Does R&D expenditure explain the stock market reaction to M&As? Evidence from the Chinese A-share market

ABSTRACT

We explore the impact of acquiring and acquired firms’ R&D expenditure on the market reaction to M&As. Using a sample of 9 739 Chinese M&A deals announced between 2009 and 2017, we find that acquired firms spending more on R&D expenditure react negatively to M&As, while acquiring firms with high R&D expenditure react positively to M&As. We further discuss the impact of R&D on market reactions when acquiring firms pay an offer premium, and we find that the premium leads acquired firms to react positively to M&As but results in negative market reactions to acquiring firms. Our results hold after we conduct robustness tests.

KEYWORDS:

• R&D investment
• mergers and acquisitions
• stock market reactions
• premium payment

JEL CLASSIFICATION:

• G34
• O31
• G31
• G14

Notes

1 The People’s Bank of China publishes quarterly reports on the monetary policy sensitivity index, which reflects the commercial banks’ response to monetary policy. This index shows the percentage of commercial banks that consider monetary policy to be moderate.

2 The data is from the Wind Database.

3 We also use the 5-day (−2,+2) and the 7-day (−3,+3) CARs to measure the market reaction to M&A deals. The results are in line with those that are estimated by using the 3-day(−1,+1) CAR.

4 We also use the R&D expenditure-to-sales ratio to measure firms’ R&D incentives. Our results hold after using this new R&D proxy.

5 The factor data is from the China Stock Market & Accounting Research Database (CSMAR).