Impact of acquisitions on short-run returns and leverage: two studies in corporate finance
This dissertation consists of two empirical studies in corporate finance. The first study, The Impact of Acquisitions on the Short-Run Returns to Shareholders and Bondholders, investigates shareholder and bondholder wealth with respect to 310 acquisitions in the UK market between 1994 and 2006. It tests the 3-day and 41-day excess security returns with an event study. The results show positive returns for target shareholders and bondholders, and negative returns for acquirer shareholders and bondholders. Moreover, the tests on value-weighted combined security returns show that stockholders lose, bondholders gain, target firms gain, acquirer firms lose, and shareholders/bondholders of target and acquiring firms as a whole lose. These results support the co-insurance hypothesis, wealth transfer hypothesis, hubris hypothesis, and bond return based on hubris hypothesis, and reject the synergy hypothesis. The univariate and multivariate analyses on the deal characteristics find that target and acquirer stock returns are higher with cash payment, acquirer stock returns are higher in friendly and industry unrelated takeovers, acquirer bond returns are higher in industry related takeovers, target firm share returns are higher when target size is smaller than the acquirer size, target and acquirer stock returns are higher in bull market period, and acquirer bond returns are higher in the bear market period. The second study, A Test of the Partial Adjustment Theory of Leverage Using Leverage Changes Arising from Takeovers, investigates firms’ capital structures by the event of takeovers. It examines 659 US acquiring firms which involved in acquisitions between 1962 and 2001. These acquiring firms’ book leverage ratio deviations are tested in an 11-year window. This result shows that takeovers have significant impact on firms’ book leverage ratios in the announcement year. The trend that firms gradually reverse their actual leverage ratios towards their optimism in the five years after the takeovers supports the dynamic trade-off theory. The partial adjustment models on the speed of adjustment further support the dynamic trade-off theory and reject the alternative capital structure theories. The tests on method of payment and source of fund demonstrate that cash payment and raise of funds are likely to increase firms’ leverage ratios at announcement and to maintain these ratios at a high level in the years after the merger.