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Conferences

SESSION VIII-1 : MERGERS & ACQUISITIONS II (21/12/2007 à 16h30)

François Derrien (HEC Paris)

Fire Sales: Revisiting the Market Equilibrium Approach

Auteurs : HOMBERT Johan (Ensae) Email : hombert@ensae.fr

Intervenants : HOMBERT Johan (Ensae)

Rapporteurs : PLAKSEN Evgeny (Swiss Finance Institute)

I explore the impact of fire sales on welfare. Because they allocate assets according to
financial muscle rather than real efficiency, they are usually seen as socially costly.
Though I show the following irrelevance result : When firms are cashless and use industry-
specific assets, the competitive equilibrium exhibits fire sales and though is socially
optimal. By contrast, when cash-rich outsiders can acquire assets in the industry, firms
hoard less liquidity and the asset resale price is lower than in the social optimum. Although
too many assets are reallocated from efficient cash-poor firms towards inefficient cash-
rich firms, restricting such asset transactions (for example with anti-takeover laws) makes
a bad situation worse.

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Value of your Advisor’s Advice

Auteurs : PLAKSEN Evgeny (Swiss Finance Institute) E-mail : plaksen@isb.uzh.ch

Intervenants : PLAKSEN Evgeny (Swiss Finance Institute)

Rapporteurs : SURET Jean-Marc (Université de Laval)

This empirical paper addresses the issue of the quality of financial advice given by
investment banks regarding firms’ acquisition activities. Motivated by anecdotal and
documented evidence on the cases of ”fee generating” motives in advisory business,
the hypothesis of the paper is whether the better established contacts of investment
bankers with firm’s executives can boost the phenomenon of ”chasing deals” and lead
to a larger number of value destroying acquisitions. We investigate whether closer
contacts between investment bankers and corporate management encourage the firm
to perform acquisitions characterized with lower abnormal returns. In this paper, the
event establishing close ties between advisors and executives is taking the firm public,
i.e. the conjecture is that those banks, who have underwritten company’s IPO issue,
have preferential access to its corporate executives, in that the bankers can easily
identify and pitch potential takeover targets deliberately and insistently. If the ”fee
generating” hypothesis is true, we expect the abnormal returns at acquisitions to be
lower for firms that went public with banks actively advising on M&A. In contrast,
whenever a firm goes public with an IPO-specialized bank, which does not seek fees
from extra M&A advisory, we expect this firm to have higher announcement returns at
acquisitions. The results suggest that there is indeed a negative relation between the
engagement of the underwriter in advisory business and stock performance at acquisitions.
The results stay robust when controlling for possible endogeneity of strategic choice of the
investment banker for IPO.

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Cosmetic Mergers: The Effect of Style Investing on the Market for Corporate Control

Auteurs : ZHANG Lei & MASSA Massimo(Insead) Email : massimo.massa@insead.edu

Intervenants : ZHANG Lei (Insead)

Rapporteurs : THESMAR David (HEC Paris)

We study the impact of style investing on the market for corporate control. We argue that
a firm may choose to boost its market value by merging with a firm that belongs to a style
that is more favored by the market. By using data on the flows in mutual funds, we construct
a measure of neglectedness, which relies directly on the identification of sentiment-induced
investor demand, rather than being a direct transformation of stock market data. We show
that bidders tend to pair with targets that are relatively less neglected. The merger with a less
neglected target generates a halo effect from the target to the bidder that induces the market
to evaluate the assets of the more neglected bidder at the (inflated) market value of the less
neglected target. Both bidder and target premia are positively related to the difference in
neglectedness between bidder and target. However, the target’s ability to appropriate the gain
is reduced by the fact that its bargaining position is weaker when the bidder’s potential for asset
appreciation is higher. We document a better medium-term performance of more neglected firms
taking over less neglected firms. The bidder managers engaging in these cosmetic mergers take
advantage of the window of opportunity created by the higher stock price induced by the M&A
deal to reduce their stake in the firm under convenient conditions.

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