eThesis - Kauppakorkeakoulun sähköiset gradut

This thesis studies the effects of opinion divergence in takeovers of European publicly listed companies, adding to the literature on the takeover premium, heterogeneous beliefs, and bidder gains. First, I study how differences of opinion about the target company's value affect the takeover premium paid by an acquirer to gain control in the target. Second, I examine the relations between market-wide investor sentiment and firm-specific heterogeneity of beliefs, and between the market-wide sentiment and the takeover premium. In addition, I study how divergence of opinion on a firm's value affects its likelihood of becoming a takeover target, and how the target's opinion divergence affects the expected synergies from successful transactions. Finally, I examine the differences between equity and cash payment transactions in the effect of opinion divergence about the acquiring company's value on the bidder's announcement returns.

The used data set consists of 2,459 takeovers between publicly listed companies from 16 Western European countries during 1987-2011, drawn from the Securities Data Corporation's Platinum Mergers & Acquisitions database. Thomson Financial Datastream, Worldscope and I/B/E/S are used for firm-specific return, fundamental and analyst forecast data. The methodology of the study mainly follows Chatterjee, John and Yan (2012) in target-company related hypotheses, and Moeller, Schlingemann and Stulz (2007) in the case of bidder returns. I principally employ multiple linear regression and probit regression analyses in hypothesis testing. As a proxy for divergence of opinion, I use the idiosyncratic volatility of a firm's stock returns, the dispersion of analysts' earnings per share forecasts, the relative dispersion in the group with the same number of analysts following, and the common factor between the first two variables.

I show that the takeover premium increases with the degree of opinion divergence about the target's value. The effect is robust to different model specifications, and is economically significant as well. A one standard deviation increase in idiosyncratic volatility (analyst dispersion) increases the takeover premium roughly by 8.2pp (8.7pp), ceteris paribus. The results on market-wide sentiment and divergence of opinion are mixed, as I find a negative relation between sentiment and analyst dispersion, but a positive yet insignificant relation between sentiment and idiosyncratic volatility. However, I find a significantly positive relation between the takeover premium and the market-wide sentiment, especially when the sentiment is measured at the acquiring firm's home country. Next, I find some evidence that firm's experiencing higher divergence of opinion are less likely to become takeover targets, although the effect is not as strong as in the US. I also find some, yet weak evidence that the expected synergy from successful takeovers increases with the target's divergence of opinion. Finally, I show that bidder returns are negatively related to the acquirer's idiosyncratic volatility in equity but not in cash payment transactions, and that there is no difference in abnormal returns between cash and equity offers after idiosyncratic volatility has been controlled for.