Firm size, takeover profitability, and the effectiveness of the market for corporate control: Does the absence of anti-takeover provisions make a difference?

Abstract

Publication informationJournal of Corporate Finance, 17 (3): 418-437 Publisher ElsevierItem record/more information http://hdl.handle.net/10197/7480 Publisher's statement þÿ T h i s i s t h e a u t h o r s v e r s i o n o f a w o r k t h a t w a s a c c e p t e d f o r p u b l i c a t i o n i n J o u r n a l o fCorporate Finance. Changes resulting from the publishing process, such as peer review, ABSTRACTThe market for corporate control is generally regarded as an important disciplinary mechanism in well developed economies. Entrenchment mechanisms commonly used by US firms in the form of antitakeover provisions (ATPs) may offer some protection from disciplinary action, facilitating entrenchment and value-reducing behavior. One manifestation of entrenchment is poor acquisitions, with the literature reporting significant losses to large acquirers, and to acquirers with a higher number of ATPs. We examine the profitability of acquisitions in Australia, a market where US-style ATPs are prohibited. The results show that unlike their US counterparts, large Australian acquirers earn significant value for their shareholders, both in terms of announcement returns and long-run operating performance improvements.Takeover premiums are also substantially lower than those reported for the US and UK, and do not differ between large and small acquirers. Premiums are also positively correlated with long-run operating performance, indicating that they reflect real synergies, as opposed to hubris or overpayment. We also find that bidders who destroy value in takeovers are likely to be subsequently acquired. However, unlike US evidence, larger acquirers are just as likely to be targeted for takeover as smaller acquirers, indicating that size is not an effective impediment to the disciplining function of the market for corporate control in Australia. The findings are robust to several econometric issues common to the type of models used in our analysis.

The impact of the EU takeover directive on takeover performance and empire building

“…Alternatively, it could be because the directive enables managers to pursue self-interested investments that are designed to increase managerial status, corporate size, or managerial compensation. This is similar to argued impact of ATPs on investment profitability in the United States (Bebchuk et al, 2009;Gompers et al, 2003;Humphery-Jenner and Powell, 2011;Masulis et al, 2007). I note that some other studies are that entrenchment might not cause managers to make worse investments (Lehn et al, 2007).…”

“…Supporting this, after ATPs increased, a strongly negative relation between corporate size and takeover returns emerged (see Moeller et al, 2004). Similarly, there is some evidence that the size effect is less severe in countries that lack ATPs (Humphery-Jenner and Powell, 2011). The nature of this literature suggests that takeover protection might encourage asset growth.…”

Firm size, sovereign governance, and value creation: Evidence from the acquirer size effect

“…However, this 'protection' aspect of large size is mainly adapted to weak governance environments. Thus, it becomes less useful in strong governance environments, where large size may offer 'excess' protection from external market forces, and may enable managers to act on agency conflicts (Moeller et al, 2004(Moeller et al, , 2005Humphery-Jenner and Powell, 2011).…”

“…Using the natural log of the firm's market capitalization does not alter our findings. We also include a number of control variables that are standard to the literature (see, e.g., Harford, Humphery-Jenner and Powell, 2012;Humphery-Jenner and Powell, 2011;Moeller et al, 2004;Moeller and Schlingemann, 2005;Moeller et al, 2005;Masulis et al, 2007;and Travlos, 1987). Specifically, we include relative size of the target, Tobin's q, return on assets, capital expenditures, free cash flow, leverage, and indicator variables for diversifying deals, all cash, all stock, target organizational status (i.e., public, private or subsidiary), competed deals, and friendly deals.…”

“…The dependent variable is measured as the transaction value scaled by the target's market value one week or four weeks before the takeover. This is a relatively standard way to compute takeover premiums (Humphery-Jenner and Powell, 2011;Harford et al, 2012;Alexandridis et al, 2013).…”