What drives mergers & acquisitions waves of listed companies of the ChiNext market? IPO over-financing or stock overvaluation
Abstract
A wave of mergers and acquisitions (M&A) has been consistently rising among the China’s ChiNext companies over the past years, which has drawn great attention across academia and industry. Based on the neoclassical theory and the behavioral theory, this paper explores the driving factors of M&A among Chinese ChiNext companies. Two hypotheses were put forward: one based on IPO over-financing and the other based on the market value overvaluation. IPO over-financing is specific to the Chinese capital market while market value overestimation is driven by the continuous upsurge in the ChiNext Market. Our study found that both factors account for enterprises’ mergers and acquisitions. They have far-reaching influences on such fields as acquisition probability, the size of the transaction, transaction frequency, M&A payment method and market reaction. Due to IPO over-financing, enterprises tend to carry out M&A via cash payment or cash and stock mixed payment method. Heavier IPO over-financing will increase the chance of M&A and leads to larger transaction size and higher transaction frequency. Market value overvaluation will lead to more uses of stock or cash and stock mixed payment on M&A transactions. When the company’s stock is overvalued, the company will use the overvalued equity to acquire other companies. Greater overvaluation of the market value also increases the chance of M&A and leads to a larger transaction size and higher frequency of M&A. In China, IPO over-financing rather than market value over-valuation, is the major driving factor for China’s corporate mergers and acquisitions. Further study found that the market reaction to different payment methods in mergers and acquisitions varies: it has the minimum reaction on cash payment, a larger reaction on stock payment and the greatest reaction on mixed payment. Also, the mixed payment method has the largest cumulative abnormal returns. This is different from the empirical findings in the United States and Europe. This paper provides a theoretical basis and empirical evidence for an in-depth understanding of the wave of mergers and acquisitions of Chinese ChiNext companies, and provides a basis for decision-making and policy recommendations for the government regulators and investors.
Keyword : The ChiNext Market, M&A, IPO over-financing, stock overvaluation, method of payment
This work is licensed under a Creative Commons Attribution 4.0 International License.
References
between deals. Journal of Financial Economics, 108(1), 99-117. https://doi.org/10.1016/j.jfineco.2012.10.010
Andrade, G., Mitchell, M., & Stafford, E. (2001). New evidence and perspectives on mergers. Journal of Economic Perspectives, 15, 103-120. https://doi.org/10.1257/jep.15.2.103
Ang, J., & Cheng, Y. M. (2006). Direct evidence on the market-driven acquisition. Journal of Financial Research, 29, 199-216. https://doi.org/10.1111/j.1475-6803.2006.00174.x
Arikan, A. M., & Stulz, R. M. (2016). Corporate acquisitions, diversification, and the firm’s life cycle. Journal of Finance, 71(1), 139-193. https://doi.org/10.1111/jofi.12362
Baker, M., Stein, J. C., & Wurgler, J. (2003). When does the market matter? Stock prices and the investment of equity-dependent firms. Quarterly Journal of Economics, 118, 969-1005. https://doi.org/10.1162/00335530360698478
Bekkum, S. V., Han, S., & Pennings, E. (2011). Buy smart, time smart: are takeovers driven by growth opportunities or mispricing?. Financial Management, Winter, 911-940. https://doi.org/10.1111/j.1755-053X.2011.01166.x
Betton, S., Eckbo, B. E., & Thorburn, K. (2008). Corporate takeovers. In B. E. Eckbo (Ed.), Handbook of corporate finance: empirical corporate finance, vol. 2. Elsevier/North-Holland.
Chang, S. (1998). Takeovers of privately held targets, methods of payment, and bidder returns. Journal of Finance, 53(2), 773-784. https://doi.org/10.1111/0022-1082.315138
China Securities Regulatory Commission. (2009). Guiding opinions on further reforming and improving the issuance system of new shares. Retrieved from http://www.csrc.gov.cn/pub/newsite/flb/flfg/bmgf/fx/fxycx/201012/t20101231_189641.html
China Securities Regulatory Commission. (2009). Interim measures on administration of initial public offering and listing on the ChiNext. Retrieved from http://www.csrc.gov.cn/pub/newsite/zjhxwfb/xwdd/200903/t20090331_99727.html
China Securities Regulatory Commission. (2010). Guiding opinions on deepening the reforms in the issuance system of new shares. Retrieved from http://www.csrc.gov.cn/pub/newsite/flb/flfg/bmgf/fx/fxycx/201012/t20101231_189628.html
China Securities Regulatory Commission. (2014). Measures on administration of initial public offering and listing on the ChiNext. Retrieved from http://www.csrc.gov.cn/pub/newsite/flb/flfg/bmgz/fxl/201805/t20180515_338130.html
Datta, S., Iskandar-Datta, M., & Raman, K. (2001). Executive compensation and corporate acquisition decisions. Journal of Finance, 56(6), 2299-2336. https://doi.org/10.1111/0022-1082.00406
Dong, M., Hirshleifer, D., Richardson, S., & Hong Teoh, S. (2006). Does investor misvaluation drive the takeover market?. Journal of Finance, 61(2), 725-762. https://doi.org/10.1111/j.1540-6261.2006.00853.x
Eckbo, B. E. (2009). Bidding strategies and takeover premiums: a review. Journal of Corporate Finance, 15, 149-178. https://doi.org/10.1016/j.jcorpfin.2008.09.016
Eckbo, B. E., & Thorburn, K. S. (2000). Gains to bidder firms revisited: domestic and foreign acquisitions in Canada. Journal of Financial and Quantitative Analysis, 35(1), 1-25. https://doi.org/10.2307/2676236
Faccio, M., & Masulis, R. W. (2005). The choice of payment method in European mergers and acquisitions, Journal of Finance, 60(3), 1345-1388. https://doi.org/10.1111/j.1540-6261.2005.00764.x
Fang, J. X., & Fang, F. (2011). Over-funding in IPO and capital misuse in China’s market. Securities Market Herald, 9, 37-42 (in Chinese).
Fuller, K., Netter, J., & Stegemoller, M. (2002). What do returns to acquiring firms tell us? Evidence from firms that make many acquisitions. Journal of Finance, 57(4), 1763-1793. https://doi.org/10.1111/1540-6261.00477
Harford, J. (1999). Corporate cash reserves and acquisitions. Journal of Finance, 54(6), 1969-1997. https://doi.org/10.1111/0022-1082.00179
Harford, J. (2005). What drives merger waves?. Journal of Financial Economics, 77, 529-560. https://doi.org/10.1016/j.jfineco.2004.05.004
Holmstrom, B., & Kaplan, S. N. (2001). Corporate governance and merger activity in the US: making sense of the 1980s and 1990s. Journal of Economic Perspectives, 15, 121-144. https://doi.org/10.1257/jep.15.2.121
Hu, M., & Yang, J. J. (2016). The role of leverage in cross-border mergers and acquisitions. International Review of Economics and Finance, 43, 170-199. https://doi.org/10.1016/j.iref.2015.10.039
Jensen, M. C. (1986). Agency costs of free cash flow, corporate finance, and takeovers. American Economic Review 76(2), 323-29.
Jensen, M. C. (2005). Agency costs of overvalued equity. Financial Management, 34(1), 5-19. https://doi.org/10.1111/j.1755-053X.2005.tb00090.x
Jovanovic, B., & Rousseau, P. (2002). The Q-theory of mergers. American Economic Review, 92(2), 198-204. https://doi.org/10.1257/000282802320189249
Lang, L., Stulz, R., & Walking, R. (1991). A test of the free cash flow hypothesis: the case of bidder return. Journal of Financial Economics, 29(2), 315-335. https://doi.org/10.1016/0304-405X(91)90005-5
Liu, F. (2017). The significance of research. China Journal of Accounting Research, 10(3), 227-230.
Maksimovic, V., & Phillips, G. (2001). The market for corporate assets: who engage in mergers and asset sales and are there efficiency gains?. Journal of Finance, 56, 2019-2065. https://doi.org/10.1111/0022-1082.00398
Maksimovic, V., Phillips, G., & Yang, L. (2013). Private and public mergers waves. Journal of Finance, 68(5), 2177-2217. https://doi.org/10.1111/jofi.12055
Martynova, M., & Renneboog, L. (2009). What determines the financing decision in corporate takeovers: cost of capital, agency problems, or the means of payment?. Journal of Corporate Finance, 15, 290-315. https://doi.org/10.1016/j.jcorpfin.2008.12.004
Mitchell, M. L., & Mulherin, J. H. (1996). The impact of industry shocks on takeovers and restructuring activity. Journal of Financial Economics, 41, 193-229. https://doi.org/10.1016/0304-405X(95)00860-H
Moeller, S. B., Schlingemann, F. P., & Stulz, R. M. (2004). Firm size and the gains from acquisitions. Journal of Financial Economics, 73, 201-228. https://doi.org/10.1016/j.jfineco.2003.07.002
Moeller, S. B., Schlingemann, F. P., & Stulz, R. M. (2005). Wealth destruction on a massive scale? A study of acquiring-firm returns in the resent merger wave. Journal of Finance, 60(2), 757-782. https://doi.org/10.1111/j.1540-6261.2005.00745.x
Officer, M. S. (2007). The price of corporate liquidity: acquisition discount for unlisted targets. Journal of Financial Economics, 83(3), 571-598. https://doi.org/10.1016/j.jfineco.2006.01.004
Rhodes-Kropf, M., & Viswanathan, S. (2004). Market valuation and merger waves. Journal of Finance, 59(6), 2685-2718. https://doi.org/10.1111/j.1540-6261.2004.00713.x
Rhodes-Kropf, M., Viswanathan, S., & Robinson, D. T. (2005). Valuation waves and merger waves: the empirical evidence. Journal of Financial Economics, 77(3), 561-603. https://doi.org/10.1016/j.jfineco.2004.06.015
Savor, P. G., & Lu, Q. (2009). Do stock mergers create value for acquirers. Journal of Finance, 64(3), 1061-1097. https://doi.org/10.1111/j.1540-6261.2009.01459.x
Servaes, H. (1991). Tobin’s Q and the gains from takeovers. Journal of Finance, 46(1), 409-419. https://doi.org/10.1111/j.1540-6261.1991.tb03758.x
Shenzhen Stock Exchange. (2012). Memorandum No.1 on Information Disclosure by ChiNext Companies – IPO Over-financing. Retrieved from http://www.szse.cn/main/rule/bsywgz/ssgsl/cybzy_front/
Shleifer, A., & Vishny, R. W. (1992). Liquidation values and debt capacity. Journal of Finance, 32, 337-347.
Shleifer, A., & Vishny, R. W. (2003). Stock market driven acquisitions. Journal of Financial Economics, 70(3), 295-311. https://doi.org/10.1016/S0304-405X(03)00211-3
Song, S. L., Tan, J. S., & Yi, Y. (2014). IPO initial returns in China: underpricing or overvaluation?. China Journal of Accounting Research, 7(1), 31-49. https://doi.org/10.1016/j.cjar.2013.12.001
State Administration of Taxation of The People’s Republic of China. (2009). Circular on some policy questions concerning the handling of income taxes in the restructuring of enterprises. Retrieved from http://www.chinatax.gov.cn//n810341/n810765/n812166/n812637/c1188923/content.html
Tao, Q. Z., Sun, W. J., Zhu, Y. J., & Zhang, T. (2017). Do firms have leverage targets? New evidence from mergers and acquisitions in China. North American Journal of Economics and Finance, 40, 41-54. https://doi.org/10.1016/j.najef.2017.01.004
Tebourbi, I. (2012). Timing of mergers and acquisitions: evidence from the Canadian stock market. International Journal of Economics and Finance, 4(9), 87-107. https://doi.org/10.5539/ijef.v4n9p87
Xu, E. Q. Y. (2017). Cross-border merger waves. Journal of Corporate Finance, 46(5), 207-231. https://doi.org/10.1016/j.jcorpfin.2017.07.004
Xu, X., & Xia, Y. (2012). Internal corporate governance and the use of IPO over-financing: evidence from China. China Journal of Accounting Research, 5(3), 231-249. https://doi.org/10.1016/j.cjar.2012.08.003