IDEAS home Printed from https://ideas.repec.org/a/eee/bracre/v56y2024i6s0890838923001336.html
   My bibliography  Save this article

Exploring the acquisition behavior of penny stock firms

Author

Listed:
  • Liu, Shujie
  • Sualihu, Mohammed Aminu
  • Sun, Mingwei
  • Yawson, Alfred

Abstract

We document that penny stock firms' acquisition likelihood increases with firm size, sales growth, free cash flow, stock price volatility, and run-up, but decreases with leverage, the number of years since IPO, and Tobin's Q. These findings are validated in a stepwise regression framework and are robust to alternative model specifications. Penny stock acquirers prefer public targets and are more (less) likely to use stocks (cash) as the payment method. We also find that acquisitions announcement returns are higher for penny stock firms than for non-penny stock firms, even after accounting for firm- and deal-characteristics. Further analyses indicate that the increase in announcement returns is driven by the firm's improved information environment. Overall, we document that penny stock firms are significant players in the market for corporate control.

Suggested Citation

  • Liu, Shujie & Sualihu, Mohammed Aminu & Sun, Mingwei & Yawson, Alfred, 2024. "Exploring the acquisition behavior of penny stock firms," The British Accounting Review, Elsevier, vol. 56(6).
    • Handle: RePEc:eee:bracre:v:56:y:2024:i:6:s0890838923001336
    DOI: 10.1016/j.bar.2023.101276
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0890838923001336
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.bar.2023.101276?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to

    for a different version of it.

    References listed on IDEAS

    as
    1. Shleifer, Andrei & Vishny, Robert W., 1989. "Management entrenchment : The case of manager-specific investments," Journal of Financial Economics, Elsevier, vol. 25(1), pages 123-139, November.
    2. Paul A. Gompers & Andrew Metrick, 2001. "Institutional Investors and Equity Prices," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 116(1), pages 229-259.
    3. Hainmueller, Jens, 2012. "Entropy Balancing for Causal Effects: A Multivariate Reweighting Method to Produce Balanced Samples in Observational Studies," Political Analysis, Cambridge University Press, vol. 20(1), pages 25-46, January.
    4. Michael C. Jensen, 2010. "The Modern Industrial Revolution, Exit, and the Failure of Internal Control Systems," Journal of Applied Corporate Finance, Morgan Stanley, vol. 22(1), pages 43-58, January.
    5. Morck, Randall & Shleifer, Andrei & Vishny, Robert W, 1990. "Do Managerial Objectives Drive Bad Acquisitions?," Journal of Finance, American Finance Association, vol. 45(1), pages 31-48, March.
    6. Malcolm Baker & Jeffrey Wurgler, 2006. "Investor Sentiment and the Cross‐Section of Stock Returns," Journal of Finance, American Finance Association, vol. 61(4), pages 1645-1680, August.
    7. Gentry, Matthew & Stroup, Caleb, 2019. "Entry and competition in takeover auctions," Journal of Financial Economics, Elsevier, vol. 132(2), pages 298-324.
    8. Stulz, ReneM., 1990. "Managerial discretion and optimal financing policies," Journal of Financial Economics, Elsevier, vol. 26(1), pages 3-27, July.
    9. Vojislav Maksimovic & Gordon M. Phillips, 2013. "Conglomerate Firms, Internal Capital Markets, and the Theory of the Firm," Annual Review of Financial Economics, Annual Reviews, vol. 5(1), pages 225-244, November.
    10. To, Thomas Y. & Navone, Marco & Wu, Eliza, 2018. "Analyst coverage and the quality of corporate investment decisions," Journal of Corporate Finance, Elsevier, vol. 51(C), pages 164-181.
    11. Rosati, Pierangelo & Cummins, Mark & Deeney, Peter & Gogolin, Fabian & van der Werff, Lisa & Lynn, Theo, 2017. "The effect of data breach announcements beyond the stock price: Empirical evidence on market activity," International Review of Financial Analysis, Elsevier, vol. 49(C), pages 146-154.
    12. Wei Huang & George J. Jiang, 2020. "Big Fish in a Small Pond: Institutional Trading of Penny Stocks," Quarterly Journal of Finance (QJF), World Scientific Publishing Co. Pte. Ltd., vol. 10(02), pages 1-31, June.
    13. Ming Dong & David Hirshleifer & Scott Richardson & Siew Hong Teoh, 2006. "Does Investor Misvaluation Drive the Takeover Market?," Journal of Finance, American Finance Association, vol. 61(2), pages 725-762, April.
    14. Jensen, Michael C, 1986. "Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers," American Economic Review, American Economic Association, vol. 76(2), pages 323-329, May.
    15. Malatesta, Paul H., 1983. "The wealth effect of merger activity and the objective functions of merging firms," Journal of Financial Economics, Elsevier, vol. 11(1-4), pages 155-181, April.
    16. Shleifer, Andrei & Vishny, Robert W., 2003. "Stock market driven acquisitions," Journal of Financial Economics, Elsevier, vol. 70(3), pages 295-311, December.
    17. Michael Gort, 1969. "An Economic Disturbance Theory of Mergers," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 83(4), pages 624-642.
    18. Brian J. Bushee & John E. Core & Wayne Guay & Sophia J.W. Hamm, 2010. "The Role of the Business Press as an Information Intermediary," Journal of Accounting Research, Wiley Blackwell, vol. 48(1), pages 1-19, March.
    19. Samitas, Aristeidis G. & Kenourgios, Dimitris F., 2005. "Entrepreneurship, small and medium size business markets and European economic integration," Journal of Policy Modeling, Elsevier, vol. 27(3), pages 363-374, April.
    20. B. Espen Eckbo, 2014. "Corporate Takeovers and Economic Efficiency," Annual Review of Financial Economics, Annual Reviews, vol. 6(1), pages 51-74, December.
    21. Myers, Stewart C. & Majluf, Nicholas S., 1984. "Corporate financing and investment decisions when firms have information that investors do not have," Journal of Financial Economics, Elsevier, vol. 13(2), pages 187-221, June.
    22. Berkovitch, Elazar & Narayanan, M. P., 1993. "Motives for Takeovers: An Empirical Investigation," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 28(3), pages 347-362, September.
    23. Micah S. Officer & Annette B. Poulsen & Mike Stegemoller, 2009. "Target-firm information asymmetry and acquirer returns," Review of Finance, European Finance Association, vol. 13(3), pages 467-493.
    24. Eckbo, B. Espen & Makaew, Tanakorn & Thorburn, Karin S., 2018. "Are stock-financed takeovers opportunistic?," Journal of Financial Economics, Elsevier, vol. 128(3), pages 443-465.
    25. Rhodes-Kropf, Matthew & Robinson, David T. & Viswanathan, S., 2005. "Valuation waves and merger activity: The empirical evidence," Journal of Financial Economics, Elsevier, vol. 77(3), pages 561-603, September.
    26. Cocco, João F. & Volpin, Paolo F., 2013. "Corporate Pension Plans as Takeover Deterrents," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 48(4), pages 1119-1144, August.
    27. Ronan G. Powell, 1997. "Modelling Takeover Likelihood," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 24(7‐8), pages 1009-1030, September.
    28. Lynn Hodgkinson & Graham H. Partington, 2008. "The Motivation for Takeovers in the UK," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 35(1‐2), pages 102-126, January.
    29. Heckman, James J, 1978. "Dummy Endogenous Variables in a Simultaneous Equation System," Econometrica, Econometric Society, vol. 46(4), pages 931-959, July.
    30. Sualihu, Mohammed Aminu & Yawson, Alfred & Yusoff, Iliyas, 2021. "Do analysts’' forecast properties deter suboptimal labor investment decisions? Evidence from Regulation Fair Disclosure," Journal of Corporate Finance, Elsevier, vol. 69(C).
    31. Mitchell, Mark L. & Mulherin, J. Harold, 1996. "The impact of industry shocks on takeover and restructuring activity," Journal of Financial Economics, Elsevier, vol. 41(2), pages 193-229, June.
    32. Ghosh, Aloke & Jain, Prem C., 2000. "Financial leverage changes associated with corporate mergers," Journal of Corporate Finance, Elsevier, vol. 6(4), pages 377-402, December.
    33. Sayan Chatterjee, 1986. "Types of synergy and economic value: The impact of acquisitions on merging and rival firms," Strategic Management Journal, Wiley Blackwell, vol. 7(2), pages 119-139, March.
    34. Yakov Amihud & Baruch Lev, 1981. "Risk Reduction as a Managerial Motive for Conglomerate Mergers," Bell Journal of Economics, The RAND Corporation, vol. 12(2), pages 605-617, Autumn.
    35. Eckbo, B Espen & Giammarino, Ronald M & Heinkel, Robert L, 1990. "Asymmetric Information and the Medium of Exchange in Takeovers: Theory and Tests," The Review of Financial Studies, Society for Financial Studies, vol. 3(4), pages 651-675.
    36. Paul Barnes, 1998. "Why Do Bidders Do Badly Out of Mergers? Some UK Evidence," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 25(5‐6), pages 571-594, June.
    37. Vermaelen, Theo & Xu, Moqi, 2014. "Acquisition finance and market timing," Journal of Corporate Finance, Elsevier, vol. 25(C), pages 73-91.
    38. Asli M. Arikan & René M. Stulz, 2016. "Corporate Acquisitions, Diversification, and the Firm's Life Cycle," Journal of Finance, American Finance Association, vol. 71(1), pages 139-194, February.
    39. Moeller, Sara B. & Schlingemann, Frederik P. & Stulz, Rene M., 2004. "Firm size and the gains from acquisitions," Journal of Financial Economics, Elsevier, vol. 73(2), pages 201-228, August.
    40. Harford, Jarrad & Humphery-Jenner, Mark & Powell, Ronan, 2012. "The sources of value destruction in acquisitions by entrenched managers," Journal of Financial Economics, Elsevier, vol. 106(2), pages 247-261.
    41. Ronald W. Masulis & Cong Wang & Fei Xie, 2007. "Corporate Governance and Acquirer Returns," Journal of Finance, American Finance Association, vol. 62(4), pages 1851-1889, August.
    42. Travlos, Nickolaos G, 1987. "Corporate Takeover Bids, Methods of Payment, and Bidding Firms' Stock Returns," Journal of Finance, American Finance Association, vol. 42(4), pages 943-963, September.
    43. Alexandridis, George & Hoepner, Andreas G.F. & Huang, Zhenyi & Oikonomou, Ioannis, 2022. "Corporate social responsibility culture and international M&As," The British Accounting Review, Elsevier, vol. 54(1).
    44. Roll, Richard, 1986. "The Hubris Hypothesis of Corporate Takeovers," The Journal of Business, University of Chicago Press, vol. 59(2), pages 197-216, April.
    45. Cécile Carpentier & Jean-Marc Suret, 2011. "The survival and success of Canadian penny stock IPOs," Small Business Economics, Springer, vol. 36(1), pages 101-121, January.
    46. repec:bla:jfinan:v:53:y:1998:i:2:p:773-784 is not listed on IDEAS
    47. Wilde, Joachim, 2000. "Identification of multiple equation probit models with endogenous dummy regressors," Economics Letters, Elsevier, vol. 69(3), pages 309-312, December.
    48. Kristine Watson Hankins & Mark J. Flannery & M. Nimalendran, 2008. "The Effect of Fiduciary Standards on Institutions' Preference for Dividend‐Paying Stocks," Financial Management, Financial Management Association International, vol. 37(4), pages 647-671, December.
    49. Maryjane R. Rabier, 2017. "Acquisition Motives and the Distribution of Acquisition Performance," Strategic Management Journal, Wiley Blackwell, vol. 38(13), pages 2666-2681, December.
    50. Malmendier, Ulrike & Opp, Marcus M. & Saidi, Farzad, 2016. "Target revaluation after failed takeover attempts: Cash versus stock," Journal of Financial Economics, Elsevier, vol. 119(1), pages 92-106.
    51. Lynn Hodgkinson & Graham H. Partington, 2008. "The Motivation for Takeovers in the UK," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 35(1-2), pages 102-126.
    52. Kathleen Fuller & Jeffry Netter & Mike Stegemoller, 2002. "What Do Returns to Acquiring Firms Tell Us? Evidence from Firms That Make Many Acquisitions," Journal of Finance, American Finance Association, vol. 57(4), pages 1763-1793, August.
    53. Palepu, Krishna G., 1986. "Predicting takeover targets : A methodological and empirical analysis," Journal of Accounting and Economics, Elsevier, vol. 8(1), pages 3-35, March.
    54. Healy, Paul M. & Palepu, Krishna G. & Ruback, Richard S., 1992. "Does corporate performance improve after mergers?," Journal of Financial Economics, Elsevier, vol. 31(2), pages 135-175, April.
    55. Alfred Yawson & Huizhong Zhang, 2021. "Central Hub M&A Advisors [Common advisers in mergers and acquisitions: determinants and consequences]," Review of Finance, European Finance Association, vol. 25(6), pages 1817-1857.
    56. Golubov, Andrey & Yawson, Alfred & Zhang, Huizhong, 2015. "Extraordinary acquirers," Journal of Financial Economics, Elsevier, vol. 116(2), pages 314-330.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Andrey Golubov & Dimitris Petmezas & Nickolaos G. Travlos, 2013. "Empirical mergers and acquisitions research: a review of methods, evidence and managerial implications," Chapters, in: Adrian R. Bell & Chris Brooks & Marcel Prokopczuk (ed.), Handbook of Research Methods and Applications in Empirical Finance, chapter 12, pages 287-313, Edward Elgar Publishing.
    2. Martynova, M. & Renneboog, L.D.R., 2005. "Takeover Waves : Triggers, Performance and Motives," Discussion Paper 2005-107, Tilburg University, Center for Economic Research.
    3. Martynova, Marina & Renneboog, Luc, 2008. "A century of corporate takeovers: What have we learned and where do we stand?," Journal of Banking & Finance, Elsevier, vol. 32(10), pages 2148-2177, October.
    4. Martynova, M., 2006. "The market for corporate control and corporate governance regulation in Europe," Other publications TiSEM 8651e281-4914-41f2-ac14-1, Tilburg University, School of Economics and Management.
    5. An, Suwei, 2023. "Essays on incentive contracts, M&As, and firm risk," Other publications TiSEM dd97d2f5-1c9d-47c5-ba62-f, Tilburg University, School of Economics and Management.
    6. Ma, Qingzhong & Whidbee, David A. & Zhang, Wei, 2019. "Acquirer reference prices and acquisition performance," Journal of Financial Economics, Elsevier, vol. 132(1), pages 175-199.
    7. Bruyland, Evy & Lasfer, Meziane & De Maeseneire, Wouter & Song, Wei, 2019. "The performance of acquisitions by high default risk bidders," Journal of Banking & Finance, Elsevier, vol. 101(C), pages 37-58.
    8. Eckbo, B. Espen, 2009. "Bidding strategies and takeover premiums: A review," Journal of Corporate Finance, Elsevier, vol. 15(1), pages 149-178, February.
    9. Gao, Ning, 2015. "The motives of cash reserve and bidder cash reserve effects," International Review of Financial Analysis, Elsevier, vol. 37(C), pages 73-88.
    10. Gary Gorton & Matthias Kahl & Richard Rosen, 2005. "Eat or Be Eaten: A Theory of Mergers and Merger Waves," NBER Working Papers 11364, National Bureau of Economic Research, Inc.
    11. Basnet, Anup & Davis, Frederick & Walker, Thomas & Zhao, Kun, 2021. "The effect of securities class action lawsuits on mergers and acquisitions," Global Finance Journal, Elsevier, vol. 48(C).
    12. Renneboog, Luc & Vansteenkiste, Cara, 2019. "Failure and success in mergers and acquisitions," Journal of Corporate Finance, Elsevier, vol. 58(C), pages 650-699.
    13. Khatami, Seyed Hossein & Marchica, Maria-Teresa & Mura, Roberto, 2015. "Corporate acquisitions and financial constraints," International Review of Financial Analysis, Elsevier, vol. 40(C), pages 107-121.
    14. Alexandridis, George & Chen, Zhong & Zeng, Yeqin, 2021. "Financial hedging and corporate investment," Journal of Corporate Finance, Elsevier, vol. 67(C).
    15. Huang, Wenxuan & Xu, Weidong & Li, Donghui & Zhao, Ling & Yang, Shijie, 2024. "Does market misvaluation drive cross-border M&As?," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 92(C).
    16. Ovtchinnikov, Alexei V., 2013. "Merger waves following industry deregulation," Journal of Corporate Finance, Elsevier, vol. 21(C), pages 51-76.
    17. Humphery-Jenner, Mark L. & Powell, Ronan G., 2011. "Firm size, takeover profitability, and the effectiveness of the market for corporate control: Does the absence of anti-takeover provisions make a difference?," Journal of Corporate Finance, Elsevier, vol. 17(3), pages 418-437, June.
    18. Bhagat, Sanjai & Dong, Ming & Hirshleifer, David & Noah, Robert, 2005. "Do tender offers create value? New methods and evidence," Journal of Financial Economics, Elsevier, vol. 76(1), pages 3-60, April.
    19. Mario Fischer, 2015. "Challenging the payment effect in bank-financed takeovers," Journal of Management Control: Zeitschrift für Planung und Unternehmenssteuerung, Springer, vol. 26(4), pages 347-376, October.
    20. Bhabra, Harjeet S. & Huang, Jiayin, 2013. "An empirical investigation of mergers and acquisitions by Chinese listed companies, 1997–2007," Journal of Multinational Financial Management, Elsevier, vol. 23(3), pages 186-207.

    More about this item

    Keywords

    ;
    ;
    ;
    ;
    ;

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:bracre:v:56:y:2024:i:6:s0890838923001336. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: https://www.journals.elsevier.com/the-british-accounting-review .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.