Sellerss reactions to takeover rumours and announcements before ma the event study on hose

UNIVERSITY OF ECONOMICS HO CHI MINH CITY VIETNAM ERASMUS UNIVERSITY ROTTERDAM INSTITUTE OF SOCIAL STUDIES THE NETHERLANDS VIETNAM – THE NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS SELLERS'S REACTIONS TO TAKEOVER RUMOURS AND ANNOUNCEMENTS BEFORE M&A: THE EVENT STUDY ON HOSE BY NGUYEN THI HONG NGOC MASTER OF ARTS IN DEVELOPMENT ECONOMICS HO CHI MINH CITY, DECEMBER 2017 UNIVERSITY OF ECONOMICS HO CHI MINH CITY VIETNAM ERASMUS UNIVERSITY ROTTERDAM INSTITUTE OF SOCIAL STUDIES THE NETHERLANDS VIETNAM - NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS SELLERS'S REACTIONS TO TAKEOVER RUMOURS AND ANNOUNCEMENTS BEFORE M&A: THE EVENT STUDY ON HOSE A thesis submitted in partial fulfilment of the requirements for the degree of MASTER OF ARTS IN DEVELOPMENT ECONOMICS By NGUYEN THI HONG NGOC Academic Supervisor: DR VU VIET QUANG HO CHI MINH CITY, December 2017 DISSERTATION DECLARATION I declares that I am the sole author of "Seller's Reaction to Takeover Rumours and Announcements before M&A: The event study on HOSE", and to the best of my knowledge and belief that all of outcomes included data, ideas and analyzed is written or published another by neither person Besides, I also declare that my thesis has not been summited or being simultaneous submitted for any Degree, Diploma or any other University or any educational institution Date: December 01, 2017 Signature: Nguyen Thi Hong Ngoc ACKNOWLEDGEMENTS The dissertation could not be possible without the genuine encouragement of many great and wonderful people First and foremost, I would like to express my whole-hearted gratitude to Dr Vu Viet Quang He has truly dedicated to instructing us from the head start of the thesis and has given me deep motivation and clear guideline so that I can implement the research project in the right way In addition, he has also given me a chance to learn from trials and errors with specific advice for each progress report so that I can make the gradual improvement Moreover, I also would like to send my truly sincere my thanks to all of my team "Cao Hoc Ha Lan" in VNP, who has always supported me, read a lot of my revisions, and given me professional feedback and advice Especially, Mr Khang and Ms Ha provided helpful comments, insights, and also a different perspective to the discussion along the way Furthermore, I would like to thank the Vietnam - The Netherlands Program for M.A in Development Economics for imparting me invaluable knowledge and creating a great space for me during my study period I also wish to thank the Doctors who taught me in the M.A environment for giving me an opportunity to study and providing knowledge in the most beautiful university Sincere thanks are also given to the staff of University of Economics Ho Chi Minh City for their help and support to me Finally, I would like to thank my family, my lover, and close friends for their love and motivating me to higher achievements Again, many thanks and my honest gratitude to all of you ABSTRACT This paper examines the trading activity of target firms in the days before acquisition announcement Using a sample of acquisition announcements in HOSE during the period of 2012 - 2016, the results showed that significantly abnormally trading volume precedes share price movements In order words, using intraday data, active-selling in target shares in preannouncement increased, which compensates rising active-buying It means that sellers might lose a lot of money if an unexpected acquisition occurs Thereforee, the explanations showed that sellers are the mixture of liquidity and noise traders who overreact to takeover rumours Furthermore, it might lose money when an acquisition is actual It is consistent since most cases of acquisition rumours are materializing into public announcements Results also provide evidence that highly uncertain information in takeover rumours are reflected by preannouncement TABLE OF CONTENTS: CHAPTER 1: INTRODUCTION 1 Problem Statement and Significance Research The Research Objectives and Research Questions 3 Thesis Structure CHAPTER 2: LITERATURE REVIEW Prior Research on Pre-announcement Trading Activity 1.1 Developed Market 1.2 Emerging Market Prior Research on Takeover Rumours CHAPTER 3: HYPOTHESIS DEVELOPMENT Abnormal Returns and Abnormal Trading Volume in The Pre-announcement Sell-Side Trading Before Announcement Day 2.1 Liquidity Trading 2.2 Noise Trading 10 2.3 Rational Trading 10 2.4 Testing 11 Rumours are reasons why increasing trading volume lead to price movement 11 CHAPTER 4: DATA AND METHODOLOGY 12 Sample Data 12 Matching Methodology 13 2.1 Selection of Target Firms and Matching Firms 14 Differences-in-Differences Estimation 15 3.1 Measuring Abnormal Returns 16 3.2 Measuring Abnormal Trading Activity 16 3.3 Measuring Abnormal Relative Spread 17 3.4 Measuring Abnormal Quoted Depth 18 3.5 Shorting Takeover Rumours - Measuring Abnormal Returns 19 3.6 Robustness Test – Multiple Rumours 20 CHAPTER 5: FINDINGS AND DISCUSSIONS 22 Daily Returns and Trading Activity 22 Trade Imbalances in Buy-side and Sell-side Transaction 27 Change in Ask-Bid Spread and Quoted Depth 30 Takeover Rumours: Noise and Rational Traders 33 Robustness test – Multiple Rumours 34 Relation between Takeover Rumours and Highly Trading Volume-Leading-Returns 35 CHAPTER 6: CONCLUSION 40 REFERENCES 42 APPENDIX 48 CHAPTER 1: INTRODUCTION Problem Statement and Significance Research During the post-WTO globalization process, Mergers and Acquisitions (M&A) in Vietnam became serious, which might be a complex signal of the economy’s next period of transition (Vuong et al, 2014) In 1990–2010, M&A data in Vietnam showed that foreign firms attempt to acquire domestic ones by M&A about 79.4% Vietnam’s M&A wave happens with anomalies and transactional characteristics, especially it could help explain economic occurrence consisting of security, banking, non-bank financial, portfolio investment, and real estate market (Vuong, 2010) According to Bloomberg (2016), M&A deal activities continue to expand in Vietnam and are looking ahead to hit a fresh record, indicating that M&A models as investment trends are booming strongly in the market Moreover, they also offered a new opportunity for investors or country’s deeper and wider development The booming of M&A in Asia has caught the attention of both investors and academia (Wright et al, 2005) When corporate acquisition is announced, it is considered as a major new event for trading volume of the target firm While many previous studies have found evidence on stock price run-ups and high trading volume in pre-announcement, the controversy on pre-announcement trading in target stocks highly indicates the non-criminal market anticipation or insider trading From various kinds of previous literature reviews, most studies on the effects of M&A announcements focus on developed countries There were few studies in emerging countries, especially in Vietnam The investigation of abnormal returns around the day of M&A announcement is analyzed for ten emerging countries in Asia by J Ma, Pagan, & Chu (2009) The findings showed that it has a positive reaction to the announcement of M&A deals Almost all studies aim to investigate abnormal returns in post-announcement that are advantages of active arbitrages These active arbitrages might be against the efficient market and have a certain impact on abnormal returns However, Vietnam’s stock markets have a primary market, different from the previous studies Hence, the investigation of an anomaly, which an abnormally high volume precedes the price movement in Vietnam, is a motivation Moreover, the results from previous researches also showed that increased in both price and trading activity before the announcement Then, there are a lot of debates of whether the preannouncement trade reflects insider trading or non-criminal market anticipation Notwithstanding, this study will focus on the abnormally high volume preceding the price movement Based on these findings, it is the motivation to examine the phenomenon of the volume-leading-return with the Vietnam’s dataset and then by explaining its actuality Furthermore, the trading activity translates into the price discovery before the announcement day, or an extreme informational event will be shed light Compared with corporate activities, the predications of acquisition announcements are so rare However, if investors who can anticipate these acquisition, their profits can be high Thereforee, takeover rumours, often preceded the announcement, may reflect these substantial incentives for investors It is an opportunity to study how the market operates with the highly uncertain information impact on stock prices Most previous studies examine trading activity on target stock at the time surrounding the announcement period focus on buyer-initiated trades (Gao & Oler, 2012) The price runup is due to insider trading assumed by Keown & Pinkerton (1981) Thus, this study will focus on share transactions both buying-active and selling-active which are contradictory In term of every transaction, it is obvious that it has a buy side and a sell side, but the “active” for buying or selling is determined by the initiating party The transactions from active sellers or buyers usually are started by posting a market sell or buy order for a transaction immediately Besides, the transaction is facilitating for passive buyers and sellers While most previous research studies used buy-side transactions since they are able to be initiated by potential acquires constructing a toe hold in targets, the seller-side is less clear (Gao & Oler, 2012) (Vuong, Tran, & Nguyen (2009) showed that using a particular case study, under pressure of unspecified source M&A rumours, Vietnamese investors often quickly spent money on any stock Due to lack of a system for tracking M&A transactions, they just collected a part of the attributes – buy active for their data Thereforee, this study will be motivated to make completely of the lack of data’s Vuong, the sell-side will be collected and examined Thereforee, using intraday data, this study will show a phenomenon which increased transactions on both active buy-side and active sell-side However, a question asks why sellers sell their target stocks before acquisition announcements Meanwhile, sellers could wait a bit longer and get profits To investigate this problem more deeply, the study follows the previous way, used by Gao in 2008 methodology that evaluated the active “moneylosing” selling in target stocks before takeover announcements with three possible explanations Following the previous studies, this study focuses on the trading activity of target firms in the days before acquisition announcement This study will expand Vuong’ results with larger data for all cases of M&A from 2012 to 2016 with 542 deals at Ho Chi Minh Stock Exchange (HOSE) The abnormal returns and abnormal trading volume are examined by using M&A announcement data Then, by using Gao & Oler (2012) methodology, the takeover rumour data are collected with 419 rumours between 2012 and 2016 to investigate “money-losing” sellers The Research Objectives and Research Questions In particular, the study attempts to answer why sellers sell their target stocks before acquisition announcement There are three main objectives This study uses Zephyr’s data and data stream from 2012 to 2016 The first objective is to find the evidence that abnormally high volume precedes the price movement before announcement date by using intraday data and comparison of trading volume and returns in target stocks Then, the phenomenon of the increase in transactions on both buy-active and sell-active is showed The second objective is to evaluate possible explanations for the sellers sell their target stocks by divide sellers into three groups: liquidity traders, noise traders and rational traders While liquidity trader is evaluated by expecting increased liquidity follow Lee-Ready algorithm approach, noise traders and rational traders are classified into two kind of investors who get profits or lose money by calculating buy-and-hold abnormal returns around 70 trading days The third objective is to examine whether rumours are the reasons why high volume precedes the price movement The final objective investigates whether a company has more than one deals, and whether different sellers react in the same ways The empirical contribution of this study is to utilize the latest data about M&A in Vietnam in 2012 to 2016 to study the trading activity of target firms in the days before acquisition announcement These results provide insight into the M&A environment in Vietnam through stock activations where the market reacts to both certain information (M&A announcements and uncertain information (takeover rumours) With more doubt on the future, the findings also contribute to the kind of investors in Vietnam and policies relevant to Vietnam in term of protecting investors against insider trading and non-criminal market Thesis Structure The remainder of the paper is organized as follows: months The buy-and-hold abnormal returns in investigating takeover rumoured day is shown Table Table 5: Buy-and-Hold Returns for Multiple Rumours Buy-and-Hold Abnormal Returns Strategy Obs Returns (%) T-statistic Zero to months 94 -2.04 -1.88 months to 12 months 55 -3.47 -2.70 More than 12 months 106 -2.64 -3.02 Consequently, most of the buy-and-hold abnormal returns in Table are similar to Table findings which are negative and statistically significant In term of months to 12 months’ strategy, the abnormal returns are lowest with (-3.47 %), meaning that sellers who sell their takeover rumoured stock will highest lose money If takeover rumours multiple in the period zero to months, buy-and-hold abnormal returns are higher than in more than 12 months Sell traders lose money least in the period takeover rumours multiple around zero to months It can be seen that although rumours multiple, sellers still trade their takeover rumoured stock and lose money It may that they have strong belief that stocks prices are overvalued On the other hand, while informed traders who are rational speculation accounts for most overall trading, the traders who are overconfident explain nearly as all uninformed trading (Kelley & Tetlock, 2013) Relation between Takeover Rumours and Highly Trading VolumeLeading-Returns To ensure that takeover rumours lead to highly abnormal trading volume which lead to abnormal returns in the pre-announcement, the announcement sample data from Table divided to firms which have rumours or not From 39 deals which have matching firms, it is found that 11 deals have rumours and 28 deals have not rumours The abnormal trading volume and abnormal returns are showed in Table with the rumours or non-rumours strategy 35 Table 6: Abnormal Volumes and Abnormal Returns in Rumour Target and Non-Rumour Rumoured Targets Day Obs -50 -49 -48 -47 -46 -45 -44 -43 -42 -41 -40 -39 -38 -37 -36 -35 -34 -33 -32 -31 -30 -29 -28 -27 -26 -25 11 11 11 11 11 11 11 11 11 11 11 11 11 11 11 11 11 11 11 11 11 11 11 11 11 11 Ab.Returns (%) -0.6707 -0.7126 -0.3520 1.2933 0.4083 0.5789 -0.1783 0.2902 -0.2828 -0.0888 -1.2337 0.9558 1.3105 0.3883 0.5861 0.9133 * 0.5150 0.6601 -0.8385 -0.9278 0.2760 0.1119 1.1749 0.9230 0.2247 -0.3398 Non-rumoured Targets Ab.Volume 0.9544 0.4839 1.1001 1.4454 1.4842 0.6795 0.9974 1.9460 0.1589 1.2125 1.0849 2.1577 1.2170 0.2806 0.3889 0.7484 1.4024 0.9700 2.1953 0.4721 0.8150 1.2048 0.4829 1.4286 0.4968 0.1516 Obs 28 28 28 28 28 28 28 28 28 28 28 28 28 28 28 28 28 28 28 28 28 28 28 28 28 28 *** ** * * *** * * *** ** * Ab.Returns (%) -0.1899 -0.5051 1.7574 * 1.2360 ** 0.3923 -0.2920 0.1691 -0.3815 0.1124 0.6884 -0.5001 0.3389 1.2258 0.7723 -0.3330 0.8531 0.5366 0.2669 -0.5951 -1.0083 0.1776 0.4248 0.2847 0.0732 0.5301 0.2312 Ab.Volume 0.0818 0.6550 0.6703 1.2158 1.6368 1.8190 0.7260 0.9927 1.0340 2.8682 0.2766 0.5691 0.9398 0.4350 1.3292 0.2732 0.5867 0.5665 0.5854 -0.2054 0.5647 1.0713 1.0804 0.2565 0.6202 -0.0694 ** * * ** ** The corresponding two-tail t-test, (***), (**), (*) indicate significance at 1%, 5%, and 10% levels, respectively 36 Rumoured Targets Day Obs -24 -23 -22 -21 -20 -19 -18 -17 -16 -15 -14 -13 -12 -11 -10 -9 -8 -7 -6 -5 -4 -3 -2 -1 11 11 11 11 11 11 11 11 11 11 11 11 11 11 11 11 11 11 11 11 11 11 11 11 11 11 11 11 11 11 Ab.Returns (%) 0.5423 0.8538 1.4784 1.4234 0.7948 0.1020 1.7657 0.1404 0.3755 1.9700 0.7995 2.1715 1.0834 0.7536 0.2789 0.4170 0.2481 0.1399 0.6532 1.4570 0.6992 0.6733 1.5418 2.7107 0.1591 0.7073 0.6912 0.0280 2.0008 1.5503 *** * *** * ** ** Non-rumoured Targets Ab.Volume 0.2017 0.6985 0.1311 0.0589 0.8386 0.4539 0.5113 0.0620 0.0473 0.7312 0.1205 0.1837 0.1038 0.0141 0.0117 0.0927 0.2427 0.6669 0.8427 0.0328 1.2798 1.3196 3.1976 0.5272 1.1235 1.3623 3.2428 7.0725 6.2037 14.9252 Obs * * ** * 28 28 28 28 28 28 28 28 28 28 28 28 28 28 28 28 28 28 28 28 28 28 28 28 28 28 28 28 28 28 Ab.Returns (%) -0.2440 0.3635 -0.1900 0.8783 0.8664 -0.2376 0.5369 0.1741 0.0281 -0.1687 0.3311 -0.6058 1.0024 0.4575 0.8697 -0.2558 1.5318 -0.3972 0.0828 0.1532 0.1447 0.4373 -0.9443 0.1427 0.1091 0.5050 -1.3480 0.8513 -0.4759 0.3659 Ab.Volume ** ** * ** 0.2473 1.1077 0.2647 0.0076 0.4042 0.6158 -0.2403 -0.0380 0.0833 -0.2896 -0.0213 -0.3071 0.5735 0.1085 0.1567 0.1773 0.4610 0.4008 0.0191 0.3275 0.0266 0.2746 2.6830 0.9149 3.3550 6.7078 2.7054 2.5002 2.5323 1.7872 The corresponding two-tail t-test, (***), (**), (*) indicate significance at 1%, 5%, and 10% levels, respectively 37 * ** * * By classifying rumours and non-rumours in announcement sample, it can be seen that abnormal trading volume in rumoured target is positive and statistically significant higher than non-rumoured target In term of abnormal returns, target firms which have rumours are less negative returns than target firms not have rumours In the period day (-50) to (-25), highly abnormal volume for rumoured targets present strong positive and significantly statistic between day (-48) and day (-39) Meanwhile, nonrumoured targets in abnormal volume with positive and significant solely appears sparsely and the gap among significant days are relative far On the other hand, trading volume in rumoured target illustrates a positive trend, while non-rumoured target about trading volume is not clear However, most of abnormal returns in the period in both rumoured- and nonrumoured target are insignificant Liquidity traders which are found and discussed from Figure and Figure may a reason why highly abnormal trading volume leads to the price movement slightly, meaning that the price is near the equilibrium point While abnormal trading volume illustrates positive, but insignificant for rumoured target, abnormal returns present strong positive and significantly statistical in day (-24) till post-event day Nevertheless, for non-rumoured target firms, all abnormal trading volume remain insignificant with mixture between positive and negative Especially, abnormal returns both rumoured-targets and non-rumoured targets are more positive and statistically significant than in the prior period [-50; -25] It is able to explain by noise trades that it has abnormal returns though abnormal trading volume is insignificant Finally, the findings from Table provides explanation clearly that highly abnormal trading volume creates price movement caused by takeover rumours in the pre-announcement day When takeover rumours begin, it creates increasing in abnormal trading volume Meanwhile, liquidity trader appearances lead to lagged returns Until rumours are died, noise traders made highly abnormal returns though abnormal trading volumes not happen The brief summary of the findings indicates that most of the sellers are liquidity traders and noise traders, in term of sell-side trading in HOSE market With regardless of liquidity traders, sellers may be affected by speculators or insider trading For a reason, the carry less information from speculators and insider trading leads to sellers trade their stock Noise traders can explain following these reasons The first reason is that they think their stocks are overvalued which rumours push increasing stock price Although takeover rumours are good news in the market, noise traders overreact and sell their stock because of overconfidence However, there are 230 rumours (about 63.8%) materialized into takeover announcements, and only 90 rumours (25%) turn out to be false It is obviously that sellers 38 who trade their stocks lose money in the period beginning takeover rumours to M&A announcement By using serial correlation tests, Avramov, Chordia, & Goyal (2006) investigated sell traders who are herding traders (uninformed traders) and contrarian traders (informed traders) from takeover rumours It illustrated that herding traders increase volatility, while contrarian traders decrease volatility Moreover, they showed that when the stock price decreases, herding (sell) traders lead to an increase in volatility Then when the stock price increases, contrarian traders decrease volatility 39 CHAPTER 6: CONCLUSION In this study, trading activities of target stocks are investigated on HOSE in the preannouncement day using intraday data The findings are found that highly abnormal trading volume illustrated by the pre-announcement beginning with the day (-48) will lead to an increase in abnormal returns for target firms The rise in both abnormal trading volume and abnormal returns are able to denote information leakage or insider trading By using matched firm controlling for industry and size together with the differences-in-differences method, the increase in trading volume is significant around day (-48) to day (-25), but price movements rise slightly with lagged returns of about ten trading days Thereforee, the curiosity about the heavy trading with takeover information does not affect the price immediately With regard to buy-side and sell-side initiated trading, the abnormal trading in both cases rises dramatically, which precedes the significant price movement before the announcement day It is interesting that the sign of the trading imbalance between buy active and sell active is negative and significant statistically It implies that sell-side trading volume is higher than buy-side trading volume in target firms in the pre-announcement Furthermore, transactions in buy-side are easy to predict the motivations, and the sellers who trade their target stock are not conscious about these motivations Not only is takeover information good news for investors, but also M&A announcement gives profits to the buyers who buy target stocks in contrast to the sellers who sell target stocks in the pre-announcement Hence, motivations on sell-side transactions are investigated thoroughly To investigate seller motivations, three possible explanations are used, including liquidity traders following Lee-Ready algorithm approach, noise traders, and rational traders following money-losing through buy-and-hold abnormal returns within 70-day investment period The sellers who trade their stocks before the announcement day belong to the mixture of liquidity traders and noise traders It is indicated through the decreasing spread and increasing depth for liquidity traders and significant negative value of buy-and-hold abnormal returns Returns of rumoured firms except large firms are calculated for all years and for only hot years Moreover, the gap of times between takeover rumours is taken into account to examine the changes in sellers’ reactions The findings of buy-and-hold abnormal returns are significantly negative Generally, both liquidity traders and noise traders lose their money since 63,8% takeover rumours are materialized 40 Especially, the relationship trading in the pre-announcement and rumours is examined by identified M&A sample data consisting of rumour and non-rumour targets The findings show that trading volume in rumour targets is higher and more significant than in non-rumour targets before the announcement day Moreover, the increase in the abnormal volume in target rumours and abnormal returns is possible but insignificant However, compared to nonrumour targets, abnormal returns and abnormal volume in rumour targets are more distinct The market overreacts to rumours, supporting the liquidity and noise trading on rumour explanations According the findings, the trading activities are illustrated When rumours begin, liquidity traders (sell) trade their stocks because of an increase in trading volume and a decrease in the bid-ask spread Then, it leads to the very high price run-ups and the slight rise in trading volume Noise traders (sell) trade with their overconfidence that the price is overvalued In consequence, the liquidity trading and noise trading on takeover rumour explanations are the possible reason for 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Emerging Markets Finance and Trade, 50(1), 197-209 Zimmerman, A (2006) Mergers and Acquisitions Available at Zimmerman's Research Guide: http://www lexisnexis com/infopro/zimmerman/disp aspx(1687) Zivney, T L., Bertin, W J., & Torabzadeh, K M (1996) Overreaction to takeover speculation The Quarterly Review of Economics and Finance, 36(1), 89-115 47 APPENDIX Table 7: Data Sample Description Data Announcement Sample 542 Deals 134 Firms One deal 6.64% More than one deal 93.36% One deal 26.87% More than one deal 73.13% Takeover Rumours Sample Materialize 63.80% Fail to Materialize 36.20% 360 Rumours 48 49 ... (2016)investigation about investor reaction to mergers and acquisition rumours They showed the evidence against investor rationality according to negative abnormal stock returns over the three months around the. .. M&A environment in Vietnam through stock activations where the market reacts to both certain information (M&A announcements and uncertain information (takeover rumours) With more doubt on the future,... of rumours, and then determine the asset price in the market to confirm that rumours are able to materialize in an actual announcement Although, investors receive common information about events