eThesis - School of Business electronic theses

PURPOSE OF THIS STUDY This study examines how the intensity of product market competition and the number of antitakeover provisions (ATPs) in corporate charter together affect acquirer shareholders' announcement abnormal returns (CAR). Previous studies have found evidence that companies which face only weak product market competition and have several ATPs are more likely to have higher agency costs between company's management and its shareholders. The first objective of this thesis is to test whether the weak product market competition and numerous ATPs together have a negative effect on acquirer shareholders' wealth. The interaction is tested more thoroughly than in previous studies by using different variable combinations. The second objective of this paper is to examine the development of management's performance by investigating successive deals. Previous interaction studies have not been set to serial acquisition context.

DATA AND METHODOLOGY The sample covers 4,042 acquisitions made by public U.S companies from 1990 to 2008. Deal data is retrieved from TFSD Mergers and Acquisitions database. To be included in the sample, an acquisition must be completed, and the transaction value must be at least $1 million and 1% of acquirer's market value. Acquiring company needs to have trading data from 210 days before the transaction in CRSP database and CEO information must be found from Compustat Execucomp database. The number of ATPs is measured with G-index, and therefore the company must be included to IRRC database. The intensity of product market competition is measured with Herfindahl Hirschman index (HHI) which is calculated to 49 Fama-French industries for each year. HHI is a sum of squared market shares. Event study methodology is applied in this thesis, and announcements' effect on shareholders' wealth is measured over 5-day event window (CAR(-2,+2)). OLS regression analysis is used as the main method.

RESULTS The evidence shows that companies with several ATPs have lower abnormal announcement returns (-0.25%) than companies with less ATPs if these companies operate in competitive markets. These companies don't manage to win consecutive acquisitions as often as their comparison groups. The average CAR of their first acquisitions are negative (-0.56%) suggesting that the agency costs between management and shareholders are notable already in the beginning of the acquisition series. Still, deal orders' effect on CARs is positive, which is an indication of learning. On the other hand, the overall performance of those acquirers that have positive CARs in their first deals is poorer than average, which implies hubris development. The findings of the CEO characteristics examination provide more evidence supporting agency based than hubris based explanations for negative average CAR. All in all, the evidence suggests that several, even opposite, performance development trends coexist in the sample, and the CARs can be explained with hubris, learning and empire building.