Testing the Inefficient Management Hypothesis: Are United Kingdom Mergers and Acquisitions Disciplinary?
Auzius Kazombo Mwale
Department of Accounting & Finance
Testing the inefficient management hypothesis: Are United Kingdom mergers and acquisitions disciplinary?
This thesis is provided in fulfilment of the requirements of the degree of Doctor of Philosophy at The University of Stirling
May 2007
ACKNOWLEDGEMENTS
I would like to thank various people to whom I am indebted for assisting me in producing this thesis. I am greatly indebted to Professor Robin Limmack for assisting me with the groundwork for this study. I am greatly indebted to Dr Kevin Campbell, my principal supervisor for his continuous support and guidance throughout the period of study.
I would to thank the Faculty of Management and the Department of Accounting and Finance at the University of Stirling for moral support, without which completion of this study on time would not be achieved. I would like to thank Roy Baker, the research assistant in the Department for assisting with office back up.
This thesis is dedicated to all my teachers, especially Mr Chagwesha, who taught me to read and write in my first grade class way back in 1967. I would like to thank God, and members of my family for the support I received during my difficult hours throughout the duration of my stay at University of Stirling. i ABSTRACT
A large body of research has examined the impact of takeovers on corporate performance. Although there has been a considerable volume of research on the wealth effects of takeovers to date, there has been very little evidence on the disciplinary role. The aim of this study is to contribute to the takeover debate by examining whether UK takeovers are disciplinary.
This study replicates previous findings on whether the market for corporate control benefits firm managers or whether it is an avenue to maximise shareholder wealth. This study examines 153 UK takeover bids in the period 1990 to 1997. This period was chosen because it coincides with the publication of the Cadbury Report in
Department of Accounting & Finance
Testing the inefficient management hypothesis: Are United Kingdom mergers and acquisitions disciplinary?
This thesis is provided in fulfilment of the requirements of the degree of Doctor of Philosophy at The University of Stirling
May 2007
ACKNOWLEDGEMENTS
I would like to thank various people to whom I am indebted for assisting me in producing this thesis. I am greatly indebted to Professor Robin Limmack for assisting me with the groundwork for this study. I am greatly indebted to Dr Kevin Campbell, my principal supervisor for his continuous support and guidance throughout the period of study.
I would to thank the Faculty of Management and the Department of Accounting and Finance at the University of Stirling for moral support, without which completion of this study on time would not be achieved. I would like to thank Roy Baker, the research assistant in the Department for assisting with office back up.
This thesis is dedicated to all my teachers, especially Mr Chagwesha, who taught me to read and write in my first grade class way back in 1967. I would like to thank God, and members of my family for the support I received during my difficult hours throughout the duration of my stay at University of Stirling. i ABSTRACT
A large body of research has examined the impact of takeovers on corporate performance. Although there has been a considerable volume of research on the wealth effects of takeovers to date, there has been very little evidence on the disciplinary role. The aim of this study is to contribute to the takeover debate by examining whether UK takeovers are disciplinary.
This study replicates previous findings on whether the market for corporate control benefits firm managers or whether it is an avenue to maximise shareholder wealth. This study examines 153 UK takeover bids in the period 1990 to 1997. This period was chosen because it coincides with the publication of the Cadbury Report in
Bibliography: Agrawal, A. J.F Jaffe and G. N. Mandelker (1992), ‘Post-merger Performance of Acquiring Firms: a Re-Examination of an Anomaly’, Journal of Finance, 47, pp. 1605-1621. Agrawal, A. & Jaffe, J. (1995) ‘Do takeover targets under-perform? Evidence from operating and stock returns’, Journal of Financial and Quantitative Analysis, vol. 38, no. 5, pp. 721-46. Aitken, M. & Czernkowski, R. (1992), ‘Information leakage prior to takeover announcements: The effect of media reports’, Accounting and Business Research, vol. 23, pp. 3-20. Alchian, Armen A. (1950), Uncertainty, Evolution and Economic Theory’, Journal of Political Economy, Vol.58, pp. 211-221. Amihud, T. and B. Lev (1981), ‘Risk Reduction as a Managerial Motive for Conglomerate Merger’, Bell Journal of Economics, Autumn 1981, pp. 605-617. Amihud, T., B. Lev and N. G. Travlos (1990), Corporate Control and Choice of Investment Financing: The Case of Corporate Acquisitions’, Journal of Finance, Vol. XLV, No. 2, June, pp. 603-616. 110 Arnold, G., (2005) The Handbook of Corporate Finance, A Business Comparison to Financial Markets Decisions and Techniques, Financial Times, Prentice Hall Asquith, P (1983), ‘Merger Bids, Uncertainty, and Stockholder Returns’, Journal Economics, 11, pp. 51-84 Asquith, P Avkiran, N.K. 1999, ‘The evidence on efficiency gains: The role of mergers and the benefits to the public’, Journal of Banking and Finance, vol. 23, pp. 991-1013. Baker, R. D. and R. J. Limmack (1999), ‘UK Takeovers and Bidding Company Wealth Changes: The Impact of Survivorship and Other Potential Selection Biases on Post Outcome Performance’, Working Paper, University of Stirling, Jan. Barber, B. and John L. Lyon (1996) ‘Detecting Abnormal Operating Performance: The Empirical Power and Specification of Test Statistics’ Journal of Financial Economics, 41, pp. 359-399 Barber, Brad M Baumol, W. J (1959), Business Behaviour, Value and Growth. New York: Macmillan Berger, P and E Berle, A. and G. Means (1936), The Modern Corporation and Private Property. The Macmillan Company Bhagat, Shleifer and Vishny (1990), ‘The Aftermath of Hostile Takeovers’, Brookings Papers of Economic Activity, Microeconomics, pp Bishop, S.R. (1991) ‘Pre-bid acquisitions and substantial shareholder notices’, Australian Journal of Management, vol. 16, pp. 1-33. Bishop, S., Dodd, P. & Officer, R.R. (1987) Australian Takeovers: The evidence, The Center for Independent Studies, St. Leonards, N.S.W. Bradley, M., D. Desai and E.H. Kim (1983), The rationale Behind Inter firm Tender Offers: Information or Synergy’, Journal of Financial Economics, Vol. 11, pp. 183-206. Bradley, M., D. Desai and E.H. Kim (1988), Synergistic Gains from Corporate Acquisitions and their Division between the Shareholders of Target and Acquiring Firms, Journal of Financial Economics, 21 (1) pp. 3-40. Brearly and Myers (2000) Principles of Corporate Finance, McGraw-Hill International 6th Edition Brown, P Brown, P. & da Silva Rosa, R. (1998), ‘Research method and the long-run performance of acquiring firms’, Australian Journal of Management, Vol. 23, pp. 23-38. Brown, S.J. and J.B.Warner (1980), ‘Measuring Security Price Performance’, Journal of Financial Economics, 16, pp. 3-31. Bugeja, M. & Walter, T. (1995), ‘An empirical analysis of some determinants of the target shareholder premium in takeover bids’, Accounting and Finance, vol. 35, no. 2, pp. 33-60. Cadbury, A., (1992) “Codes of best practice”, “Report from the committee on financial aspects of corporate governance” London, Gee Publishing Casey, R., Dodd, P Caves, R. (1989), ‘Takeovers and Economic Efficiency: Foresight VS Hindsight’, International Journal of Industrial Organization, 7, pp. 151-174. Chatterjee, R. and G. Meeks (1996), ‘The Financial Effects of Takeover Accounting Rates and Return and Accounting Regulation’, Journal of Business Finance and Accounting, 23 (5) and (6), July, pp. 851-868. Chatterjee, S. (1986), ‘Types of Synergy and economic Value: The Impact of Acquisitions on Merging and Rival Firms’, Strategic Management Journal, 7, pp. 119-139. Choi, D. and G. Philippatos (1983), ‘Synergism or Diversification: Is Merger Desirable’, The Journal of Financial Research, 6 (3), Fall, pp. 239-256. Clark, K. and Eli Ofek (1994), Mergers as a Means of Restructuring Distressed Firms: An Empirical Investigation’, Journal of Financial and quantitative Analysis. 113 Coase, Ronald H Comment, R. and G.A. Jarrell (1995), ‘Corporate Focus and Stock Returns’, Journal of Financial Economics, 37, pp. 67-87. Cornett, M.M. and H. Tehranian (1992), ‘Changes in Corporate Performance Associated with Bank Acquisitions’, Journal of Financial Economics 31, pp 211-234 Cosh, A Cowling, Keith (1980) Mergers and Economic Performance. Cambridge University Press, Cambridge Dahya, Jay, (2002) “The Cadbury Committee, Corporate Performance and Top Management Turnover,” Journal of Finance, Vol Dahya, Jay, and Ronan Powell, (1998), Multinational Finance Journal, Vol. 2 Number 1. pp1-19 114 Denis, D.J. and D.K. Denis (1995), ‘Performance Changes Following Top Management Dismissals,’ Journal of Finance, Vol. 50, No. 4, pp. 1029-1057. Dennis, D.K. and John J. McConnell (1986), ‘Active Investors and Management Takeover Following Unsuccessful Control Contests,’ Journal of Financial Economics, 16 pp. 143-187. Dennis, D. J., and J. M. Serrano, (1996) “Active Investors and Management Turnover Following Unsuccessful Control Contests.” Journal of Financial Economics, 40, no. 2 pp. 239-266. Dickerson, A. and H. Gibson and E. Tsakalotos (1997), ‘The Impact of Acquisitions on Company Performance: Evidence from a Large Panel of UK firms’, Oxford Economic Papers, 49, July, pp. 344-361. Dietrich, J.K. and E. Sorensen (1984), ‘An Application of Logit Analysis to Prediction of Merger Targets’, Journal of Business Research 12, pp. 393-402. Dimson, E. and Paul Marsh (1986), ‘Event Study Methodologies and the Size Effect: The Case of UK Press Recommendation’, Journal of Financial Economics, 17, pp. 113-142. Dodd, P, & R. Ruback (1977), ‘Tender Offers and Stockholder Returns: An Empirical analysis’, Journal of Financial Economics, 5 December, pp. 351-374. Dodd, P. (1980), ‘Merger Proposals, Management Discretion and Stockholder Wealth’, Journal of Financial Economics, 8, pp.105-138. Dodds, J. and J. Quek (1985), ‘Effects of Mergers on the Share Price Movement of the Acquiring Firms: A UK study’, Journal of Business Finance and Accounting, 12, pp. 285-296. 115 Donaldson, Gordon (1984), Managing Corporate Wealth, Praeger Eddey, P.H. 1991, ‘Corporate Raiders and Takeover Target’, Journal of Business Finance and Accounting, vol. 18, pp. 151-71. Ellert, J. C., (1976) “Mergers, Anti Trust Law Enforcement and Stockholder Returns” Journal of Finance 31, no. 2, pp 715-732 Fama, E Fama, E. and K.R. French (1995), ‘Size and Book to Market Factors in Earnings and Returns’, Journal of Finance, 50, pp. 131-155. Fama, E.F.L. Fisher, Mc Jensen, R. Roll (1969) “The Adjustment of Stock Price to New Information’, International Economic Review, 10, p. 1-21. Fama, E.F. and M.C. Jensen (1983), ‘Separation of Ownership and Control’, Journal of Law and Economics, 26, June, pp. 301-324. Firth, M. (1979), ‘The Profitability of Takeovers and Mergers’, Economic Journal, 89, pp. 316-328. Firth, M. (1980) “Takeovers, Shareholders Returns, and the Theory of the Firm,” Quarterly Journal of Economics, 94, pp. 235-60 Franks, J., J Franks, J. and R. Harris (1989), ‘Shareholder Wealth Effects of Corporate Takeovers: the UK Experience 1955-85’, Journal of Financial Economics, 23, pp. 225-49. Franks, Julian, and Colin Mayer, 1996, Hostile Takeovers and Managerial Failure, Journal of Financial Economics 40, 163-181 116 Franks, J. R. Harris and S. Titman (1991), ‘The Post-Merger Share Price Performance of Acquiring Firms’, Journal of Financial Economics, 29, pp. 81-96. Ghosh, Aloke (1998), ‘Does Accounting Based Performance Really Improve Following Corporate Acquisitions’, Working Paper Zicklin School of Business, Baruch College (CUNY), New York, USA. Ghosh, Aloke (2001), ‘Does Accounting Based Performance Really Improve Following Corporate Acquisitions’, Journal of Corporate Finance 7: 151 – 178 Gregory, A Grossman, S. and O. Hart (1981), ‘The Allocation role of Takeover Bids in Situation of Asymmetric Information’, Journal of Finance, 36, pp. 253-270. Halpern, Paul (1983), ‘Corporate Acquisitions: A Theory of Special Cases? A Review of Event Studies Applies to Acquisitions’, Journal of Finance, 38, pp.297-317. Hartford, Jarrad (1999), ‘Corporate Cash Reserves and Acquisitions’, Journal of Finance, Vol. 54, No. 6, Dec. pp. 1969-1997. Hay, Donald A. and Guy S. Liu (1998), ‘When Do Firms Go In For Growth for Acquisitions,’ Oxford Bulletin of Economics and Statistics, May, V.60, N.2, pp. 143-164. Healy, P.K. Palepu and R. Ruback (1992), ‘Does Corporate Performance Improve after Mergers?’ Journal of Financial Economics, 31, pp. 135-75. Higson, C. (1990), ‘The choice of Accounting Method in UK Mergers and Acquisitions’, London: Research Board of the Institute of Chartered Accountants in England and Wales. Higson, C. and Elliot (1998), Post takeover Returns: The UK evidence’, Journal of Empirical Finance, 5, pp. 27-46 117 Holl, P. and J.F. Pickering (1988), ‘Determinants and Effects of Actual, Abandoned and Contested Mergers’, Managerial and Decision Economics, 9, pp. 1-19. Hubbard, R. and D. Palia (1995), ‘Benefits of Control, Managerial Ownership and the Stock Returns of Acquiring firms’, Rand Journal of Economics, Vol. 26, No. 4k, Winter, pp. 782-792. Hughes A (1993), ‘Mergers and Economic Performance in UK: A Survey of the Empirical Evidence 1950 – 1990’, in M. Bishop and J. Kay (ed.) European Mergers and Merger Policy, Oxford University Press: Oxford, pp. 9-95. Hughes, A., D.C. Mueller and A. Singh (1980) in Determinants and Effects of Mergers (D.C. Mueller Ed), Cambridge. Hyde, C.E. 2002, ‘Evaluating mergers in the Australian petroleum industry’, The Economic Record, vol. 78, pp. 299-311. Ibbotson, R.G. (1975), ‘Price Performance of Common Stock New Issues’, Journal of Financial Economics, 3, pp. 235-272. Jarrel, S. (1995), The Long-Term Performance of Corporate Takeovers: An Improved Benchmark Methodology’, Working Paper University of Chicago, Chicago Jarrell, G.A Jarrell, G.A., James A. Brickley and Jeffrey M. Netter (1988), ‘The Market for Corporate Control: The Empirical Evidence Since 1980’, Journal of Economic Perspectives, 2, pp. 49-68. Jensen, Michael C., 1988, Takeovers: Their Causes and Consequences, Journal of Economic Perspectives 2, 21-48 118 Jensen, M.C. and W.H. Meckling (1976), ‘Theory of the Firm: Managerial Behaviour, Agency Costs and Ownership Structure’, Journal of Financial Economics, 3, September, pp. 305-360.