Sarbanes‐Oxley Act and the acquisition of private targets

Abstract

Using a sample of private targets of public acquirers in the US, we find that after the passage of the Sarbanes Oxley Act, acquirer announcement returns are lower, targets are larger, suffer from lower valuation discounts, and receive higher acquisition premiums relative to similar acquisitions pre-SOX. In addition, acquirer returns are negatively related to proxies for the private target's readiness to comply with SOX Section 404 (quality of internal controls). Our evidence suggests that post-SOX, private targets are less opaque, have lower valuation uncertainty, and enjoy stronger bargaining position resulting from tighter internal controls around reporting and disclosure.

CEO inside debt and the acquisition of private targets

“…While Bhabra et al . (2021) do not provide a year‐by‐year distribution of CARs , their findings indicate that acquirer CARs in private acquisition were declining throughout their sample period. In fact, they show that acquirer CARs went down more in the post‐Sarbanes–Oxley period; hence it is not surprising that CARs in our sample are low given that data‐driven restrictions limit our sample to the post‐SOX era.…”

“…This is slightly smaller than the mean CAR of 1.21 percent for the period 2002–2015 as reported in Bhabra et al . (2021) who also investigate private targets. While Bhabra et al .…”

“…Also, the average firm has a mean M/B of 3.03, and mean sales growth of 11.6 percent, suggesting significant growth potential. It is to be noted that a substantial portion of the deals are all‐cash deals (64.5 percent compared to 54 percent reported for the post‐SOX period in Bhabra et al ., 2021). Additionally, acquirers in our sample display board and ownership structures generally characteristic of well‐governed firms, with institutional ownership of 81 percent, along with 85 percent of boards consisting of independent outside members.…”

“…Following recent studies in executive compensation (see Campbell et al ., 2016; Hoi et al ., 2019) and mergers and acquisitions (see Bhabra et al ., 2021), we control for an array of CEO, firm, monitoring, and deal attributes in our multivariate analyses. For example, we control for CEO age (a CEO’s age), CEO tenure (the time the CEO has been in his/her current role), CEO pay (a CEO’s total annual compensation), Institutional ownership (percentage of shares owned by institutions), Board independence (percentage of outside directors), Firm size (natural log of the market capitalisation of the acquirer), Leverage (total debt scaled by total assets), M/B (market‐to‐book value of equity), Cash (cash and cash equivalents divided by total assets), Sales growth (natural log of sales in year t divided by sales in year ( t –1)), Stock return (cumulative abnormal returns of the acquirers over the twelve months preceding the month of the acquisition announcement date), Relative deal size (transaction value scaled by the market value of the acquirer), All cash deal_d (a dummy variable set to 1 if the deal is an all‐cash transaction, and 0 otherwise), Diversify deal_d (a dummy variable set to 1 if the target and the acquirer are from different Fama‐French 48 industries, and 0 otherwise), and Delay in closing (time in days between the day of the announcement and the day of closing the deal).…”

“…Findings in this paper contribute to at least two strands of the literature on corporate acquisitions (see Martynova and Renneboog, 2008 for a review): one that deals with wealth‐effects in acquisitions, particularly in relation to private targets (see, e.g., Officer, 2007; Bhabra et al ., 2021); and another that addresses the incentive‐effects of CEO compensation, particularly those arising out of debt‐like compensation instruments (see, e.g., Sundaram and Yermack, 2007; Wei and Yermack, 2011; Phan, 2014; Eisdorfer et al ., 2015; Chi et al ., 2017). Given the strong association between CEO inside debt and investment policies, our findings have implications for the quantity and quality of disclosure related to compensation of other top officers (including CEOs), the transparency of firm operations as disclosed in financial statements, as well as board composition and structure that can impact CEO influence.…”