Multiple Regression Analysis of Acquirers’ Short-Run Abnormal Returns

Table 9 reports the results of our multiple regression analysis. This allows us to assess the impact of the presence of EPs and FAs, jointly and individually, on the abnormal returns earned by acquirers, while also accounting for common factors influencing the latter simultaneously. The estimates recorded in Models 1 to 9 aim to investigate the wealth effects of: (a) FA-presence within all deals (Model 1), as well as within EP-financed deals (Model 2), (b) EP-financing within all deals (Model 4), as well as within FA-present deals (Model 5), and (c) the joint presence of EPs and FAs within all deals (Model 7), as well as relative to deals that do not include neither EPs, nor FAs (Model 8). Finally, in Models 3, 6 and 9 we assess the impact on acquirers’ abnormal returns of the ‘optimal’ use of FAs (OFA) in EP-financed deals, EPs (OEP) in FA-present deals and EPFA (OEPFA), relative to NEPNFA-deals, respectively.

(Insert Table 3.9 about here)

Our estimates show that larger acquirers (Models 1 to 3) destroy value, as in Moeller, Schlingemann and Stulz (2004), while relatively large deals (Models 4 to 9) add more value, as in Asquith, Bruner and Mullins (1983) and Fuller et al. (2002). Highly liquid acquirers add value (Models 1, 4 and 7), yet not within EP-financed deals (Models 2 and 3) and advised deals (Models 5 and 6), while unreported estimates suggest that low growth acquirers, highly leveraged acquirers and mature acquirers break even in the short-run. Moreover, unlisted targets add value to acquirers’ shareholders, consistent with Draper and Paudyal (2006), yet in the presence of EPs the effect of UNL becomes negligible (Model 4) as in Barbopoulos and Sudarsanam (2012). Likewise, acquirers break even in unlisted target deals under FA-presence (Model 1).38 Estimates in Model 1 also indicate that FAs do not significantly enhance acquirers’ gains in diversified or foreign deals.

Within EP-financed deals, FA-presence (Model 2), as well as ‘optimal’ FA-presence (OFA) (Model 3), are illustrated to offer significant gains to acquirers of unlisted targets. This finding extends earlier UK-based evidence (Barbopoulos and Sudarsanam, 2012) advocating that acquirers of unlisted targets break even in EP-financed deals, as well as provides support for our

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Following documented evidence regarding the strong relationship between FA-presence and deal value, we include in Models 1 to 3 the acquirer’s market value rather than the relative size of the deal. Performing the same estimations including the deal’s relative size yields qualitatively similar results.

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hypothesis H1 illustrating the superior gains earned by acquirers in advised, relative to non- advised, EP-financed deals. Model 2 also shows that acquirers involved in relatively riskier EP- deals (proxied by the Relative Earnout Value - REAV) break even in the presence of FAs.39 Overall, our estimates suggest that the more efficient design of EPs, which is possibly offered via the involvement of FAs in the deal, leads to higher abnormal returns to acquirers’ shareholders.

Model 5 records that EP-financing yields significant value gains to the shareholders of advised acquirers in unlisted target deals. Moreover, under FA-presence, valuation risk concerns in EP-financed deals, as approximated by the relative size of the deal, seem to be effectively mitigated resulting in significant abnormal returns in the short-run. The above provides further support for our hypothesis H2 predicting superior gains to acquirers’ shareholders from advised EP-financed deals, relative to advised non-EP-financed deals. The aforementioned effect persists in Model 6, in which the impact of ‘optimal’ EP-presence (OEP) in advised M&As is investigated. Model 6 also suggests a minor wealth gain of OEP in diversifying FA-present deals.40 Consequently, the above suggest that the implied risk of a given deal, despite being effectively addressed via the presence of FAs in the deal process, appears to be further mitigated via EP-financing.

Model 7 confirms that acquirers enjoy significant gains from the joint presence of EPs and FAs in the deal. Specifically, EPFA-deals yield significant abnormal returns to acquirers when involving unlisted targets, when incorporating substantial valuation risk, as well as when they constitute diversifying concentrations.41 The above persist when we study the effect of EPFA- financing, relative to deals exhibiting the joint absence of EPs and FAs (NFANEP), for both actual and ‘optimal’ EPFA-classified (OEPFA) occurrences (Models 8 and 9, respectively). Evidently, our findings confirm the presence of a complementarily effect between the two treatments (EPs and FAs). This leads to acquirers reaping the highest abnormal returns, relative to deals in which only one of the two treatments is present, or relative to deals in which both treatments are absent.

39

In unreported estimations, including REAV in the model, without interacting it with FA, results in a significant wealth loss.

40

As OEP-deals involve solely private targets (Table 7), we do not include any interaction between OEP and UNL.

41

Acquirers in EPFA-deals appear to break even when engaging in cross-border deals. A potential explanation for this finding relates to the fact that the vast majority of our EP-financed cross-border deals consist of UK-based FAs. Wang and Xie (2011) illustrate that acquirers’ shareholders in valuation complex cross-border deals enjoy a significant wealth gain when employing advisors that are indigenous to the target country.

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Lastly, in Model 10 to 12 we aim to address potential selection bias considerations within our multivariate analysis. Specifically, we conduct estimations within sub-samples involving treated EPFA-deals and control EPNFA (Model 10), NEPFA (Model 11) and NEPNFA (Model 12) counterfactuals, respectively, as identified in our PSM sequence (secion 4.4). Model 10 illustrates the positive effect of FA-involvement in deals financed with EPs. Accordingly, in Model 11, we estimate the contribution of EP-financing in deals involving FAs. In order to account for the positive effect of FA-involvement on acquirers’ returns, we conduct interaction effects with deal-specific characteristics that are more likely to appeal to the use of EPs. Consistent with our results above (Model 4), the positive effect of EP-financing in risky deals involving unlisted targets persists. Lastly, Model 12 illustrates that acquirers earn significant gains when engaging in EPFA-deals, relative to their matched non-advised non-earnout financed deals, while accounting for firm- and deal- specific characteristics simultaneously.

Overall, our multiple regression analysis provides compelling evidence suggesting that the presence of FAs within EP-financed deals constitutes an important source of value creation. We argue that the identified effects originate from the ability of FAs to address valuation complexities and accommodate asymmetric information issues more efficiently during the design of EP-financed deals. To this end, the positive implications of FA-inclusion in EP-financed deals become more pronounced when the latter involve unlisted targets and, hence, there is greater valuation complexity, as well as more scope for negotiation. As a result, this further augments our complementarity argument regarding the impact of the simultaneous presence of FAs and EPs on the likelihood of success of small, yet risky M&As, consistent with our hypotheses H1 and H2.

3.5. Conclusion

In this article we analyze the abnormal returns gained by acquirers consulting FAs in deals that are financed with contingent payments (EPs), relative to conventional single up-front payments. We complement earlier earnout studies suggesting that EPs are designed to reduce asymmetric information issues and that their efficient design presents a crucial condition under which their successful implementation is more feasible. As target-side FA-involvement in EP-financed deals

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appears to be very limited, we argue that such likelihood is increasing in the presence of FAs counselling the acquiring firms.

We present compelling evidence suggesting that EPFA-deals outperform: (a) EP-financed deals without the presence of FAs, (b) non-earnout financed deals with the presence of FAs and, (c) non-earnout financed deals without the presence of FAs. In order to reduce the exposure of our findings to potential selection-bias concerns, or to the problem of causal interpretation, the PSM method is utilised. In so doing, we identify the representatives of counterfactuals of treated (EPFA) M&As based on deal- and merging firm- specific characteristics and verify our derived conclusions. In order to ensure that the estimation of propensities, based on which our PSM exercise is executed, is not exposed to any form of omitted variable bias we also employ the Rosenbaum-bounds sensitivity analysis method. Moreover, we illustrate that ‘optimal’ EP-use in FA-deals, FA-presence in EP-deals and EPFA-occurrence, relative to deals involving neither EPs nor FAs, add significant acquirer gains. Lastly, our multiple regression analysis confirms the persistence of the interaction of EP-financing and FA-presence in generating significantly higher abnormal returns to acquirers. Specifically, we extend the findings of earlier studies indicating that unlisted target deals financed with EPs break even (Barbopoulos and Sudarsanam, 2012) by showing that the presence of FAs, counselling the acquirers, leads to significant value gains.

Overall, the presence of FAs in valuation-complex negotiation-intense deals involving unlisted targets and financed with EPs leads to substantial value gains to acquirers’ shareholders. In contrast, in the absence of FAs, the well-documented positive effect of EPs on the value gains of acquirers becomes negligible. Therefore, this article demonstrates the importance of the participation of FAs in EP-financed deals. The above provide evidence supporting the presence of a complementarity effect between EPs and FAs in small, yet risky M&As. We argue that the higher abnormal returns earned by acquirers in EPFA-deals are likely to be sourced from the ability of FAs to address the inherent complexities of the design of EPs more efficiently and, hence, enhance the their risk-mitigating properties – an unexplored, yet very interesting issue in M&A literature regarding the impact of contingent payments on M&A outcomes.

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