DSpace at VNU: Motives for Mergers and Acquisitions: Ex-PostMarket Evidence from the US

Journal of Business Finance & Accounting Journal of Business Finance & Accounting, 39(9) & (10), 1357–1375, November/December 2012, 0306-686X doi: 10.1111/jbfa.12000 Motives for Mergers and Acquisitions: Ex-Post Market Evidence from the US HIEN THU NGUYEN, KENNETH YUNG AND QIAN SUN∗ Abstract: Despite extensive research, merger motivation is largely inconclusive Incomparable methodologies further exacerbate debates in the extant literature This study uses a recently developed technique to examine post-acquisition evidence as to the motives behind merger and acquisition activity Using a sample of 3,520 domestic acquisitions in the United States, we find that 73% are related to market timing; 59% are related to agency motives and/or hubris; and 3% are responses to industry and economic shocks Our results also show that about 80% of the mergers in our sample involved multiple motives Thus, in general it is very difficult to have a clear picture of merger motivation because value-increasing and value-decreasing motives may coexist Keywords: mergers and acquisitions, merger motivation, MB ratio decomposition INTRODUCTION In 1995, completed mergers and acquisitions (M&As) among corporations in the US reached an aggregate value of US$377 billion In 2005, the amount exceeded US$1.1 trillion.1 Despite extensive research, the motivation behind mergers has been largely illusive Event studies typically find that mergers create shareholder value over shortterm windows, despite the fact that the gain predominantly accrues to shareholders of target firms There is also ample evidence that acquirers have significant negative returns over long-term windows that overwhelm their positive short-term returns, making the net wealth effect negative (Loughran and Vijh, 1997; Rau and Vermaelen, 1998; and Andrade et al., 2001) If mergers not create value for acquiring firms, it is unclear what bidders intend to achieve in merger activity Research studies of non-US mergers have also reported inconclusive results on merger motivation For example, several researchers report that multiple motives may be involved in UK mergers (Hodgkinson and Partington, 2008; and Arnold and Parker, 2009) Agarwal ∗ The first author is from the University of Technology, Vietnam National University, Ho Chi Minh City, Vietnam The second author is Professor of Finance at the College of Business and Public Administration, Old Dominion University, Norfolk, USA The third author is Associate Professor of Finance at the College of Business, Kutztown University of Pennsylvania, USA (Paper received February, 2008, revised version accepted June, 2012) Address for correspondence: Qian Sun, Associate Professor of Finance, Department of Accounting and Finance, Kutztown University of Pennsylvania, Kutztown, PA19530, USA e-mail: sun@kutztown.edu Source: Mergers and Acquisitions Magazine Various issues C 2013 Blackwell Publishing Ltd, 9600 Garsington Road, Oxford OX4 2DQ, UK and 350 Main Street, Malden, MA 02148, USA 1357 1358 NGUYEN, YUNG AND SUN and Bhattacharjea (2006) argue that corporate mergers in India are significantly related to industry shocks but unrelated to managerial motives Mehrotra et al (2011) find that merger announcements in Japan not create wealth gains for shareholders of either target or bidder firms There are several potential solutions to this merger motivation quandary One solution could be achieved by examining the stated goals in M&A announcements However, it would be difficult to implement because acquirers sometimes not announce their acquisition motives In addition, even if there is an announcement, there could be additional motives that are not announced Another solution is to infer the underlying merger motivations from ex-post market data In other words, we let the market tell us the motives behind the mergers A major advantage of this approach is that there is no need to rely on announcements of goals by acquirers in corporate takeovers This is particularly appealing given that some acquirers are not straightforward about their motives Evaluating the motivation behind a merger can be a daunting task even if expost market data are used The empirical literature on M&As is crisscrossed with methodologies that show differences in time frameworks (event-time vs calendartime), abnormal return metrics, benchmarks, and weighting procedures The differences often lead to conflicting results and make comparisons difficult (Agrawal and Jaffe, 2000; and Bruner, 2002) Hodgkinson and Partington (2008) specifically report that their UK results are sensitive to whether merger gains are measured over a long or short window and the method of measuring abnormal returns In addition, conclusions that are based on event studies could be biased because the abnormal returns of bidders could be correlated due to findings that mergers often occur in waves (Shleifer and Vishny, 2003; and Rhodes-Kropf and Viswanathan, 2004) In this study, we overcome the issue of non-comparable methodologies by using the technique of Rhodes-Kropf et al (2005, henceforth RKRV) to detect the different motives for mergers Instead of examining the abnormal returns of acquirers, the RKRV methodology decomposes the market-to-book (M/B) ratio and makes inferences based on the characteristics of the components RKRV compared the M/B ratio components of bidders and non-bidders to infer the underlying merger motivation We go beyond the original RKRV study and apply RKRV’s methodology to examine the M/B ratio components of bidders before and after a merger We argue that the changes in the M/B ratio components after mergers can serve as ex-post evidence of merger motivation We examine a sample of 3,520 US domestic M&As in the twenty-year period between 1984 and 2004 Our results contribute to the literature in several ways First, we find that single-motive mergers are relatively less common Of the 3,520 mergers examined, 78% are related to at least two motives simultaneously Our results show that 73% of the mergers are related to market timing; 59% are related to agency motives and/or hubris; and only 3% are responses to industry and economic shocks Our results confirm the postulations of a number of researchers that mergers could involve multiple motives Our finding suggests that it is generally difficult to have a clear picture of the underlying motivation for mergers as value-increasing and value-decreasing motives frequently coexist Second, in using the same methodology in evaluating merger motivation, we overcome the issue of comparability across methodologies In addition, our results are reliable because the conclusions are not based on announcement period abnormal returns that are correlated across acquiring C 2013 Blackwell Publishing Ltd MOTIVES FOR MERGERS AND ACQUISITIONS 1359 firms in merger waves Third, our results are based on ex-post market evidence and are consistent with reported results that are based on pre-acquisition information Lastly, we show that acquirers frequently exhibit firm characteristics that may promote multiple objectives in corporate mergers The rest of the paper is organized as follows Section is a review of the literature on the motives for M&As Section describes the methodology and our hypotheses development Section describes the sample Results are presented in Section and the conclusion is given in Section LITERATURE REVIEW Acquirer motives for M&As can be classified as either value-increasing or non-valueincreasing Value-increasing M&As are primarily undertaken to benefit from the synergy in combining the physical operations of the two merging firms (Bradley et al., 1988) Various considerations drive synergistic acquisitions, including increased market power, response to industry shocks, economies of scale, financial synergy, taxes, and exploitation of the asymmetric information between the acquiring and target firms Empirical evidence on acquisitions driven by value-increasing motives is mixed Pound (1988) suggests that acquirers not benefit from taking over undervalued targets Contradicting the market power theory, Eckbo (1985) finds competitors enjoy positive abnormal returns around acquisition announcements Although Hayn (1989) finds evidence of depreciation-related tax benefits in M&As, Auerbach and Reishus (1988) suggest that these benefits are not enough to justify mergers Supporting the operating synergy argument, Healy et al (1992) find that merged firms have a higher level of operating efficiency Ghosh and Jain (2000) support the financial synergy arguments by showing that financial leverage increases significantly after a merger Consistent with the response to industry shock theory, Weston and Chung (1990) observe that takeovers in the 1980s were numerous in industries undergoing deregulations and fundamental changes Jensen (1993) also suggests that many mergers in the 1980s were a response to the energy price shocks during that period Value-decreasing motives for M&As consist of three major types: agency, hubris and market timing Agency problems arise when managers consume perquisites at the expense of shareholders Other forms of agency problems arise when managers pursue excessive growth to promote personal interests (Morck et al., 1990), or diversify to reduce risk to managerial human capital (Amihud and Lev, 1981), or avoid activities that may reduce discretionary cash flows (Jensen, 1986; Stulz, 1990) The literature has ample evidence of agency problems related to M&As Malatesta (1983) finds that mergers that are probably motivated by agency problems typically are valuedecreasing transactions for the acquiring firm Morck et al (1990) report that many acquirers are more interested in maximizing firm size than firm value, and that many M&As are driven by managerial objectives Shleifer and Vishny (1989) conclude that some acquisitions are made to enhance the dependence of the firm on the skills of the acquiring managers, even though such acquisitions may reduce the value of the acquiring firm Hubris is the second type of value-decreasing motive behind M&As According to Roll (1986), many corporate managers are infected by hubris and overpay for targets Managers affected by hubris engage in acquisitions even when there is no synergy C 2013 Blackwell Publishing Ltd 1360 NGUYEN, YUNG AND SUN Moeller et al (2004) show that larger firms, which are more likely to be run by hubristic managers, tend to offer higher takeover premiums and are more likely to complete a takeover than their smaller counterparts Hayward and Hambrick (1997) find that the size of acquisition premium is highly associated with indicators of CEO hubris According to Berkovitch and Narayanan (1993) and Barnes (1998), there is strong evidence that many takeovers are motivated by hubris Market timing is another motive that results in value-decreasing M&As Shleifer and Vishny (2003) introduce a model in which overvalued acquirers use stock to buy relatively undervalued targets even though both firms could be overvalued According to Shleifer and Vishny, acquisitions are basically stock market driven Supporting the market timing hypothesis, Dong et al (2006) find that acquirers are on average more highly overvalued than their targets; and high-valuation acquirers are more likely to use stock as the payment method In addition, acquisitions by overvalued acquirers are typically followed by lower post-merger abnormal returns RKRV (2005) introduce a market timing model that is slightly different from that of Shleifer and Vishny and provide empirical support for the market timing motive Some researchers have suggested that mergers may involve multiple motives For example, Donaldson and Lorsch (1983) posit that acquiring firms pursue growth to enhance their long run survival and at the same time protect acquiring managers from outside monitoring Amihud and Lev (1981) suggest that corporate diversification allows the firm to achieve more stable operating performance yet enables the firm’s manager to reduce risk to his human capital Shleifer and Vishny (1989) find evidence that some mergers are conducted to benefit the long-term growth of the acquiring firm and simultaneously improve the acquiring manager’s job security Berkovitch and Narayanan (1993) investigate synergy, hubris, and agency as motives for mergers and conclude that the three motives simultaneously exist in some takeovers Hodgkinson and Partington (2008) and Arnold and Parker (2009) examine acquisitions in the UK and conclude that mergers may involve multiple motives Specifically, both studies report that UK mergers are probably related to synergy and market-timing motives Moreover, the lack of wealth gains during merger announcements periods in Japan is consistent with the implication that conflicting merger motivations may be involved (Mehrotra et al., 2011) TRACKING THE MOTIVES FOR M&AS AND HYPOTHESIS DEVELOPMENT In identifying merger motivation from ex-post market data, we use the methodology developed by RKRV According to RKRV, the M/B ratio of a firm can be decomposed into three components: firm-specific error, time-series sector error, and long-run valueto-book The decomposition equation is written as: m − b = (m − v1 ) + (v1 − v2 ) + (v2 − b), (1) where m and b are the market and book values of shares in logarithmic forms, respectively The first component, (m – v ), is the difference between market value and the fundamental value implied by industry averages at time t This component measures firm-specific pricing deviations from short-run industry pricing, and it exists when the firm is experiencing short-run irrational mispricing in the market The second component, (v – v ), is the difference between the firm’s fundamental value C 2013 Blackwell Publishing Ltd MOTIVES FOR MERGERS AND ACQUISITIONS 1361 implied by industry averages at time t and the firm’s fundamental value implied by long-run industry averages This component arises when contemporaneous multiples differ from long-run multiples The component reflects that firms in the same industry could share common misvaluation factors The third component, (v – b), is the difference between the firm’s fundamental value implied by long-run industry averages and the book value of the firm According to RKRV, it is the third component that captures the long-run growth opportunities of the firm RKRV use their model to compare the three M/B ratio components of acquirers and non-acquirers In this study, we take one step forward by investigating the changes in the three M/B ratio components (i.e., firm-specific error, time-series sector error, and long-run value-to-book) of acquirers after merger Given that our objective is not to identify what causes valuation errors, a negative change in the firm-specific error of the acquiring firm after a merger is sufficient to imply that the market has recognized the overvaluation of the firm’s common stock Therefore, we argue that changes in the firm-specific error are suitable for tracking the market timing motive for M&As Based on the findings of Dong et al (2006), we posit that the firm-specific error component of the acquiring firm’s M/B ratio will experience a negative change if market timing is the motive behind the acquisition We develop the two following hypotheses: Hypothesis 1: In stock mergers, the firm-specific error of the acquiring firm will experience a negative correction if market timing is the motive Hypothesis 2: Cash acquirers will likely experience less firm-specific error corrections than stock acquirers The second component of the M/B ratio in RKRV, the time-series sector error, implies that the acquirers having this component share some temporary industry-wide valuation adjustments In merger activity, this is likely to occur when the acquirers respond to system-wide fundamental shocks and attempt to obtain some benefits Thus, we argue that changes in the second component of the M/B ratio can be used to track M&A motives that represent responses to industry and/or economic shocks Hypothesis 3: For M&As motivated by industry and economic shocks, acquiring firms would experience an increase in the time-series sector-wide error after the acquisitions The last component of the M/B ratio, the long-run value-to-book, reflects longterm growth opportunities We argue that this component is suitable for tracking M&A motives that are related to agency, hubris and synergy We posit that acquiring firms that experience a decline in long-run value are likely to be those that suffer from managerial entrenchment For M&As that are related to hubris, however, we may observe either a decline or no change in the long-run firm value If we observe positive changes in the long-run value of the acquiring firm, then it is likely that the merger motive is synergy related Hypothesis 4: The third component, the long-run value of the M/B ratio of the acquiring firm, is increased (decreased) if the merger is motivated by synergy (agency or hubris) C 2013 Blackwell Publishing Ltd 1362 NGUYEN, YUNG AND SUN THE SAMPLE Information on completed M&A deals involving publicly traded US acquirers and targets with a deal value larger than US$10 million is collected from the Thomson One Mergers and Acquisitions database for the 1984 to 2004 period The initial sample of 7,199 acquisitions includes information on announcement date, effective date, method of payment, deal value, and proportion of acquirer’s ex-post ownership Stock price data are collected from the Center for Research in Securities Prices (CRSP) database Other relevant financial variables are collected from the Compustat data files, including 4-digit SIC Codes, fiscal year-end dates, and accounting data We use the method suggested by RKRV in merging data from the three sources to take into account that firms have different fiscal year-end dates and to ensure that the price data reflect the corresponding year’s accounting information This approach of merging the three sets of data, after eliminating those observations with missing variables or outliers, gives us a final sample of 3,520 completed merger events involving 1,973 acquiring firms We classify the firms in the sample into two groups: merger and non-merger A firm is included in the merger group in the year that the firm has a merger announcement A firm is included in the non-merger group in the years in which it has no merger activity Table reports the frequency distribution of the sampled mergers by year and payment method Of the 3,520 events, 26.70% are stock acquisitions, 40.39% are cash offers, and 32.90% are mixed payment acquisitions Cash is the dominant payment method for acquisitions before 1990; stock is used more often after 1990 The number of stock acquisitions in the 1990s is almost twice that in the 1980s The mean deal value in the 1990s almost doubles that in the 1980s; the median deal value increased slightly in the 1990s M/B RATIO DECOMPOSITION RESULTS The mean and median values of M/B of acquirers one year before and up to three years after merger are reported in Table Firms that are involved in more than one merger are grouped together as active acquirers In Panel A, the mean M/B ratio of all the acquirers decreases gradually from 4.01 before merger to 3.59 three years afterwards Similar declines are found for one-time and active acquirers In Panel B, the logarithm form of M/B ratio, (m – b), shows similar changes All the declines are significant at the 1% level, implying that mergers destroy shareholder value in general Changes in the three M/B components one, two and three years after merger are reported in Table In this study, we name these corrections to highlight the ex-post market reaction regarding the acquiring firm’s valuation Panel A reports the market corrections of the components over the three event windows for the whole sample Panel B compares the corrections experienced by acquirers with those experienced by non-merger firms In Panels C–G of Table 3, changes in the three components of the M/B ratio are reported, with the sample grouped according to the frequency of merger, method of payment, proportion of shares acquired, pre-merger M/B ratio, and acquirer’s market value (i) Evidence for the Market Timing Motive For the entire sample, the firm-specific error significantly and consistently declines in the one, two and three years after merger Specifically, in Panel A of Table 3, the C 2013 Blackwell Publishing Ltd C 2013 Blackwell Publishing Ltd 13 11 18 13 16 18 21 21 54 62 93 128 131 117 85 40 51 31 940 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 Total 17.86 12.00 6.90 12.94 12.16 14.85 17.81 26.42 24.59 21.18 29.85 28.75 25.85 32.64 37.33 33.33 32.67 32.73 18.68 20.77 20.00 26.70 Row% 15 38 52 54 53 56 40 21 25 30 33 79 99 91 115 145 142 85 94 93 62 1,422 Freq 53.57 64.00 75.86 54.12 60.81 47.52 46.58 33.96 36.07 38.82 47.76 41.88 40.98 31.82 33.56 36.94 39.93 32.73 43.96 38.16 37.86 40.40 Row% All-cash Acquisitions 14 12 33 24 45 31 23 28 44 18 45 80 101 100 117 98 89 80 100 68 1,158 Freq 28.57 24.00 17.24 32.94 27.03 37.62 35.62 39.62 39.34 40.00 22.39 29.38 33.17 35.54 29.11 29.73 27.39 34.55 37.36 41.06 42.14 32.90 Row% Mixed Payment Acquisitions 28 59 68 100 87 119 88 62 72 100 79 188 240 285 344 392 357 259 204 224 165 3,520 Freq 0.80 1.67 1.94 2.84 2.47 3.38 2.44 1.77 2.04 2.84 2.24 5.35 6.85 8.09 9.76 11.13 10.13 7.36 6.08 6.92 4.68 100.00 Column% 108.7 122.1 113.2 133.1 97.2 59.5 37.3 72.3 59.7 75.4 47.2 86.3 78.5 131.2 111.1 149.2 172.9 110.4 86.4 111.0 167.2 Median Deal Value 397.5 410.8 323.7 346.2 392.5 421.5 110.1 187.7 164.0 262.3 194.9 516.3 521.4 471.1 833.0 1, 280.5 1, 450.1 897.1 766.5 646.7 1, 311.7 Mean All Acquisitions Notes: This table provides the distribution of merger events by year Merger events are collected from the Thomson One database and are required to have acquirer information on the Center for Research in Securities Prices (CRSP) and Compustat data tapes Only completed deals with value greater than US$10 million are included All-stock and all-cash acquisitions refer to transactions that are paid wholly in stock or cash, respectively Freq is the number of events The mean and median of deal value are in millions of US dollars Freq Year All-stock Acquisitions Table Frequency Distribution of Mergers and Acquisitions by Year MOTIVES FOR MERGERS AND ACQUISITIONS 1363 1364 NGUYEN, YUNG AND SUN Table The Market-to-Book Ratio Before and After Merger All Acquirers Panel A The M/B Ratio in Base Form N 3,520 Before event 4.01∗∗∗ 2.38∗∗∗ One year after event 3.71∗∗∗ 2.27∗∗∗ Two years after event 3.52∗∗∗ 2.31∗∗∗ Three years after event 3.59∗∗∗ 2.37∗∗∗ One-time Acquirers Active Acquirers 992 3.20∗∗∗ 1.92∗∗∗ 2.79∗∗∗ 1.79∗∗ 2.32∗∗∗ 1.74∗∗ 2.83∗∗∗ 1.85∗∗ 2,528 4.26∗∗∗ 2.52∗∗∗ 3.98∗∗∗ 2.40∗∗∗ 3.84∗∗∗ 2.48∗∗∗ 3.77∗∗∗ 2.60∗∗∗ Panel B The M/B Ratio in Logarithmic Form, log(M) – log(B) N 3,520 992 Before event 1.379∗∗∗ 1.172∗∗ 0.869∗∗∗ 0.651∗ One year after event 1.347∗∗∗ 1.095∗∗ 0.823∗∗∗ 0.580∗∗ Two years after event 1.250∗∗∗ 1.004∗∗ 0.840∗∗∗ 0.555∗∗ Three years after event 1.206∗∗∗ 0.935∗∗ 0.867∗∗∗ 0.617∗ 2,528 1.425∗∗ 0.923∗∗∗ 1.405∗∗ 0.876∗∗∗ 1.301∗∗ 0.908∗∗ 1.225∗∗ 0.954∗∗ Notes: This table presents the average M/B ratio of acquirers before and after merger Mean (median) values are reported in the first and second rows, respectively ∗∗∗ , ∗∗ and ∗ denote significance at the 1%, 5%, and 10% levels, respectively firm-specific error is reduced by 0.058 in one year, 0.160 in two years, and 0.172 in three years after merger Panel B of Table shows that the corrections of the firm-specific error of acquirers are significantly larger than those of non-merger firms over the three windows On average, the correction of the firm-specific error of acquirers is 0.038 more than that of non-merger firms in one year, 0.141 in two years, and 0.134 in three years The result is consistent with the implication that the market has corrected its overvaluation of the acquirer’s share value relative to the fair value based on short-run industry averages The correction of the firm-specific error persists over the three event windows after merger This finding strongly supports Hypothesis that market timing is a motive for acquisitions In untabulated results, Hypothesis was tested by excluding finance and utility industries and similar results were found Panel C of Table shows that the firm-specific error of one-time acquirers is reduced by 0.111 in one year, 0.166 in two years, and 0.224 in the three years after merger, and all the changes are significant at the 1% level For the active-acquirer group, firm-specific error is reduced by 0.040 in one year, 0.158 in two years, and 0.155 in three years The difference between the two groups in each window is not statistically significant An implication is that once the market has recognized its overvaluation of an acquirer, a one-time correction is adequate and further acquisitions by the same acquirer not lead to further valuation revisions by the market C 2013 Blackwell Publishing Ltd MOTIVES FOR MERGERS AND ACQUISITIONS 1365 Panel D of Table provides results supporting Hypothesis that stock payers suffer more firm-specific error corrections than cash payers Panel D shows that stock payers experience significant reductions in firm-specific mispricing over all the three event windows, whereas cash payers experience a significant reduction only in the first two years The corrections experienced by stock payers range from –0.070 to –0.473 and are much larger than those experienced by cash payers, which range from –0.039 to –0.046 The difference between the stock and cash payers is significant at the 1% level The result shows a strong support for Hypothesis that stock payers experience larger firm-specific error corrections than cash payers, implying that market timing is a more important motive among stock acquirers To further evaluate the market timing motive, we divide the acquirers into five quintiles based on the pre-acquisition M/B ratio and compare the correction of the firm-specific error between quintile one (value stocks) and quintile (glamour stocks) In Panel F of Table 3, the correction of the firm-specific error of glamour acquirers is 0.374 more than that of the value acquirers in one year, 0.366 in two years, and 0.438 in three years; and the difference between the two groups is significant at the 1% level in each window The result is consistent with implications that the market considers higher-valuation acquirers more likely to have the market timing motive We also divide the sample into five quintiles based on the pre-acquisition market value of the acquirer and report the result in Panel G of Table We find that large acquirers experience larger firm-specific error corrections than small acquirers That is, the market believes that overvaluation is more serious among glamour and/or large acquirers and therefore corrects more strongly (ii) Evidence for the Response to Industry/Economic Shocks Motive In Panel A of Table 3, the mean time-series sector error for the whole sample increases after merger and is significant at the 1% level for both the two and three years windows The median value is also significant in each of the three event windows The result implies that the acquiring firms experience higher levels of sector-wide valuation error after merger as the mergers are likely responses to industry/economic shocks However, in Panel B of Table 3, when compared with the non-merger firms’ time-series sector error corrections, the corrections of acquirers are not significantly different from those of the non-merger firms One possible explanation is that sectorwide errors also exist in industries that not have industry/economic shocks; another possible reason is that the non-merger firms are able to react to sector-wide changes without going through mergers In Table 3, an increase in time-series sector error among the acquirers is consistently found in the various sub-category analyses when the sample is sorted by the frequency of M&A (Panel C), method of payments (Panel D), proportion of acquired shares (Panel E), pre-acquisition M/B ratio (Panel F), and acquirer’s pre-acquisition market value of shares (Panel G) The findings suggest that many M&As are driven by industry and/or economic shocks In untabulated results, we examine the correction of time-series sector error by industry and find that about one-third of the industries show significant increases in time-series sector error after merger The increase happens mainly in the business equipment, finance, chemicals, and consumer non-durables industries These industries experienced many price and regulatory shocks over the sample period; C 2013 Blackwell Publishing Ltd [0, 2] 0.012 0.016∗∗ Panel D Post M&A Corrections: Stock vs Cash Payers Stock payers −0.070∗∗∗ −0.378∗∗∗ −0.473∗∗∗ N = 940 events −0.066 −0.180∗∗∗ −0.279∗∗∗ Cash payers −0.039∗∗∗ −0.097∗∗∗ −0.046 N = 1,422 events 0.003∗∗∗ −0.084∗∗∗ −0.015 Other method payers −0.048 −0.038 −0.077∗ N = 1,158 events −0.004 −0.041∗∗∗ −0.059∗∗∗ Difference (Stock – Cash) −0.031∗∗∗ −0.281∗∗∗ −0.426∗∗∗ Difference (Cash – Other) −0.022 −0.058 0.031 Difference (Stock – Other) 0.0087 −0.339∗∗∗ −0.395∗∗∗ Panel C Post M&A Corrections: One-time vs Active Acquirers One-time acquirers −0.111∗∗∗ −0.166∗∗∗ −0.224∗∗∗ N = 992 events −0.103∗∗∗ −0.067∗∗∗ −0.173∗∗∗ Active acquirers −0.040∗ −0.158∗∗∗ −0.155∗∗∗ N = 2,528 events −0.018 −0.105∗∗∗ −0.076∗∗∗ Difference (Once – Active) −0.071 −0.008 −0.069 0.046∗∗∗ 0.011 0.051∗∗∗ 0.050∗∗∗ −0.005 0.046∗ 0.165∗∗∗ 0.053∗∗∗ 0.109∗∗∗ 0.001 0.010 0.015∗ 0.020∗ 0.028 0.014 0.006 0.028∗∗ 0.045∗ 0.1544∗∗∗ −0.027 −0.004 0.018 0.150∗∗∗ 0.026 0.029∗ 0.006 0.014 0.020 0.050∗∗∗ 0.041∗∗∗ 0.041∗∗∗ 0.036∗∗∗ 0.009 0.050∗∗∗ 0.041∗∗∗ [0, 2] 0.222∗∗∗ 0.141∗∗∗ 0.038∗∗∗ 0.016∗∗ 0.056∗∗∗ 0.037∗ 0.184∗∗∗ −0.017 0.167∗∗∗ 0.086∗∗∗ 0.043∗∗∗ 0.078∗∗∗ 0.045∗∗∗ 0.008 0.080∗∗∗ 0.045∗∗∗ 0.061∗∗∗ 0.051∗∗∗ 0.019 0.080∗∗∗ 0.045∗∗∗ [0, 3] Time-series Sector Error Correction [0, 1] Panel B Post M&A Corrections: Acquiring Firms vs Non-merger Firms All Acquiring firms (A) −0.058∗∗∗ −0.160∗∗∗ −0.172∗∗∗ 0.012 −0.039∗∗∗ −0.089∗∗∗ −0.090∗∗∗ 0.016∗∗ Non-merger firms (NM) −0.020∗∗ −0.019∗∗∗ −0.038∗∗∗ 0.016∗∗∗ N = 33,085 −0.022∗∗∗ −0.012∗∗∗ −0.027∗∗ 0.001∗∗∗ Difference (A – NM) −0.038∗∗ −0.141∗∗∗ −0.134∗∗∗ −0.004 −0.172∗∗∗ −0.090∗∗∗ [0, 3] Firm-specific Error Correction [0, 1] Panel A Post M&A Corrections: All Acquirers All events −0.058∗∗∗ −0.160∗∗∗ N = 3,520 −0.039∗∗∗ −0.089∗∗∗ Event windows [year] Table The Three Components of M/B −0.019∗ 0.005 −0.026 −0.006 0.021 0.033∗∗∗ −0.006 0.000 −0.047∗ 0.027 −0.020 0.008 −0.002 0.009 0.022∗∗ −0.001 −0.084∗∗∗ −0.040∗∗∗ −0.007 0.026∗ 0.014 0.007 −0.077∗∗ −0.021 −0.097∗∗∗ −0.068∗∗∗ −0.045∗∗∗ −0.003 0.021∗∗ −0.065∗∗ 0.009 −0.019∗ 0.017∗∗ 0.005 −0.019∗∗∗ −0.047∗∗∗ −0.003∗∗ −0.028∗∗ 0.027∗∗∗ 0.028∗∗ 0.009 0.017∗∗ [0, 2] −0.153∗∗∗ −0.069∗∗∗ −0.076∗∗∗ −0.042∗∗∗ −0.012 −0.016∗∗ −0.077∗∗ −0.064∗ −0.141∗∗∗ −0.140∗∗∗ −0.118∗∗∗ −0.062∗∗∗ −0.025∗∗∗ −0.077∗∗ −0.081∗∗∗ −0.040∗∗∗ −0.069∗∗∗ −0.045∗∗∗ −0.012 −0.081∗∗∗ −0.040∗∗∗ [0, 3] Long-run Value Correction [0, 1] 1366 NGUYEN, YUNG AND SUN C 2013 Blackwell Publishing Ltd C 2013 Blackwell Publishing Ltd 0.121∗∗∗ 0.082∗∗∗ 0.055∗ 0.014 −0.017 0.016 −0.008 0.038∗ 0.106∗∗∗ 0.072∗∗∗ 0.015 0.135∗∗∗ 0.100∗∗∗ 0.096∗∗∗ 0.052∗∗ −0.025 −0.032∗ 0.025 0.017 0.163∗∗∗ 0.102∗∗∗ 0.028 0.035 0.029 −0.006 0.087∗∗∗ 0.050∗∗∗ 0.058∗∗∗ 0.044∗∗∗ −0.005 0.014 0.087∗∗ 0.055 −0.033 0.093∗∗∗ 0.066∗∗∗ 0.091∗∗∗ 0.084∗∗∗ 0.040 0.026 0.016 −0.028∗ −0.044 0.058∗∗∗ 0.018∗ 0.004 0.017 0.024 0.015 Panel F Post M&A Corrections: By the Pre-acquisition M/B Ratio of Acquirers M/B ratio of Acquirers Quintile (value) 0.060∗∗∗ −0.048 −0.002 0.023 0.072∗∗∗ 0.010 0.007 0.006 Quintile −0.135∗∗∗ 0.007 −0.053 0.000 −0.057∗∗∗ 0.019 0.006 0.014 Quintile −0.024 −0.070 −0.025 0.011 −0.040 −0.049 −0.023 0.007 Quintile −0.020∗∗ −0.169∗∗∗ −0.214∗∗∗ −0.027 −0.028 −0.144∗∗∗ −0.103∗∗∗ 0.016 ∗∗∗ Quintile (glamour) −0.314 −0.414∗∗∗ −0.440∗∗∗ 0.049∗∗ −0.246∗∗∗ −0.172∗∗∗ −0.272∗∗∗ 0.050∗∗∗ ∗∗∗ ∗∗∗ ∗∗∗ Difference (Q5 – Q1) −0.374 −0.366 −0.438 0.027 Panel E Post M&A Corrections: By Proportion of Shares Acquired Acquired shares less than −0.079 −0.060∗ −0.063∗ ∗∗∗ ∗ 10% (Group 1) −0.066 −0.046 −0.023 N = 869 Acquired shares greater −0.063 −0.076 −0.050 than 10% and less than −0.013 −0.019 −0.078 100% (Group 2) N = 675 Acquired shares of 100% −0.046∗ −0.240∗∗∗ −0.272∗∗∗ (Group 3) −0.031∗ −0.129∗∗∗ −0.137∗∗∗ N = 1,976 Difference (Group – Group 1) 0.017 −0.016 0.013 (Group – Group 1) 0.033 −0.180∗∗∗ −0.209∗∗∗ (Group – Group 2) 0.017 −0.164∗∗∗ −0.222∗∗∗ Table (Continued) −0.053∗∗ −0.037∗∗ −0.009 −0.022∗∗ −0.014 −0.011 0.036 0.033∗∗∗ 0.056∗∗∗ 0.047∗∗∗ 0.110∗∗∗ −0.029 0.002 0.031 0.015 0.018∗∗ −0.015 −0.028 0.014 0.032∗∗∗ −0.218∗∗∗ −0.196∗∗∗ −0.117∗∗∗ −0.103∗∗∗ −0.008 0.005 0.082∗∗∗ 0.049∗∗∗ 0.081∗∗∗ 0.059∗∗∗ 0.299∗∗∗ −0.048 −0.053∗∗ −0.005 −0.035∗∗∗ −0.011 −0.030 −0.030∗∗ 0.018 0.033∗∗ −0.167∗∗∗ −0.149∗∗∗ −0.138∗∗∗ −0.122∗∗∗ −0.068∗∗ −0.044∗∗∗ −0.021 0.001 −0.048∗∗ −0.011 0.118∗∗∗ −0.076∗ −0.123∗∗∗ −0.046 −0.124∗∗∗ −0.082∗∗∗ −0.078∗∗∗ −0.069∗∗∗ −0.002 0.007 MOTIVES FOR MERGERS AND ACQUISITIONS 1367 [0, 2] [0, 3] Firm-specific Error Correction [0, 1] 0.047 0.026 0.079∗∗∗ 0.035∗∗ 0.063∗∗ 0.043∗∗ 0.093∗∗∗ 0.032∗∗ 0.108∗∗∗ 0.070∗∗∗ 0.061 [0, 3] C 3,520 (1) 377 10.7 (2) 113 3.2 (3) 278 7.9 (4) 387 11.0 (5) 1550 44.0 −0.065∗∗∗ −0.073∗∗ −0.058∗ −0.033∗∗ −0.022 0.002 −0.027 0.021 0.055∗∗∗ 0.051∗∗∗ 0.120 (6) 308 8.8 (7) 262 7.4 Mergers with Mergers with both all the three time-series corrections sector error and changes in long-run value 0.024 0.002 −0.012 −0.006 −0.022 −0.003 0.011 0.031 0.042∗∗ 0.034∗∗∗ 0.018 [0, 2] −0.064∗ −0.055∗ −0.095∗∗∗ −0.072∗∗∗ −0.109∗∗∗ −0.103∗∗∗ −0.068∗∗∗ −0.029∗∗∗ −0.070∗∗∗ −0.019∗ −0.006 [0, 3] Long-run Value Correction [0, 1] Notes: This table provides information on decomposed M/B ratio components of acquirers over three event windows after merger The M/B ratio in logarithmic form is decomposed into three components: firm-specific mispricing (m – v ), time-series sector error (v – v ), and long-run value to book value (v – b) m and b are market and book values of shares in logarithmic forms v is the firm’s fundamental value implied by industry averages at time t v is the firm’s fundamental value implied by long-run industry averages The changes in each component over one-, two-, and three-year windows are reported First and second row statistics in Panels A to G are the mean and median, respectively ∗∗∗ , ∗∗ and ∗ denote significance at the 1%, 5%, and 10% levels, respectively Group number Number of events Percentage of total Panel H Number of Observations by the Type of Error Correction All mergers Mergers with Mergers with Mergers with Mergers with Mergers with both both changes in firm-specific time-series firm-specific firm-specific long-run sector error error and error and value correction correction time-series changes in sector error long-run corrections value 0.064∗∗ 0.061∗∗∗ 0.018 0.020 0.026 0.019 0.107∗∗∗ 0.038∗∗∗ 0.032 0.070∗∗∗ 0.033 [0, 2] Time-series Sector Error Correction [0, 1] Panel G Post M&A Corrections: By the Market Value of Acquirers Market value of Acquirers Quintile −0.068∗∗ −0.019 0.016 0.006 −0.017∗∗∗ 0.037 0.060 0.008 Quintile −0.071∗ −0.090∗ −0.178∗∗∗ 0.005 −0.087∗∗∗ −0.061∗ −0.094∗∗∗ 0.025∗ Quintile 0.042 −0.089∗∗ −0.128∗∗ −0.030 0.011 −0.047∗ −0.047∗ 0.005 Quintile −0.103∗∗ −0.262∗∗∗ −0.234∗∗∗ 0.056∗∗ −0.037∗ −0.144∗∗∗ −0.115∗∗∗ 0.024∗∗ Quintile −0.094∗∗ −0.284∗∗∗ −0.280∗∗∗ 0.016 −0.101 −0.130∗∗∗ −0.129∗∗∗ 0.016 Difference (Q5 – Q1) −0.026 −0.266∗∗∗ −0.296∗∗∗ 0.010 Event windows [year] Table (Continued) 1368 NGUYEN, YUNG AND SUN 2013 Blackwell Publishing Ltd MOTIVES FOR MERGERS AND ACQUISITIONS 1369 mergers in these industries account for more than one-third of the aggregate M&A transactions Our result is consistent with the observations of many researchers that mergers frequently take place in industries that have experienced input price and deregulation shocks (Mulherin and Boone, 2000) The analysis of the time-series sector error correction by industry suggests that response to industry/economic shocks is a common merger motivation (iii) Evidence for Synergy, Agency, and Hubris Motives We explain above that the long-run value component of the market-to-book ratio can be affected by motives related to synergy, agency and hubris However, seeking evidence for motives that may have conflicting valuation implications from aggregate data may not be meaningful For example, in Panels A and B of Table 3, the mean and median long-run values of the whole sample change inconsistently over the first two event windows Thus, it is better that we focus on subcategory results that are directly related to synergy, agency and hubris, respectively The results in Panel C of Table show that active acquirers experience inconsistent changes in long-run value-to-book In the first year after merger, the long-run value experienced an insignificant positive gain For the two-year window, the mean change is insignificantly negative, whereas the median change is insignificantly positive Only the mean change for the three-year window period is significant but negative Inconsistent changes in the long-run value of active acquirers are consistent with implications that the acquirers are motivated by hubris and have engaged in acquisitions that may or may not increase firm value Panel D of Table shows that stock payers experience significantly larger decreases in the long-run value component than cash payers in each of the three event windows In one, two, and three years after merger, stock payers lose 0.026, 0.084 and 0.153 of the long-run value, respectively, whereas cash payers gain 0.021 in one year and lose 0.007 and 0.076 of the long-run value in two and three years after merger The median long-run value for cash payers significantly increases in the first two event windows The result shows that stock payers are more likely to be associated with value-decreasing acquisitions, whereas cash payers are more likely to be associated with value-increasing acquisitions This implies that stock-financed mergers are more often affected by agency-related motives and/or hubris Panel E of Table provides additional evidence that mergers could be driven by managerial objectives In Panel E of Table 3, acquirers that purchase 100% of the target experience a significantly larger reduction in long-run value than acquirers seeking less than 10% of the target firm The difference between the two groups is significant for both the two- and three-year windows This is consistent with implications that mergers driven by empire-building incentives reduce the long-term value of the firm more significantly Panel F of Table provides evidence for the synergy motive High-valuation acquirers significantly gain in long-run value in the one and two years after merger by 0.056 and 0.081, respectively, although suffer a significant loss in the three-year window That is, it appears that M&As by the glamour acquirers could be synergistic at first, yet become value-decreasing later One the other hand, low-valuation acquirers experience a significant reduction in the long-run value component in each of the three event windows The declines are –0.053 in one year, –0.218 in two years, and C 2013 Blackwell Publishing Ltd 1370 NGUYEN, YUNG AND SUN –0.167 in three years In Panel G where the sample is grouped by the market value of the acquirer, the result shows that large acquirers create value initially but eventually experience a decrease in value (iv) Summary of the MB Ratio Decomposition Evidence The results in Table show that the market timing motive is more significant among stock payers and high-valuation acquirers Mergers that represent responses to industry/economic shocks are confined to industries that have undergone significant fundamental changes Stock payers and empire builders are more associated with the agency and hubris motives, and they typically experience a decline in long-run value Cash payers are more likely to be related to the synergy motive On the other hand, high-valuation and large acquirers are able to create synergy in the one to two years after a merger, but they will eventually experience a decline in long-run value In Panel H of Table 3, we sort the whole sample into the following seven groups based on the type of misvaluation correction over the one-year window: (1) mergers that have the firm-specific error correction only; (2) mergers that have the timeseries sector error correction only; (3) mergers that have the long-run value-to-book correction only; (4) mergers that have both the firm-specific error and time-series sector error corrections; (5) mergers that have both the firm-specific error and longrun value to book corrections; (6) mergers that have both the time-series sector error and long-run value-to-book corrections; and (7) mergers that have all three types of error corrections The sorting based on the one-year window provides some interesting statistics.2 Of the 3,520 M&As examined, 377 (10.7%) experienced only the firmspecific error correction; 113 (3.2%) experienced only the time-series sector error correction; and 278 (7.9%) experienced only the long-run value-to-book correction Among mergers that have more than one type of mispricing correction, 1,550 (44%) have both the firm-specific error and long-run value corrections This implies that many acquiring managers use overvalued shares to achieve personal goals Aggregating the seven groups, 2,576 (73%) acquirers have motives that are related to firmspecific mispricing; 762 (21.6%) acquirers have motives that are related to responses to industrial and economic shocks; and 2,090 acquirers (59.2%) have motives that are related to long-run value-to-book mispricing In short, the results suggest that singlemotive acquisitions are relatively less common This is consistent with the postulations of Amihud and Lev (1981) and Donaldson and Lorsch (1983) Our finding of multiple motives for mergers also supports the findings of Shleifer and Vishny (1989) and Berkovitch and Narayanan (1993) which are based on the announcement period abnormal returns of bidders and targets.3 The existence of competing motivations in a single merger is not impossible For example, mergers motivated by synergy could be value-decreasing at the same time if they are also intended to enhance the Consistent sorting results are found based on the two- and three-year windows Many acquiring firms prefer the pooling-of-interests to purchase accounting in merger activity due to alleged tax advantages and higher reported earnings However, researchers have shown that the pooling method has no real economic advantage as it does not increase assets, reduce liabilities, nor modify tax treatment Hong et al (1978) and Aboody et al (2000) confirm that the choice of accounting method produces no abnormal stock returns in mergers as investors are able to see through the window dressing effect of pooling Thus, it is likely that the choice of acquisition accounting method would have no impact on the M/B ratio decomposition results reported in this study We thank the journal editors for directing our attention to the literature on acquisition accounting C 2013 Blackwell Publishing Ltd MOTIVES FOR MERGERS AND ACQUISITIONS 1371 CEO’s entrenchment and personal objectives Value-deceasing diversifications could also be value-increasing if the co-existing motive is to obtain operating or financial synergy Similarly, conflicting motivations exist when a CEO carries out a synergyrelated takeover but overpays for the target because of his hubris Gao (2010) finds that acquiring managers with a short managerial horizon tend to emphasize more the short-term value than the long-term value of a firm He reported evidence that shorthorizon acquiring managers undertake mergers that increase the short-term firm value whether or not these mergers may destroy firm value in the long run (v) Logistic Regressions on Merger Motivation Next, we perform logistic regressions to see whether we can find results consistent with our earlier findings on merger motivation without relying on the M/B error components In these logistic regressions, the dependent variable is equal to if the firm is a bidder and zero otherwise The four groups of independent variables are intended to reflect overvaluation, agency motives, growth opportunities and managerial hubris The first group of independent variables includes proxies for firm overvaluation The chosen variables are M/B ratio and the pre-acquisition three-year buy-and-hold stock return We expect the coefficients on the variables to be positive as it has been well documented in the literature that overvalued firms are more likely to acquire targets that are less-overvalued The second group of independent variables is a set of firm-specific characteristics commonly used as proxies for agency problems: firm size, sales and free cash flow Moeller et al (2004) report that larger firms are more likely to attempt value-destroying acquisitions than smaller firms, which indicates that the market for corporate control is less effective in disciplining the managers of larger firms than the managers of smaller firms Masulis et al (2007) hypothesize that undisciplined managers are more likely to indulge in value-destroying empire building acquisitions Jensen (1986) stipulates that firms with high levels of free cash flow are often associated with agency problems and tend to overinvest Thus, we expect firms that are larger in size or sales as well as firms that have high levels of free cash flow are more likely to pursue corporate acquisitions The third group of independent variables includes proxies for growth opportunities: three-year income growth and three-year sales growth before acquisition These variables are included to determine if the acquisitions represent attempts to buy growth We expect the coefficients on income growth and sales growth to be negative based on the results in the existing literature Finally, we include Tobin’s Q as an independent variable that proxies for managerial hubris To the extent that Tobin’s Q reflects the ability of firm management (Lang et al., 1989), Q also reflects the manager’s tendency to become overconfident Thus, a positive coefficient on the variable is consistent with the implication that managers acquire other firms to satisfy their hubris Table presents the results of the logistic regressions The first column shows that bidders are indeed more acquisitive when their firms are overvalued The coefficient on the M/B ratio is positive and significant at the 1% level The coefficient on the preacquisition three-year raw stock return is also positive and significant at 1% The results lend support to the M/B ratio decomposition findings reported earlier that shortterm firm misvaluation is common among acquiring firms That is, market timing is a common merger motivation In the first column, the coefficients on firm size and sales are both positive and significant at the 1% level, although the coefficient on free cash C 2013 Blackwell Publishing Ltd 1372 NGUYEN, YUNG AND SUN Table Logistic Regressions on Motives of Corporate Mergers Predicted Sign Intercept M/B ratio RET(raw) RET (excess) Sales Size FCF ROA NIg Salesg Q LR ratio Wald Statistic + + + + + + − − −/+ + (1) (2) (3) (4) −4.56∗∗∗ 0.01∗∗∗ 0.59∗∗∗ −4.86∗∗∗ 0.01∗∗∗ −4.47∗∗∗ 0.01∗∗∗ 0.64∗∗∗ −4.82∗∗∗ 0.01∗∗∗ 0.68∗∗∗ 0.01∗∗∗ 0.01 0.18 −0.03 0.03∗∗∗ 1,441∗∗∗ 799∗∗∗ 0.28∗∗ 0.70∗∗∗ 0.01∗∗∗ 0.01 0.09 −0.45∗∗∗ 3.04∗∗∗ 0.04∗∗∗ 1,546∗∗∗ 791∗∗∗ 0.68∗∗∗ 0.01∗∗∗ 0.01 0.19 −0.02 0.03∗∗∗ 1,439∗∗∗ 789∗∗∗ 0.35∗∗∗ 0.69∗∗∗ 0.01∗∗∗ 0.01 0.09 −0.46∗∗∗ 3.05∗∗∗ 0.04∗∗∗ 1,547∗∗∗ 769∗∗∗ Notes: This table presents results of logistic regressions on motives of corporate mergers The dependent variable is a (0, 1) dummy with a value of if the firm is an acquiring firm RET(raw) and RET(excess) are three-year buy-and-hold returns before merger FCF is sales growth NIg and Salesg are net income growth and sales growth rates before acquisition Q is Tobin’s Q ∗∗∗ , ∗∗ and ∗ denote significance at the 1%, 5%, and 10% levels, respectively flow is insignificant We can nevertheless make a general conclusion that firms that are more acquisitive are likely to be associated with higher levels of agency problems This observation is consistent with the existing literature that one of the motives for mergers is that managers of acquiring firms use overvalued stocks to achieve personal goals Regarding growth opportunities, the coefficient on income growth (NIg ) is negative The sign of the coefficient is consistent with our expectation, although insignificant The coefficient of Tobin’s Q in the first column is positive and significant at the 1% level, consistent with the implication that CEO hubris is present among acquiring firms The results in the other columns are similar to those in the first column The coefficients on the pre-acquisition three-year excess stock return in columns and are consistent with the coefficients on the raw return in columns and The negative coefficients on income growth (NIg ) in columns and have become significant This finding supports the implication that one of the motives for mergers is to buy growth through acquisitions, suggesting that bidders might be seeking synergy in acquisitions in addition to other motives In columns and 4, we have added sales growth (Salesg ) to the independent variables The positive and significant coefficient on sales growth is consistent with an empire building implication Overall, the results in Table indicate that corporate acquisitions are most likely intertwined with multiple motives such as market timing, managerial self-interest, synergy and hubris The results in Table also provide empirical support for our earlier findings on the M/B ratio decomposition that different types of valuation errors could simultaneously exist among bidders CONCLUSIONS We decompose the M/B ratio of corporate acquirers into firm-specific error, timeseries sector error, and long-run value-to-book and observe how they change in the C 2013 Blackwell Publishing Ltd MOTIVES FOR MERGERS AND ACQUISITIONS 1373 post-acquisition period in order to decipher merger motivation We find evidence that merger motivation includes market timing, agency/hubris, synergy and response to industry/economic shocks However, our results show that single-motive acquisitions are relatively uncommon About 80% of the 3,520 sampled acquirers have multiple merger motives It appears that many acquiring managers use overvalued shares to promote personal goals and/or other objectives through merger activity Our finding of multiple motivations in corporate takeovers is consistent with the predictions of a number of researchers Our results suggest that it is generally difficult to have a clear picture of the underlying motivations for M&As because value-increasing and value-decreasing motives frequently coexist Our methodology allows us to draw conclusions based on ex-post market evidence Since we use the same methodology in evaluating merger motives, we overcome the issue of comparability across different methodologies in the existing literature Despite the interesting findings of our investigation, some caveats should be noted First, the result of this study is based on a sample of takeovers that took place in the US only Institutional differences in non-US countries may lead to results that are different from the current study For example, the less rigorous corporate disclosure requirements in emerging markets may affect firm value in developing countries and render the M/B decomposition analysis less effective (Leuz et al., 2003; and Jiao, 2011) Second, even among developed markets, some studies of non-US corporate takeovers suggest that the non-US experience may be different For example, despite Hodgkinson and Partington (2008) and Arnold and Parker (2009) find that multiple motives are present in UK takeovers, the researchers also suggest that there is less evidence of agency related motives in UK mergers Arnold and Parker attribute their conclusion to the policies of the competition authorities in monitoring corporate behavior In contrast to the existing evidence on US firms, Bi and Gregory (2011) find that overvaluation is a more important determinant of acquisition activity in the UK Third, there is also recent evidence that cultural factors have a significant impact on the acquiring firm’s ability to assimilate merger gains (Steigner and 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(1989), ‘Management Entrenchment: The Case of Manager-specific Investments’, Journal of Financial Economics, Vol 25, pp 123–39 ——— and R Vishny (2003), ‘Stock Market Driven Acquisitions’, Journal of Financial Economics, Vol 70, pp 295–311 Steigner, T and N Sutton (2011), ‘How Does National Culture Impact Internalization Benefits in Cross-Border Mergers and Acquisitions?’ Financial Review, Vol 46, pp 103–25 Stulz, R (1990), ‘Managerial Discretion and Optimal Financing Policies’, Journal of Financial Economics, Vol 26, pp 3–27 Weston, J and K Chung (1990), ‘Takeovers and Corporate Restructuring: An Overview’, Business Economics, Vol 25, pp 6–11 C 2013 Blackwell Publishing Ltd ... to infer the underlying merger motivations from ex-post market data In other words, we let the market tell us the motives behind the mergers A major advantage of this approach is that there is... that single-motive mergers are relatively less common Of the 3,520 mergers examined, 78% are related to at least two motives simultaneously Our results show that 73% of the mergers are related... dates, and accounting data We use the method suggested by RKRV in merging data from the three sources to take into account that firms have different fiscal year-end dates and to ensure that the