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SESSION I-1 : MERGERS & ACQUISITIONS (18/12/2008 à 09h00)

Patrice Fontaine

Why Do Firms Pay Cash in Acquisitions? Evidence from a Catering Perspective

Auteurs : ZHANG Lei (INSEAD)

Intervenants : ZHANG Lei (INSEAD)

We study the means of payment in acquisitions from a catering perspective. We argue that the decision to pay cash in acquisitions is affected by the prevailing investor preferences for cash dividends. We define a measure of investor cash preferences by exploring the informational value of mutual fund flows. We call it cash popularity. We find that one standard deviation increase in cash popularity increases the probability of using cash as means of payment from 38% to 53%. The target’s bargaining position becomes weakened in cash mergers when cash popularity in the market is high. It is especially true for those targets with higher idiosyncratic volatility which is due to further deterioration in bargaining power over the bidder. The impact on offer premium has been transmitted into the market reaction of the target around the merger announcement. In terms of merger outcome we observe a lower deal withdrawal rate for cash mergers if combined with a high cash popularity. And if conditioning on completed mergers, it is more likely that the bidder is able to obtain absolute control over the target in cash mergers under higher cash popularity. In general the evidence supports a cash catering explanation on the choice of medium of exchange in mergers and acquisitions.

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Do investors reinvest dividends and tender offer proceeds?

Auteurs : KAUSTIA Markku & RANTAPUSKA Elias (Helsinki School of Economics)

Intervenants : KAUSTIA Markku (Helsinki School of Economics)

We find that households reinvest a very small proportion of corporate cash disbursements within two weeks, less than 1% of cash dividends and around 10% of tender offer proceeds. Tender offer proceeds are more likely to be reinvested even after controlling for the investor’s identity, as well as for the size and unexpected nature of the cash flow. A dividend clientele story is consistent with some of the findings, but does not fare well under a closer look. We find that the bulk of households’ reinvestment behavior is likely explained by a combination of default effects and mental accounting.

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Stock Option Grants to Target CEOs during Merger Negotiations

Auteurs : CAI Jie & FICH Eliezer & TRAN Anh L. (LeBow College of Business Drexel University)

Intervenants : TRAN Anh L. (LeBow College of Business Drexel University)

Many target CEOs receive unscheduled stock option awards during merger negotiations which become
immediately exercisable when the acquisition is completed. We find an inverse association between the size of
golden parachutes given to target CEOs and the probability that these executives receive unscheduled options
during merger negotiations. These unscheduled awards are also more likely to be issued when CEOs expect large
compensation losses if their firms are sold. Consistent with option backdating, we find that (1) grant dates are
systematically set to benefit CEOs, and (2) the grants’ post-issuance performance increases with the awards’
reporting lag. After the Sarbanes-Oxley Act promulgation, backdating episodes decline, but the exercise
premiums target CEOs realize on unscheduled options exceed the takeover premiums their shareholders receive
by over 25 percent. Our results indicate that the Act has curtailed the targets’ ability to backdate stock options, but
not their ability to favorably time these awards.

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