Liquidity and information asymmetry considerations in corporate takeovers

ABSTRACT

We examine how stock market liquidity and information asymmetry considerations influence the wealth effects of Mergers and Acquisitions (M&As). We present a simple model predicting that M&As of listed targets that have relatively illiquid stocks are profitable for acquirers due to (a) the weak bargaining power of the targets’ shareholders, and (b) the limited information asymmetry concerns when evaluating takeover synergies. Our results show that cash-financed M&As of listed targets that have relatively illiquid stocks are associated with an increase in acquirer risk-adjusted returns. These gains are equivalent to those realized from comparable private target M&As. When engaging in stock-financed listed-target M&As, acquirers with liquid stocks enjoy significant gains when the targets have relatively illiquid stocks. This result holds especially when the deal is announced during periods of deterioration in the overall stock market liquidity. Lastly, we find that liquidity considerations affect the acquirer’s choice of the target firm’s listing status, as well as the M&A method of payment.

KEYWORDS:

• Stock market liquidity
• listed targets
• private targets
• method of payment
• takeover premia
• risk-adjusted returns

JEL CLASSIFICATIONS:

• G12
• G14
• G30
• G34

Acknowledgements

We are grateful to comments and suggestions offered by the participants in the 2017 Financial Engineering and Banking Society Conference and the 14th INFINITI Conference on International Finance. The authors are also grateful for comments and suggestions offered by Faten Hammoud, Marc Morris, Andrew Marshall, Patrick McColgan, and the participants in the seminar series of the School of Economics and Finance at the University of St. Andrews. Any remaining errors are ours.

Disclosure statement

No potential conflict of interest was reported by the authors.

ORCID

Samer Adra http://orcid.org/0000-0001-7570-1707

Notes

1 As illustrated by Muthoo (1999), during the bargaining process, the share earned by each player in a subgame perfect Nash equilibrium can be exactly equal to the value of her outside options.

2 Nevertheless, our results are not altered if full cash and stock payments are used, or if the 50% threshold is used.

3 These results are available from the authors upon request.

4 The p-value in the Wald test is 0.32.

5 In alternative estimations, we exclude all the listed target M&As in which the target’s pre-acquisition turnover is between the 10th and 90th percentiles to exclusively focus on the wealth differentials between listed target deals with highly liquid and highly illiquid shares, in addition to private target M&As. Our main economic conclusions are not altered when we conduct our estimations on this sample.

6 These results are available from the authors upon request.

7 In a recent paper, Alexandridis, Antypas, and Travlos (2017) argue that, due to the ramifications of the recent financial crisis on corporate governance, listed target M&As no longer represent sources of value destruction. Our results – emphasizing the gains from M&As of listed targets with relatively less liquid stocks – hold after excluding the post-2009 period from our analysis. Accordingly, these gains cannot be attributed to the improvement in the corporate governance structure in response to the recent financial crisis.

8 Among stock-financed acquisitions, 146 deals include acquirers with share turnover exceeding their target’s turnover by more than one percent, and 251 deals include share turnover liquidity differences below one percent.

9 The univariate analysis of stock-financed deals, to some extent, supports our empirical predictions. Stock-financed deals in which the acquirer has more liquid shares than the target tend to be value-destroying. However, the economic and statistical significance of these losses are relatively limited (1.6% weakly significant decline in the acquirer’s CAR) compared to stock-financed deals in which the target’s shares are more liquid than the acquirer’s (4.48% significant decline in the acquirer’s CAR).

10 An anonymous reviewer suggested the use of alternative measures of takeover premium, such as the deal-value-to-total-assets or the deal-value-to-market-value-of-equity. We apply this analysis exclusively on the sample of listed target M&As for which these variables are more frequently available. The resulting conclusions support the prediction that the negative premium-CAR relationship is neutralized in deals in which the listed target is in a relatively weak liquidity position. These results are available from the authors upon request.

11 We include the variable referring to the relative size of the deal as a proxy for the resources that the acquirer aims to spend on the takeover.

12 Panel B highlights the balancing of the propensity scores between treated and untreated observations on the matched sample.