Two essays on transparency in corporate finance Mergers and repurchases
THE FLORIDA STATE UNIVERSITY COLLEGE OF BUSINESS TWO ESSAYS ON TRANSPARENCY IN CORPORATE FINANCE: MERGERS AND REPURCHASES By Yung Ling Lo A Dissertation submitted to the Department of Finance in partial fulfillment of the requirements for the degree of Doctor of Philosophy Degree Awarded: Summer Semester, 2007 Copyright © 2007 Name All Rights Reserved UMI Number: 3282641 3282641 2007 Copyright 2007 by Lo, Yung Ling UMI Microform Copyright All rights reserved. This microform edition is protected against unauthorized copying under Title 17, United States Code. ProQuest Information and Learning Company 300 North Zeeb Road P.O. Box 1346 Ann Arbor, MI 48106-1346 All rights reserved. by ProQuest Information and Learning Company. ii The members of the Committee approve the dissertation of Yung Ling Lo defended on May16th, 2007. . James Ang Professor Directing Dissertation . Bruce Billings Outside Committee Member . William Christiansen Committee Member . Ying-Mei Cheng Committee Member Approved: . William Christiansen, Chair, Finance Department . Caryn L. Beck-Dudley, Dean, College of Business The Office of Graduate Studies has verified and approved the above named committee members. iii ACK NOWLEDGEMENTS I appreciate all the suggestions and comments from my dissertation committee, which consists of James Ang, William Christiansen, Bruce Billings, and Yingmei Cheng; from James Doran; and from finance faculty members at Florida State University, University of New Hampshire, Western Kentucky University, Central Michigan University, and Bowling Green University. I also thank the Dissertation Research Grant Committee for the Dissertation Grant in 2006-2007. iv TABLE OF CONTENTS LIST OF TABLES……………………………………………………………………………….v LIST OG FIGURES………………………….…………………………………………………ix ABSTRACT………………………………………………………………………………………x ESSAY 1: ESSAY ON TRANSPARENCY IN THE MERGERS MARKET 1 INTRODUCTION 1 LITERATURE REVIEW 3 HYPOTHESES 5 METHODOLOGY 12 RESULTS 28 CONCLUSIONS 37 ESSAY TWO: ESSAY ON MARKET-TIMING ABILITY OF LOW TRANSPARENCY FIRMS THROUGH STOCK REPURCHASE 38 INTRODUCTION 38 LITERNATURE REVIEW 39 HYPOTHESES 42 METHODOLOGY 55 RESULTS 71 CONCLUSIONS 82 APPENDIX A: PROBABILITY OF ANNOUNCING STOCK REPURCHASE 167 APPENDIX B: SIZE OF ANNOUNCED AND ACTUAL REPURCHASE 168 APPENDIX C: THE PROBABILITY OF CARRYING OUT REPURCHASE AND TENDER OFFER 169 APPENDIX D: MARKET REACTION OF LT FIRMS VERSUS HT FIRMS 170 REFERENCES 171 BIOGRAPHICAL SKETCH 179 v LIST OF TABLES TABLE 1: CHARACTERISTICS OF THE TARGETS BASED ON TOTAL TRANSPARENCY 84 TABLE 2: PROBIT ANALYSIS OF BIDDING 86 TABLE 3: UNIVARIATE ANALYSIS OF ACQUISITION PREMIUM 88 TABLE 4: MULTIVARIATE ANALYSIS ACQUISITION PREMIUM 89 TABLE 5: PROBABILITY OF STOCK PAYMENT 92 TABLE 6: UNIVARIATE ANALYSIS ON ACQUIRER’S MARKET REACTION 94 TABLE 7: OLS ANALYSIS ON ACQUIRER’S MARKET REACTION 95 TABLE 8: LONG-TERM BHARS OF THE MERGED FIRM 96 TABLE 9: LONG-TERM CARS OF THE MERGED FIRM 97 TABLE 10: CALENDAR-TIME APPROACH FACTOR ANALYSIS 98 TABLE 11: REGRESSION ANALYSIS OF POST-ACQUISITION LONG-TERM BUY- AND-HOLD ABNORMAL RETURNS 99 TABLE 12: REGRESSION ANALYSIS OF POST-ACQUISITION LONG-TERM CUMULATIVE ABNORMAL RETURNS 101 TABLE 13 MARKET REACTION OF ACQUIRERS AND LONG-TERM PERFORMANCE OF MERGED FIRMS BASED ON THE NEGOTIATING POWER OF THE TARGETS 104 vi TABLE 14: CALENDAR-TIME APPROACH FACTOR ANALYSIS 105 TABLE 15: MARKET REACTION OF ACQUIRERS AFTER CONTROLLING FOR CHARACTERISTICS OF THE TARGETS 107 TABLE 16: LONG-TERM PERFORMANCE AFTER CONTROLLING FOR NEGOTIATING POWER, BOOK-TO-MARKET, AND SIZE OF THE TARGETS 108 TABLE 17: CHARACTERISTICS OF THE OPEN MARKET REPURCHASE FIRMS BASED ON TOTAL TRANSPARENCY 109 TABLE 18: PROBABILITY OF OPEN MARKET REPURCHASE ANNOUNCEMENT 110 TABLE 19: MARKET REACTION OF OPEN MARKET REPURCHASE FIRMS 112 TABLE 20: SIZE OF THE REPURCHASE ANNOUNCEMENT 114 TABLE 21: PROBABILITY OF ACTUAL REPURCHASE RELATIVE TO ANNOUNCED REPURCHASE 116 TABLE 22: SIZE OF THE ACTUAL REPURCHASE RELATIVE TO MARKET VALUE OF EQUITY PRIOR TO ANNOUNCEMENT 119 TABLE 23: PROBABILITY OF ANNOUNCING TENDER OFFER VERSUS OPEN MARKET REPURCHASE 122 TABLE 24: LONG-TERM CARS OF THE OPEN MARKET REPURCHASE FIRM 126 TABLE 25: LONG-TERM BHARS OF THE OPEN MARKET REPURCHASE FIRM 128 TABLE 26: CALENDAR-TIME APPROACH FACTOR ANALYSIS OF COMPLETED OPEN MARKET REPURCHASE FIRMS 130 vii TABLE 27: CALENDAR-TIME APPROACH FACTOR ANALYSIS OF CANCELLED OPEN MARKET REPURCHASE FIRMS 132 TABLE 28: LONG-TERM PERFORMANCE OF OPEN MARKET REPURCHASE FIRMS 133 TABLE 29: CHARACTERISTICS OF THE DUTCH AUCTION FIRMS BASED ON TOTAL TRANSPARENCY 137 TABLE 30: PROBABILITY OF DUTCH AUCTION ANNOUNCEMENT 138 TABLE 31: MARKET REACTION OF DUTCH AUCTION FIRMS 139 TABLE 32: LONG-TERM CARS OF THE DUTCH AUCTION FIRM 140 TABLE 33: LONG-TERM BHARS OF THE DUTCH AUCTION FIRM 141 TABLE 34: CALENDAR-TIME APPROACH FACTOR ANALYSIS OF DUTCH AUCTION FIRMS 142 TABLE 35: LONG-TERM PERFORMANCE OF DUTCH AUCTION FIRMS 143 BASED ON THREE-FACTOR MODEL RATS PROCEDURE 143 TABLE 36: CHARACTERISTICS OF THE FIXED-PRICE TENDER OFFER FIRMS BASED ON TOTAL TRANSPARENCY 145 TABLE 37: PROBABILITY OF FIXED-PRICE TENDER OFFER ANNOUNCEMENT 146 TABLE 38: MARKET REACTION OF FIXED-PRICE TENDER OFFER FIRMS 148 TABLE 39: LONG-TERM CARS OF THE FIXED-PRICE TENDER OFFER FIRMS . 150 TABLE 40: LONG-TERM BHARS OF THE FIXED-PRICE TENDER OFFER FIRMS 152 viii TABLE 41: CALENDAR-TIME APPROACH FACTOR ANALYSIS OF COMPLETED FIXED-PRICE TENDER OFFER FIRMS 154 TABLE 42: CALENDAR-TIME APPROACH FACTOR ANALYSIS OF CANCELLED FIXED-PRICE TENDER OFFER FIRMS 156 TABLE 43: LONG-TERM PERFORMANCE OF FIXED-PRICE TENDER FIRMS BASED ON THREE-FACTOR MODEL RATS PROCEDURE 157 ix LIST OF FIGURES FIGURE 1: THE PROBABILITY OF RECEIVING OFFER 161 FIGURE 2: SUMMARY OF LOW TRANSPARENCY FIRMS 162 FIGURE 3: SUMMARY OF HIGH TRANSPARENCY FIRMS 163 FIGURE 4: PROBABILITY OF ANNOUNCING OPEN MARKET REPURCHASE 164 FIGURE 5: PROBABILITY OF ANNOUNCING DUTCH AUCTION 165 FIGURE 6: PROBABILITY OF ANNOUNCING FIXED-PRICE TENDER OFFER 166 [...]... target, POOLING INTERESTS is equal to one if the accounting method of the corporate combination is pooling of interests method, or zero otherwise23 Two interaction terms, COMPETITIONT * LT Dummy and ADVISING FEES PAIDT * LT Dummy, are used to examine if competition in the target firm’s industry and advising fees paid by the LT target will increase the negotiating power of the LT firm The interaction term... of earnings, as additional proxies of corporate transparency measures By doing so, the dispersion measures allow me to include mergers and acquisitions from January 1, 1980 to December 31, 2005 to ensure that the results in this study are consistent through time Furthermore, instead of only including successful mergers as in many mergers and acquisitions studies, I include unsuccessful mergers in the... as others In addition, I also follow Martin (1996) to classify the method of payment into three categories The first category is cash financing which includes combinations of cash, debt, and liabilities The second category is stock financing, which includes payments with common stock or a combination of common stock and options or warrants The third category is the combination (others) financing which... ON TRANSPARENCY IN THE MERGERS MARKET INTRODUCTION In this study, I classify targets based on their transparency levels Low transparency (LT) targets have lower disclosure and more information asymmetry problems, while high transparency (HT) targets have higher disclosure, and therefore less information asymmetry problems High transparency and the corresponding reduction in information asymmetry are... willing to overpay In the analysis, since higher competition in the acquisition market will cause acquirer managers to overpay, I also make sure to control for competition in the acquisition market when examining the acquisition premium in this study In addition, related mergers can occur when the acquirer and the target are in the same industry Since related mergers can create more synergy and therefore... verdict on the pros and cons of greater corporate transparency is not yet settled or definitive This allows some firms to choose high transparency, while other firms to choose low transparency for different reasons and advantages Mergers and acquisitions is a promising area in which to conduct empirical tests of whether there is a rational basis for the choice of low transparency in certain situations...ABSTRACT In this dissertation, I examine whether low transparency (LT) firms have more markettiming opportunities and are able to earn higher market-timing profits than high transparency (HT) firms in two separate essays: 1) Essay on Transparency in Mergers Market and 2) Essay on Market-Timing Ability of Low Transparency Firms through Stock Repurchase Activities LT firms have more information asymmetry... the transparency score is calculated based on annual reports, 10-Ks, quarterly reports, proxy statements, and press releases and communication with the analysts In most cases, the subcommittee will classify the transparency measures of a firm into annual transparency, quarterly and other published information transparency, and investor relation transparency Note that while the Corporate Information... variation in scores due to differences in subcommittee composition and in industry characteristics Since I am using the forecast dispersion to measure transparency rather than announcement effect, I follow Lang and Lundholm (1996) by averaging the dispersions across the twelve monthly reporting periods on the IBES tape during the company’s fiscal year This 11 Lang and Lundholm (1996), Healy, Hutton, and. .. competition in the acquisition market To measure competition, I follow Schlingemann, Stulz, and Walkling (2002) to measure competition as the liquidity index18 in specific industry as the value of all corporate control transactions of $1 million or more reported by SDC for each year and two- digit SIC code divided by the total book value of assets of all Compustat firms in the same two- digit SIC code and . COLLEGE OF BUSINESS TWO ESSAYS ON TRANSPARENCY IN CORPORATE FINANCE: MERGERS AND REPURCHASES By Yung Ling Lo A Dissertation submitted to the Department of Finance in partial. market- timing opportunities and are able to earn higher market-timing profits than high transparency (HT) firms in two separate essays: 1) Essay on Transparency in Mergers Market and 2) Essay on Market-Timing. ESSAY ON TRANSPARENCY IN THE MERGERS MARKET INTRODUCTION In this study, I classify targets based on their transparency levels. Low transparency (LT) targets have lower disclosure and more information