Emerald | International Journal of Managerial Finance

Ownership structure, Earnings Management and Acquiring Firm Post-Merger Market Performance: Evidence from Canada

Claude Francoeur, Walid Ben Amar, Philémon Rakoto — 2012-03-30 00:00:00.0

Abstract

Purpose - This study investigates the link between ownership structure, earnings management (EM) preceding mergers and acquisitions (M&A) and acquiring firm’s subsequent long-term market performance.Design/methodology/approach - We measure the magnitude of discretionary current accruals using two methodologies, that of Teoh et al. (1998a, 1998b) and that of Kothari et al. (2005). The latter methodology is used to control for the presence of extreme performance prior to the event. We use the calendar-time Fama-French three-factor model to evaluate long-term stock performance and to minimize potential problems related to the cross-sectional dependence of the returns. Findings - We find that firms using stock as a financing medium exhibit significant positive discretionary accruals during the year preceding the M&A and during the year of the acquisition. We also document that voting right concentration and control enhancing mechanisms are not associated with any significant level of earnings management. Finally, we find a negative association between EM and abnormal stock returns over a three-year period following the acquisition. Research limitations/implications - These results suggest that the concentrated ownership alignment effect dominates the entrenchment motives and acts as a deterrent mechanism to prevent controlling shareholders from managing earnings in stock-financed M&A.Practical implications - Our results highlight the importance of maintaining good legal and extra-legal protection of minority shareholders. Regulators can play an important role in preventing dominant shareholders from engaging in opportunistic EM in stock-financed M&A. Originality/value - This study extends prior literature by taking a closer look at dominant shareholders’ motivations to manage earnings in stock-financed M&A. Large shareholders have strong incentives to manage earnings upward prior to stock-financed transactions to limit the dilution of their controlling position.

Trading Costs around M&A Announcements

LIUQING MAI — 2012-03-30 00:00:00.0

Abstract

Purpose - This paper aims to examine trading costs of both acquiring firms and target firms differentiated by method of payment, mode of acquisition, and deal attitude around merger and acquisition (M&A) announcements. We calculate four spread measures of trading costs: quoted spread, percentage quoted spread, effective spread, and percentage effective spread.Design/methodology/approach - We calculate the differences in spreads differentiated by M&A characteristics and apply two-sample t-tests. A linear regression model is developed to test whether changes in trading costs are related to acquiring firm’s post-merger price performance. The regression is estimated by OLS method.Findings - It is found that various methods of payment affect the spreads of target firm differently on certain days around M&A announcement. For acquiring firms, we find significant differences in spreads between cash offers and stock offers, and between stock offers and mix offers. We do not find significant difference in spreads between cash offers and mix offers. The mode of acquisition affects the bid-ask spreads of target firms only, but not those of acquiring firms. Deal attitudes affect the spreads of target firms on and after M&A announcements. We also find that all four spread measures are significantly linked to acquiring firms’ post-merger daily returns.Research limitations/implications - Further study can be done on mechanisms through which M&A characteristics impact trading costsPractical implications - This study suggests that M&A characteristics affect firms’ spreads and changes in spreads need to be accounted for in explaining acquiring firms’ post-merger daily returns.Originality/value - This study fills in an important gap in existing literature by examining trading costs of acquiring firms around M&A announcements. It provides additional evidence on the anomaly of acquiring firm’s negative post-merger returns. This study is intended to help improve the understanding of trading costs and the behavior of the market participants in response to a major corporate event.

Baltic States and the Euro: A Spectral Analysis of the 2007 Financial Crisis

David Gray — 2012-03-30 00:00:00.0

Abstract

Purpose - To examine whether the banking crisis in the US and Western Europe change the relationships between the currencies of the Baltic States and the Euro. Specifically, the paper asks did the event result in contagion to the Baltic Stares and was this affected by the ‘hardness’ of the currency peg within ERMII.Design/methodology/approach - The crisis period began in August 2007 but ends before Lehman Brothers collapsed. Change is revealed by spectral density, coherence and phase spectrum changes. Shift contagion is said to be revealed if there a change in the co-movements of exchange rates after August 2007 compared with before. Findings - Rather than weaken, the bonds between the Euro and the Lat, the Kroon and the Litas are stronger after the banking crisis began. The phase spectrum suggest some shift in flows between the Baltic and the Euro money markets. With the Lat, the delays appear the same but at longer periodicies. The other two appear to be subject to a reversal of money flows at various periodicies. It is suggested that this reflects a repatriation of funds from the Baltic States to western European banks.Research limitations/implications - Spectral analysis reveals that co-movement between currencies of ERMII countries and the Euro intensified. On a co-movement of currencies, an ERMII currency appears to be afforded greater stability in a time of turbulence. However, this may be a result of a net repatriation of foreign deposits, undermining the implication that ERMII membership instils stability. To what extent this approach to contagion is an improvement over correlation methods could be the basis of further research. Practical implications - Co-movement may not be a definitive guide to whether convergence criteria prepare a country for Euro accession. Once acceded to the Eurozone, the Baltic States could represent a source of asymmetric shocks and a conduit of contagion with the Swedish Krona.Originality/value - Spectral analysis could be used more widely in financial economics to reveal the impact of events on term structures.

Working capital management and firms’ performance in emerging markets: The case of Jordan

bana mousa Abuzayed — 2012-03-30 00:00:00.0

Abstract

Purpose - The purpose of this paper is to examine the effect of working capital management on firms’ performance for a sample of firms listed on a small emerging market, namely Amman Stock Exchange.Design/methodology/approach - The paper includes a conceptual as well as empirical analysis in which data from a sample of listed firms for the period from 2000 to 2008 are analyzed to examine if more efficient working capital management improves firms’ accounting profitability and firms’ value. Cash conversion cycles as well as its components are used as measures of working capital management skills. Two performance measures are used in this study one accounting and one market measure believing that wealth maximization is shareholders main concern. To bring up more robust results, this study used more than one estimation technique including panel data analysis, fixed and random effects, and generalized methods of moments (GMM). Findings - Using robust estimation techniques this study found that profitability is affected positively with the cash conversion cycle. This indicates that more profitable firms are less motivated to manage their working capital. In addition financial markets failed to penalize managers for inefficient working capital management in emerging markets.Originality/value - This paper’s originality and value lies in suggesting that policy makers in emerging markets need to motivate and encourage managers and shareholders to pay more attention on working capital through improving investors’ awareness and improving information transparency.