The Behaviour of Announcement Period Returns of Bidders and Targets Involved in Takeovers and Mergers in the U.K. for the Period 1985 to July 1988

This study examines the behaviour of announcement period returns of bidders and targets involved in takeovers and mergers in the U.K. during the period 1985 to July 1988. In particular it examined the following aspects: (1) The validity of the 'information hypothesis' as suggested by Myers and Majluf (1984) on bidder returns in cash and share offers. (2) Comparison of announcement period returns to target shareholders in cash offers and those in share offers, in view of the presence of capital gains tax liability for shareholders in cash offers and the possibility that the bidders compensate them for this liability. (3) The effect of the takeover announcement on the returns to bidders and targets respectively. (4) The effect of takeover announcements on the wealth of shareholders in the combined firm. (5) The possibility that shareholders in high leveraged bidding firms earn higher returns than those in the low leveraged bidding firms. (6) The effect of merger announcement on the returns to bidders and targets respectively. (7) The effect of merger announcement on the wealth of shareholders in the combined firm. A sample of 90 bidders and targets in hostile bids and 21 bidders and targets in mergers which satisfied the sampling requirements were collected for the period January 1985 to July 1988. The market model was used to generate expected returns. The daily abnormal returns and cumulative abnormal returns for the two-day announcement period were used to measure the wealth effect of takeover and merger announcement. For takeovers, the findings of this study show that shareholders of share bidders earned significant negative abnormal returns for the two-day announcement period, whereas shareholders of cash bidders did not suffer losses, in support of the 'information hypothesis' suggested by Myers and Majluf (1984). The two-day announcement cumulative abnormal returns of all bidders in the takeover sample are significantly negative, in support of the notion that takeovers are negative net present value investments for bidder shareholders. However, the combined gains of bidders and targets are significantly positive implying that takeovers do create wealth for the shareholders of the combined firm. Shareholders of target firms in takeovers earned significant positive abnormal returns for the two-day announcement period irrespective of the form of payment (cash, shares, and combination) offered. However, there was no significant difference in the two-day announcement period returns of cash and share targets, in support of the notion that target shareholders in cash offers are not compensated for their capital gains tax liability. There is no evidence of shareholders in high leveraged bidding firms earning higher returns than those in the low leveraged bidding firms. For the sample of mergers, the two-day announcement period returns were positive for the targets, consistent with the findings of the earlier studies on merger targets in the U.K. and the US. The returns to bidders for the same period were not significantly different from zero. The combined gains at the two-day announcement period were significantly positive implying that the announcement of mergers does have a positive wealth effect on the share price of the combined firm. This contrasts with the findings of earlier studies which suggest that the combined gains in U.K. mergers are not significantly different from zero (Firth (1979)). This research was based on the assumption that the capital market is at least semistrong efficient. Since the analysis covered only eleven days surrounding the official announcement, it is not possible to infer that the findings of this study support this assumption. However, the significant positive combined gains of bidders and targets in both takeovers and mergers at the two-day announcement period imply that the securities market is strong form inefficient

Auditor Change During Listings: Effect On IPO Premiums

The study investigates the relationship between auditing services provided to 213 listed firms over a period from 1996 to 2000 by reputable (or tier 1) and non-reputable (non-tier 1) audit firms and the initial returns at listing. We use market adjusted initial return to reflect the firm’s choice of auditor during the initial public offering (IPO’s). The findings show that there is an inclination for listed firms to engage tier 1 audit firms, probably due to management’s intention of signal the firm’s favorable private information and credibility and integrity of reported financial information and ultimately increasing their chances of getting listed. The findings alos show that there is no significant difference in the initial returns of IPO’s firms irrespective of the reputation of auditors. However, there is a significant difference in the initial return of main and second board firms at listing whether firms are either audited by Tier 1 or non-Tier 1 audit firms. Firms that had upward switch showed higher returns, inconsistent with the auditor reputation hypothesis. This results, however, could be biased by the large number of new firms that did not switch auditors at listing, probably due to lack of time to make changes before listing, and/or have engaged tier 1 auditors at incorporation in anticipation of listing. However, the findings showed significant higher returns for second board firms relative to main board firms. These results do not support the widely held view that firms that seek listing do switch auditors prior to their listing for positive market signalling. The results indicate that auditor’s reputation is not an important determinant of the IPO’s initial return

Price Changes and Trading Volume Relationship: Some Preliminary Evidence from the Kuala Lumpur Stock Exchange

This study provides evidence regarding the relationship between price changes and volume of trading of firms listed on the KLSE. Absolute price changes were found to have a strong relationship with trading volume compared to price changes. Transaction volume associated with a price upturn was, on the average, larger than the transaction volume associated with a price downturn which probably explained the positive correlation between price changes and trading volume. Causality tests indicated that price changes cause volume changes but not vice versa. The interaction test showed that large transaction volume coupled with an increasing trend in price will further gather momentum and result in a further increase in price. This fll1ding, however, does not suggest that the KLSE is weak-form inefficient which provides an opportunity to investors to devise strategies as there is evidence that the KLSE is weak-form efficient and pockets of inefficiencies observed are not economically viable. The findings defy the basic tenet of technical analysis that past price volume data can be consistently used to design profitable investment strategies

The Performance and Signalling Process of Initial Public Offers in Malaysia: 1980-1996

Malaysian IPOs are, on average, substantially underpriced compared to underpricing in other emerging and developed market. The findings of this study suggest that this average abnormal return on the first trading day is 135 percent, after which the returns decline slightly in the first week and gradually increase thereafter. A test on possible signalling attributes of new issues to potential investors reveal that of all the suggested determinants, the ex-ante risk factor seems to explain the level of underpricing

Factors Associated with Stock Price Volatility and Evaluation of Gordon's Share Valuation Model on the Kuala Lumpur Stock Exchange

The worldwide increase in share price volatility in recent years has stimulated an abundance of research in an effort to understand individual share price volatility in international markets. The objectives of this study are: (i) to isolate factors suggested by investment theories and practices and to observe their ability to jointly explain share price volatility on the developing Kuala Lumpur Stock Exchange (KLSE) and (ii) to evaluate the applicability of Gordon's share valuation model on the KLSE. The findings suggest that five of the six suggested variables jointly explain 23 per cent of price changes on the KLSE for the period 1975 to 1990, and two of these factors were significant at 5 per cent level. Gordon's model holds well with F-statistics significant at 5 per cent level, R-squared is 70 per cent, and the signs of the coefficient of dividend and earnings growth variables are in the predicted direction. Contrary to popular belief, fundamental factors appear to be a significant force influencing share price changes on the KLSE

Governance structure and external audit price: evidence from an emerging economy

This study provides new evidence on the relationship between external audit price and corporate governance of the largest (based on market capitalization) 100 listed firms on both the main and second board of the Bursa Malaysia (BMB) (previously known as the Kuala Lumpur Stock Exchange). The findings show that for main board companies, external audit price is positively and significantly associated with corporate size, complexity and internal governance variable (i.e. director’s remuneration). For the second board firms, complexity, corporate size and internal governance variables (i.e. proportion of non-executive directors to total directors) were important determinants of external audit pricing. External audit price had a significant negative relationship with individual shareholders ownership for both main and second board companies, and companies’ age for companies listed on the second board

The Stability and Predictability of Betas: Evidence from the Kuala Lumpur Stock Exchange

Beta measures the systematic or undiversifiable risk of a security. Investors desire stable (and hence predictable) measures of beta to enable them to accurately estimate the expected returns on their investment. Instable betas lead to inaccurate estimates of expected returns over time and hence provide misleading signals on performance of investments. This study examines the stability and predictability of the three leads/lags version of FowlerRorke betas (unlike OLS betas, these betas address the problem of thinness of trading peculiar to the KLSE) of 148 firms listed on the Kuala Lumpur Stock Exchange (KLSE). The findings suggest that the beta of both individual securities and portfolios are quite stationary over time. As expected the portfolio betas are relatively more stable than individual securities betas. Furthermore, the method of portfolio formation affects the relative portfolio beta stability. However, portfolio beta stability is achieved with 15 or more securities, irrespective of method of portfolio formation. Overall, the findings indicate that investors can reliably utilize estimated individual security and portfolio betas for their portfolio selection and investment decisions

Shareholders' versus management's interest: A review

Shareholders are basically owners of their corporations who elect corporate directors (who are policy makers) and employed corporate management (who implement corporate policies). In modern businesses, due to the large number and dispersion of shareholders, control is normally vested to professional managers who may pursue actions in their own self-interest rather than those of the shareholders. This paper reviews various ways managers are perceived to deviate from the shareholders' wealth maximisation objective, and the possible methods and constraints involved of aligning management's and shareholders'interest

Audit committee and auditor independence: the bankers' perception

This paper examines the perception of bankers on contribution of audit committees towards external auditor independence in public listed companies. All Malaysian public listed companies are required to establish an audit committee as a measure to improve on the internal control mechanism that can help improve the corporate governance practices of firms. Postal questionnaires and interview surveys were used to solicit the perception and views of loan officers. The majority of the respondents believe that auditor independence is preserved with the presence of an actively functioning audit committee. This implies favourably on the corporate governance reforms initiated by the government after the 1998 financial crisis

Returns to Bidding and Target Finns in Hostile Takeovers: Some UK Evidence

This paper explores the returns to bidding and target firms in hostile takeovers and their combined wealth effects on the announcement of the offer in the UK. The findings reveal that bidder firms earn negative and significant abnormal returns, whereas target firms earn positive and significant abnormal returns. The gains to target firms more than compensate the losses suffered lry bidders as the combined gains are positive and significant. These findings are consistent with those documented in the US. The positive and significant combined gains imply that takeovers are wealth-creating investments, which is consistent with the notion that managers pursue takeovers to maximise wealth rather than size of theirfirm