconsistent and biased. To mitigate endogeneity problem among corporate governance variables, this study adopts an IV approach and statistical inference is based on IV-GMM estimates (Model 6).