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The underperformance of equity‐financed bidders

Author

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  • Ben Lau
  • Alex Proimos

Abstract

Purpose - The purpose of this paper is to investigate bidder and target returns in the time surrounding merger and acquisition (M&A) announcements. Design/methodology/approach - The paper employs parametric and non‐parametric tests and regressions on holding period and abnormal returns to bidder and targets using indicators for equity and mixed financing, hostility, and Fama‐French SMB and HML factors. Findings - The paper provides evidence that the cumulative average abnormal returns to shareholders of bidder companies in equity financed mergers following an M&A announcement are significantly negative. Practical implications - The paper highlights the fiduciary duty of bidder company management and M&A advisory professionals to bidder company shareholders. Originality/value - The paper updates the limited research on hostility and bidder returns in Australian M&A literature by re‐examining the share price performance over various windows and controlling for the Fama‐French factors.

Suggested Citation

  • Ben Lau & Alex Proimos, 2010. "The underperformance of equity‐financed bidders," International Journal of Managerial Finance, Emerald Group Publishing Limited, vol. 6(1), pages 4-23, February.
    • Handle: RePEc:eme:ijmfpp:v:6:y:2010:i:1:p:4-23
    DOI: 10.1108/17439131011015760
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    References listed on IDEAS

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    1. Divesh S. Sharma & Jonathan Ho, 2002. "The Impact of Acquisitions on Operating Performance: Some Australian Evidence," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 29(1‐2), pages 155-200.
    2. Shleifer, Andrei & Vishny, Robert W., 2003. "Stock market driven acquisitions," Journal of Financial Economics, Elsevier, vol. 70(3), pages 295-311, December.
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    4. Divesh S. Sharma & Jonathan Ho, 2002. "The Impact of Acquisitions on Operating Performance: Some Australian Evidence," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 29(1&2), pages 155-200.
    5. Fama, Eugene F & French, Kenneth R, 1996. "Multifactor Explanations of Asset Pricing Anomalies," Journal of Finance, American Finance Association, vol. 51(1), pages 55-84, March.
    6. Fama, Eugene F & French, Kenneth R, 1992. "The Cross-Section of Expected Stock Returns," Journal of Finance, American Finance Association, vol. 47(2), pages 427-465, June.
    7. Clive Gaunt, 2004. "Size and book to market effects and the Fama French three factor asset pricing model: evidence from the Australian stockmarket," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 44(1), pages 27-44, March.
    8. Krishnan Maheswaran & Sean Pinder, 2005. "Australian evidence on the determinants and impact of takeover resistance," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 45(4), pages 613-633, December.
    9. Philip Gharghori & Howard Chan & Robert Faff, 2007. "Are the Fama-French Factors Proxying Default Risk?," Australian Journal of Management, Australian School of Business, vol. 32(2), pages 223-249, December.
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