The market valuation of M&A announcements in the United Kingdom

Abstract

This paper investigates the short-term market reaction to UK acquirers announcing domestic and foreign mergers and acquisitions (M&As) from 2000-2010. We define acquirers as value, moderate and glamour acquirers based on equally weighted market-to-book terciles. We find that value acquirers outperform glamour acquirers during and after the M&A announcement. We also focus on the impact of institutional ownership and find that higher domestic, foreign and total institutional ownership leads to lower market reaction to M&A announcements. We also find that long-term institutional investors lead to a higher post-announcement market performance. Finally, we find that a higher domestic institutional ownership mitigates the typical poor short-term performance following M&A announcements of glamour acquirers

Glamorous Acquisitions in Telecommunications after the Market Liberalisation: Success or Failure?

“…Among the factors influencing the glamorous M&A, Andriosopoulos et al (2016) find indications about the possible role of company size in glamour acquisitions, suggesting that glamour acquirers are smaller in size, have lower leverage and higher cash ratios. In general, among the factors influencing the success of M&A, size is one of the included, well-studied ones (Akhigbe and Madura, 1999;Kallunki et al, 2009;Benou et al, 2007).…”

“…Regarding the analysis of motivations in glamour acquisitions, the reasons generally given to justify these operations, and their potential underperformance relative to value stocks in the long run, includes hubris and mispricing (Malmendier and Tate, 2008;Doukas and Petmezas, 2007). The positive expectation of future growth allows glamour acquirers to make value-decreasing acquisitions for which the market may not penalize them (Sudarsanam and Mahate, 2003;Andriosopoulos et al, 2016). This is in line with the hypothesis that managerial hubris plays an important role in the decision-making process of glamour acquirer firms when managers may be overconfident about their ability to manage an M&A deal.…”

“…Value stocks are regarded as more risky than glamour stocks and thus can be expected to out-perform glamour stocks. Some research highlights the tendency of "value" stocks to outperform "glamour" firms (Piotroski and So, 2012) as glamour portfolios consist of an excessive share of overvalued firms and value portfolios contain a disproportionate share of undervalued companies, but many investors are more likely to shift their investment toward 'good' or 'glamour' equity rather than basing their investment decisions on objective risk characteristics, especially for banks and mutual funds (Andriosopoulos et al, 2016;Del Guercio, 1996). Some researchers recognize also (Sudarsanam and Mahate, 2003) that glamour stocks are high growth and value stocks are low growth firms, since their high market valuation may reflect the expected high growth or investment opportunities.…”

Abnormal returns on Canadian insider purchases before press releases

“…M&As are the most important economic events for firms because significant resources are devoted to capital investments (Anderson et al , 2017). Andriosopoulos et al (2016) and Cheng et al (2016) showed that information asymmetry may affect the market’s reactions to M&A announcements. For example, Cheng et al (2016) reported that information asymmetry is positively correlated with the cumulative ARs (CARs) around M&As announcements over five-day event windows.…”

“…More specifically, Emery and Switzer (1999) showed that information acquirers exploit information asymmetry when selecting payment methods for investments that are expected to earn higher ARs. According to Andriosopoulos et al (2016), the choice of payment method for a M&A can significantly influence shareholders’ wealth at the time of the M&A announcement and also during the post-merger period. In the Canadian context, Jabbour et al (2000) reported that the ARs earned before an acquisition announcement are because of the corporate insiders’ actual trading.…”