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CFGE-2: What is new in Mergers and Acquisitions?
EPS-Sensitivity and Merger Deals
1Chinese University of Hong Kong, CEPR and ABFER; 2University of Washington; 3Chinese University of Hong Kong
Announcements of mergers where the target is offered stock very often discuss the impact of the deal on the acquirer’s earnings per share (EPS), especially when the deal is EPS-accretive for the acquirer. In this paper, we document that the acquirer’s EPS-sensitivity affects how deals are structured, the premium that is paid, and the types of deals that are done. We provide evidence that EPS-sensitivity of acquirers is another manifestation of short-termism, driven by institutional investor horizon as well as components of managerial compensation contracts. Our results suggest that the relative popularity of deals financed in cash since early 2000 could be a consequence of acquirers’ EPS-sensitivity and low value-multiple acquirers pursuing high value-multiple targets. EPS-sensitivity is also consistent with the overall pattern of “like-buys-like” that has been documented in the literature for stock deals.
A BIT Goes a Long Way: Bilateral Investment Treaties and Cross-border Mergers
1University of Oregon, United States of America; 2George Washington University; 3University of Utah
We examine whether Bilateral Investment Treaties (BITs), an external governance mechanism, reduce impediments to cross-border mergers by protecting the property rights of foreign acquirers. BITs have a large positive effect on cross-border mergers. The probability and dollar volume of mergers between two given countries more than doubles after the signing of a BIT. The increase is driven by deals flowing from developed economies to developing economies and is concentrated in target countries with medium levels of political risk. The results suggest BITs are effective in encouraging foreign investment, particularly in the developing world.
Listing Gaps, Merger Waves, and the New American Model of Equity Finance
1University of Oklahoma; 2American University, Washington DC
We document that the U.S. economy has experienced over the last 25 years sharply declining numbers of listed firms, excessive volumes of mergers and of private equity investments, and abnormally high aggregate valuations for U.S. listed corporations. We synthesize and empirically analyze these trends and their interconnections and document the recent emergence of a new model of equity finance in the United States. We show that the listing gap identified by Doidge, Karolyi, and Stulz (2017) was caused by an unprecedented merger wave occurring between 1997-2001, which directly reduced the number of listed firms, and by the rise of the private equity industry, which curtailed new listings through IPOs. Our model of equity financing well explains changes in the number of listed U.S. firms before and after the 1997-2001 transition to a new equilibrium. We conclude that this new model of equity finance has yielded net financial and developmental benefits for the U.S. economy, although the merger waves have increased industrial concentration and the privatization of equity finance has almost certainly increased income inequality. We conclude by presenting preliminary evidence that this new model of equity financing is emerging in other developed countries.