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Investors’ Reaction to the Implementation of Corporate Governance Mechanisms The study investigates the impact of corporate governance on investor reaction. This is the first study till date that addresses this gap in literature. The design of the study comprises of corporate governance, investor reac-tion. Data was taken from 125 non-financial sector of Pakistani companies listed at KSE for the period of 2005-2010. Data was extracted from balance sheet analysis (SBP report), KSE website and annual reports of companies. Correlation (individual and composite) and linear regression tests were applied to validate the out-comes. The results confirm that there is no impact of corporate governance on investor reaction and relationship between them is negative. This implies the inefficiency of financial market where noise trades create sentiment. Corporate Governance; Investor Reaction; Emerging Market Introduction Corporate governance is an important component for profitability and growth of firms through achieving the allocative efficiency, so that scarce funds were transferred to investment projects with higher returns. Generally, efficiency can be achieved if the investment projects offer higher returns as compared to cost of capital [1]. Corporate governance mechanism provides protection to shareholders and other stakeholder particularly investors. Good governance practices help to increase the share prices that could get higher capital. It also facilitates the international investor to lend money and purchase shares in domestic companies [2]. [3,4] investigated the market reaction to corporate governance mechanism. They argued that those firms which were greatly affected from such governance practices reacted more profoundly as compared to firms exhibiting good governance practices. Furthermore, [5] investigated the market reaction to corporate governance practices. They criticized the governance practices are value destroying as they found abnormal return, reducing in CEO pay, number of large block holders, easiness of institutional investors and presence of a staggered board. Although, researchers scrutinized the market reaction to corporate governance mechanism, but there is no study till date that investigates impact of corporate governance mechanism on investor reaction. So the specialty of this study is to gain the attention of academicians and practitioners by bridging this gap in literature. Two research questions has been addressed which are: Does corporate governance impact the investor behavior? Is this relationship significant across different economies? This study confirms that the corporate governance mechanism impacts insignificantly on investor reaction. This paper is organized in a way that the first section describes the introduction of the study followed by literature review to build theoretical framework. The next one discusses the methodology, followed by discussion of the results and conclusion; the last section explains the managerial implications and future research direction. Literature Review Corporate governance is a “process whereby suppliers of capital (shareholders) attempt to ensure that managers of the firms in which they invest provide a sufficient return. It addresses the agency problem whereby the shareholders (principals) are the ultimate owners of the firm and want to ensure that managers (agents), who are separate from the shareholders, act in the shareholders’ best interests rather than the interests of managers” [6]. [6] scrutinized the link between measures of corporate governance and stock returns. They highlighted that high governance ranking firms outperform than other port- folios. Moreover, market reacts significantly to governance related information which reflects that good governance does matters to Canadian investors. Similarly, [7] investigated the price reaction to corporate governance announcements. They confirmed that investors react to these governance practices but the sign of their reaction depend upon the extension and nature of these types of announcements. Moreover, [8] studied the corporate governance mechanisms and market reaction and liquidity impact. They depicted that market price reaction is significant positive when firm committed for higher transparency and minority shareholder protection in its announcement. Furthermore, shares having voting rights experience stronger price reaction and liquidity enhancement rather than non-voting shares. They suggested that corporate governance mechanism can be effective strategy for countries having weak investor protection provisions. Corporate Governance announcements are important ways for interacting with the investors. [9] demonstrated the link between corporate governance rating announcements and stock returns of companies. By using event study, they analyzed the 11 top listed corporate governance companies for the period of 2004-2005 and found no relationship between corporate governance and share performance of firms, might be attributable to perception of Thai investors. [5] scrutinized the link between market reaction to corporate governance regarding to regulatory and legislative actions. They proved that abnormal re-turns relating to corporate governance mechanism are reduction in number of large bondholders, CEO pay, ease of institutional investors to access the proxy method and presence of stagnant board. [10] studied that how corporate governance would impact the market reaction to earning surprise regarding to post earnings announcements drift. They confirmed the investor ‘reactions both, over-reaction and under-reaction to earnings surprises can create post earnings announcement drift. They investigated for bad governance firms, that investor would under-react to earnings surprises as they believed that earnings surprises might be attributable to firm’s luck rather than its ability. On the other scenario i.e. for good governance firms, they scrutinized that investor would over-react to earnings surprises as they believed that earnings surprises are attributable to firm’s ability rather than its luck. [11] studied the role of corporate governance in abnormal returns regarding to seasonal equity offerings. They confirmed that investors react positively for companies in which people hold the CEO and chair-man positions. Moreover, investor reacts positively for companies having high outsider members, low CEO ownership and small board size. They highlighted that investors also react positively to seasonal equity offerings by companies having stronger corporate governance mechanism that ultimately reduces the agency problems. [12] demonstrated the relationship between governance and asymmetric information and other imperfections that usually firm faces. They found that corporate governance is highly related to high market valuation and operating performance. They highlighted that countries having weak legal system are more probable to firm level corporate governance mechanism. [13] examined the firm announcement that is negatively valued by investor might be attributable to information asymmetry and its adverse features. They also depicted that stronger corporate governance mechanisms experience low price de-cline from the information symmetry, transpiring that strong corporate governance mechanism might mitigate the agency problems. [14] explored the impact of corporate governance on investment decisions. They proved that strong corporate governance structure can ease the investment decisions. Owner-owned firms get less financial distress and more positive stock evaluation than management controlled firms, reflecting that firms with better corporate governance practices can get positive investor evaluation from investors. [15] depicted the effectiveness of corporate governance mechanism for increasing capital and Re-search and development investment decisions. They found that higher ownership governance yields greater abnormal returns to capital investment decisions however; higher board governance mechanism yields abnormal returns to research and development investment decisions. Institutional investors play a vital role in corporate governance activities like [16] examined the institutional investors would impact the corporate governance through analyzing the portfolio holdings of institutions in companies over the period of 2003-2008. They proved that change in institutional investment would bring positive change in firm level governance; however, they did not find any impact of governance on institutional investments. Furthermore, they highlighted that firms having higher institutional ownership could easily terminate poorly performing chief executives and made further improvements. [17] investigated the corporate governance mechanism and investor protection. They found that investor’s evaluation of investor protection regimes are related to firm-level corporate governance mechanism along with characteristics of their portfolio holdings. They also depicted that firm level corporate governance are attributable to mitigation of agency problems between large and small shareholders, irrespective of weaker investor protection. Furthermore, countries having weak legal structure might be attributable to attract investors through having strong corporate governance regime. The investor preferences for country level investor protection and good corporate governance mechanism are highly related to investment decisions. [18] investigated that governance-sensitive institutions is related to improvement in shareholder rights. They also confirmed that low turnover institutions with preference for small cap and growth companies are attributable to be more governance sensitive. Furthermore, they suggested that common proxies for governance sensitivity do not measure governance preference clearly. [19] scrutinized the relationship between governance mechanisms and firm investment choices by using Real Estate Investment Trusts (REITs) as a sample. They highlighted that responsiveness of REITs’ investment opportunities depend upon their corporate governance structures. Moreover, REITs have higher institutional ownership, then their investment opportunities are closely related to Tobin’s q. However, Real Estate Investment Trusts (REITs) may vitiate the effectiveness of internal governance mechanism. They found that information asymmetry diminished by REIT governance. Further-more, they confirmed that high financial incentives for board members along with experienced board members and independent audit committee having financial expertise reduces asymmetric information [20]. From above discussion it can be inferred that corporate governance mechanism impacts the investor reaction positively. Therefore, a proposed hypothesis is. H1: Corporate governance mechanism has a significant impact on investor reaction. Methodology Methodology portion comprises of two sections. One describes the variables, proxies and data collection and other highlights the statistical tests applied on the data. The aim of current study is to investigate impact of corporate governance mechanism on investor reaction. Therefore, data has been collected for the 125 non-financial sector of Pakistani companies listed at Karachi Stock Exchange, for the period of 2005-2010 on yearly basis. Data was extracted from Balance sheet analysis (SBP report), KSE website and annual reports of companies. Variables Corporate governance mechanism has been taken as in-dependent variable and investor reaction has been taken as dependent variable. Equation α = Intercept CG= Corporate Governance IR = Investor Reaction, BS= Board Size, ACI = Audit Committee Independence, OS = Ownership Structure, ε = Error Term. Proxies Corporate Governance Corporate Governance can be measured through four proxies: Board size = Natural log of Number of Total Directors Board independence = Number of Non Executive Directors divided by Total Number of Directors Audit Committee independence = Number of Non Executive Directors divided by Total Number of Audit Committee Members Ownership Structure = Shares held by Directors divided by Total Shares Investor reaction Investor reaction can be measured through stock re-turns. Stock Returns = Natural log of Pn/Po Methodological Tests Correlation test has applied to find out the interrelationship between variables. Linear regressions have applied to check the hypothesis. Result and Discussion Correlation Correlation tests were used to find out inter-relation- ship among Corporate Governance and Investor Reaction. The findings highlight that Investor Reaction (IS). Tables 1 and 2 depict the correlation analysis. Table 1 shows the correlation between variables of corporate governance and investor reaction. It depicts that board size is negatively related to director independence, ownership structure and investor reaction while it is positively related to audit committee independence. Director Independence is positively related to audit committee independence however, it has negative relationship between ownership structure and investor reaction. Audit committee independence is negatively related to ownership structure and investor reaction. Lastly, Ownership structure also exhibits a negative relationship with investor reaction. When correlation test was applied between corporate governance and investor reaction, it highlights that corporate governance has negative relationship with investor reaction. Linear Regression OLS regression was applied for testing the hypothesis. i.e. corporate governance has significant impact on investor reaction. The results of OLS regression have been presented in Tables 3 and 4. When investor reaction was regressed with individual component of corporate governance, it has been seen that there is no impact of corporate governance on investor reaction. The value of R-square is 0.53% which means that this model explains only few factors of corporate governance that affect investor reaction (IR) while 99% are other factors that influence investor reaction (IR). F- statistics is insignificant at 0.94. When investor reaction was regressed with corporate governance, it has been seen that corporate governance is insignificantly negatively related to investor reaction. The value of R-square is 0.16% which means that this model explains only 0.16% of factors of corporate governance that affect investor reaction (IR) while 99% are other factors that influence investor reaction (IR). F-statistics is insignificant at 1.19. Conclusions Corporate governance is insignificantly negatively related to investor reaction. On the basis of these findings, our hypothesis has been rejected. Previous studies confirmed the corporate governance practices provide investor protection, due to which investor invest more in those firms which incorporated corporate governance mechanism in their strategic policy. This study does not support the above justification. One interpretation might be that this study was con-ducted in inefficient market, due to which investor don’t have much knowledge about financial markets. They don’t respond to market rationally. Due to this behavior investor creating sentiment in markets and exploit stock return, Noise trader exploit corporate governance practices as well. In such market corporate governance mechanisms is unable to provide protection to their investors. Managerial Implications Corporate governance has no impact on investor reaction. Therefore, mangers should focus other factors while making their strategic policies to attract their investors, not solely focus on corporate governance Limitation and Future Research In future studies, further variables would be incorporated to investigate the impact of corporate governance on investor reaction. This relationship would be generalized among different economies in order to validate the out-comes. Review of Accounting Gimmicks Called Depreciation Depreciation is a complex, intricate and confusing term in the fields of engineering, social and management sciences. As a result, it has been over used, over stressed, and over worked by the accountants and professional valuers. International Accounting Standard (IAS) 4, qualifies assets for depreciation when assets are used for more than one accounting period, i.e. assets held by an enterprise for production or service, and has economic useful life. Whereas, under Standard Statement of Accounting Practice (SSAP) 12, depreciation is viewed as wearing out, consumption or other loss of value of fixed asset, whether arising from use, affluxion of time or obsolescence through technology and market changes. Complexity may arise when it is viewed as a fall in price, physical deterioration, allocation of cost, fall in value, valuation technique and asset replacement. Intricate and confusion are inevitable when accountants employ various methods of providing for depreciation on the same or similar assets of different life span. These methods may include straight line, reducing balance, sum of the year’s digit, revaluation, annuity, output, sinking fund etc which will definitely give different values in the financial statement. The consequential effect is either to undermine or overstate the reported profit or distributable profit in the hands of the stakeholders, hence the absurdity of the financial reports. It is recom- mended that depreciation should be used with caution especially when the anticipated economic useful lives of the asset is short lived by new technology or passage of time thereby making it extremely difficult to recover or replace the net book value of the asset. Depreciation; Measuring Profitability; Expense Capture; Corporate Performance Measures; Earnings Engineering Currently the theory and practice of depreciation have not generally unified the fixed amount to be charged as annual expenses in the Income Statement and Balance Sheet due to different meanings and computations. Al- though materiality concept affirms that what might be material to one person/company may not necessarily be material to another person/company (Concept of Value). Materiality concept is viewed as fundamental when inclusion, exclusion of a particular item, transaction into or from the financial statement could lead to distortion, misleading and/or debase financial statement anticipated report, meaning and understanding. In order to avoid this confusing nature of any inclusion or exclusion there is the need to explain vividly such aspects in the form of notes to the accounts which gives credence and reliability to the users of financial statement. The word depreciation has been grossly over worked, over used, over stressed and above all has varying senses with different connotations even among intra and inter group disciplines. International Accounting Standard (IAS) 4 and Statement of Standard Accounting Practice (SSAP) 12 view standards in accounting for depreciation as the allocation of depreciable amount of assets over its estimated useful life. Depreciable amount from assets is anchored on its historica

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Ultimo aggiornamento 2014-09-17
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1 Predicting Australian Takeover Targets: A Logit Analysis Maurice Peat* Maxwell Stevenson* * Discipline of Finance, School of Finance, The University of Sydney Abstract Positive announcement-day adjusted returns to target shareholders in the event of a takeover are well documented. Investors who are able to accurately predict firms that will be the subject of a takeover attempt should be able to earn these excess returns. In this paper a series of probabilistic regression models were developed that use financial statement variables suggested by prior research as explanatory variables. The models, applied to in-sample and out-of-sample data, led to predictions of takeover targets that were better than chance in all cases. The economic outcome resulting from holding a portfolio of the predicted targets over the prediction period are also analysed. Keywords: takeovers, targets, prediction, classification, logit analysis JEL Codes: G11, G17, G23, G34 This is a draft copy and not to be quoted. 2 1. Introduction In this paper our aim is to accurately predict companies that will become takeover targets. Theoretically, if it is possible to predict takeovers with accuracy greater than chance, it should be possible to generate abnormal returns from holding a portfolio of the predicted targets. Evidence of abnormal returns of 20% to 30% made by shareholders of firms on announcement of a takeover bid is why prediction of these events is of interest to academics and practitioners alike. The modelling approach adopted in this study was based on the discrete choice approach used by Palepu (1986) and Barnes (1999). The models were based on financial statement information, using variables suggested by the numerous theories that have been put forward to explain takeover activity. The performance of the models was evaluated using statistical criteria. Further, the predictions from the models were rated against chance and economic criteria through the formation and tracking of a portfolio of predicted targets. Positive results were found under both evaluation criteria. Takeover prediction studies are a logical extension of the work of Altman (1968) who used financial statement information to explain corporate events. Early studies by Simkowitz and Monroe (1971) and Stevens (1973) were based on the Multiple Discriminant Analysis (MDA) technique. Stevens (1973) coupled MDA with factor analysis to eliminate potential multicollinearity problems and reported a predictive accuracy of 67.5%, suggesting that takeover prediction was viable. Belkaoui (1978) and Rege (1984) conducted similar analyses in Canada with Belkaoui (1978) confirming the results of these earlier researchers and reporting a predictive accuracy of 85% . Concerns were raised by Rege (1984) who was unable to predict with similar accuracy. These concerns were also raised in research by others such as Singh (1971) and Fogelberg, Laurent, and McCorkindale (1975). Reacting to the wide criticism of the MDA method, researchers began to use discrete choice models as the basis of their research. Harris et al. (1984) used probit analysis to develop a model and found that it had extremely high explanatory power, but were unable to discriminate between target and non-target firms with any degree of accuracy. Dietrich and Sorensen (1984) continued this work using a logit model and achieved a classification accuracy rate of 90%. Palepu (1986) addressed a number of methodological problems in takeover prediction. He suggested the use of statebased prediction samples where a number of targets were matched with non-targets 3 for the same sample period. While this approach was appropriate for the estimation sample, it exaggerated accuracies within the predictive samples because the estimated error rates in these samples were not indicative of error rates within the population of firms. He also proposed the use of an optimal cut-off point derivation which considered the decision problem at hand. On the basis of this rectified methodology, along with the application of a logit model to a large sample of US firms, Palepu (1986) provided evidence that the ability of the model was no better than a chance selection of target and non-target firms. Barnes (1999) also used the logit model and a modified version of the optimal cut-off rule on UK data. His results indicated that a portfolio of predicted targets may have been consistent with Palepu’s finding, but he was unable to document this in the UK context due to model inaccuracy. In the following section the economic explanations underlying takeover activity are discussed. Section 3 outlines our takeover hypotheses and describes the explanatory variables that are used in the modelling procedure. The modelling framework and data used in the study is contained in Section 4, while the results of our model estimation, predictions, classification accuracy and portfolio economic outcomes are found in Section 5. We conclude in Section 6. 2. Economic explanations of takeover activity Economic explanations of takeover activity have suggested the explanatory variables that were included in this discrete choice model development study. Jensen and Meckling (1976) posited that agency problems occurred when decision making and risk bearing were separated between management and stakeholders1, leading to management inefficiencies. Manne (1965) and Fama (1980) theorised that a mechanism existed that ensured management acted in the interests of the vast number of small non-controlling shareholders2. They suggested that a market for corporate control existed in which alternative management teams competed for the rights to control corporate assets. The threat of acquisition aligned management objectives with those of stakeholders as managers are terminated in the event of an acquisition in order to rectify inefficient management of the firm’s assets. Jensen and Ruback (1983) suggested that both capital gains and increased dividends are available to an 1 Stakeholders are generally considered to be both stock and bond holders of a corporation. 2 We take the interests of shareholders to be in the maximization of the present value of the firm. 4 acquirer who could eliminate the inefficiencies created by target management, with the attractiveness of the firm for takeover increasing with the level of inefficiency. Jensen (1986) looked at the agency costs of free cash flow, another form of management inefficiency. In this case, free cash flow referred to cash flows in excess of positive net present value (NPV) investment opportunities and normal levels of financial slack (retained earnings). The agency cost of free cash flow is the negative NPV value that arises from investing in negative NPV projects rather than returning funds to investors. Jensen (1986) suggested that the market value of the firm should be discounted by the expected agency costs of free cash flow. These, he argued, were the costs that could be eliminated either by issuing debt to fund an acquisition of stock, or through merger with, or acquisition of a growing firm that had positive NPV investments and required the use of these excess funds. Smith and Kim (1994) combined the financial pecking order argument of Myers and Majluf (1984) with the free cash flow argument of Jensen (1986) to create another motivational hypothesis that postulated inefficient firms forgo profitable investment opportunities because of informational asymmetries. Further, Jensen (1986) argued that, due to information asymmetries that left shareholders less informed, management was more likely to undertake negative NPV projects rather than returning funds to investors. Smith and Kim (1994) suggested that some combination of these firms, like an inefficient firm and an efficient acquirer, would be the optimal solution to the two respective resource allocation problems. This, they hypothesised, would result in a market value for the combined entity that exceeded the sum of the individual values of the firms. This is one form of financial synergy that can arise in merger situations. Another form of financial synergy is that which results from a combination of characteristics of the target and bidding firms. Jensen (1986) suggested that an optimal capital structure exists, whereby the marginal benefits and marginal costs of debt are equal. At this point, the cost of capital for a firm is minimised. This suggested that increases in leverage will only be viable for those firms who have free cash flow excesses, and not for those which have an already high level of debt. Lewellen (1971) proposed that in certain situations, financial efficiencies may be realized without the realization of operational efficiencies. These efficiencies relied on a simple Miller and Modigliani (1964) model. It proposed that, in the absence of corporate taxes, an increase in a firm’s leverage to reasonable levels would increase the value of the equity share of the company due to a lower cost of capital. By a 5 merger of two firms, where either one or both had not utilised their borrowing capacity, would result in a financial gain. This financial gain would represent a valuation gain above that of the sum of the equity values of the individual firms. However, this result is predicated on the assumption that the firms need to either merge or be acquired in order to achieve this result. Merger waves are well documented in the literature. Gort (1969) suggested that industry disturbances are the source of these merger waves, his argument being that they occurred in response to discrepancies between the valuation of a firm by shareholders and potential acquirers. As a consequence of economic shocks (such as deregulation, changes in input or output prices, etc.), expectations concerning future cash flow became more variable. This results in an increased probability that the value the acquirer places on a potential target is greater than its current owner’s valuation. The result is a possible offer and subsequent takeover. Mitchell and Mulherin (1996), in their analysis of mergers and acquisitions in the US during the 1980s, provided evidence that mergers and acquisitions cluster by industries and time. Their analysis confirmed the theoretical and empirical evidence provided by Gort (1969) and provided a different view suggesting that mergers, acquisitions, and leveraged buyouts were the least cost method of adjusting to the economic shocks borne by an industry. These theories suggested a clear theoretical base on which to build takeover prediction models. As a result, eight main hypotheses for the motivation of a merger or acquisition have been formulated, along with twenty three possible explanatory variables to be incorporated predictive models. 3. Takeover hypotheses and explanatory variables The most commonly accepted motivation for takeovers is the inefficient management hypothesis.3 The hypothesis states that inefficiently managed firms will be acquired by more efficiently managed firms. Accordingly, H1: Inefficient management will lead to an increased likelihood of acquisition. Explanatory variables suggested by this hypothesis as candidates to be included in the specifications of predictive models included: 1. ROA (EBIT/Total Assets – Outside Equity Interests) 3 It is also known as the disciplinary motivation for takeovers. 6 2. ROE (Net Profit After Tax / Shareholders Equity – Outside Equity Interests) 3. Earnings Before Interest and Tax Margin (EBIT/Operating Revenue) 4. EBIT/Shareholders Equity 5. Free Cash Flow (FCF)/Total Assets 6. Dividend/Shareholders Equity 7. Growth in EBIT over past year, along with an activity ratio, 8. Asset Turnover (Net Sales/Total Assets) While there are competing explanations for the effect that a firm’s undervaluation has on the likelihood of its acquisition by a bidder, there is consistent agreement across all explanations that the greater the level of undervaluation then the greater the likelihood a firm will be acquired. The hypothesis that embodies the impact of these competing explanations is as follows: H2: Undervaluation of a firm will lead to an increased likelihood of acquisition. The explanatory variable suggested by this hypothesis is: 9. Market to book ratio (Market Value of Securities/Net Assets) The Price Earnings (P/E) ratio is closely linked to the undervaluation and inefficient management hypotheses. The impact of the P/E ratio on the likehood of acquisition is referred to as the P/E hypothesis: H3: A high Price to Earnings Ratio will lead to a decreased likelihood of acquisition. It follows from this hypothesis that the P/E ratio is a likely candidate as an explanatory variable for inclusion in models for the prediction of potential takeover targets. 10. Price/Earnings Ratio The growth resource mismatch hypothesis is the fourth hypothesis. However, the explanatory variables used in models specified to examine this hypothesis capture growth and resource availability separately. This gives rise to the following: H4: Firms which possess low growth / high resource combinations or, alternatively, high growth / low resource combinations will have an increased likelihood of acquisition. The following explanatory variables suggested by this hypothesis are: 7 11. Growth in Sales (Operating Revenue) over the past year 12. Capital Expenditure/Total Assets 13. Current Ratio (Current Assets/Current Liabilities) 14. (Current Assets – Current Liabilities)/Total Assets 15. Quick Assets (Current Assets – Inventory)/Current Liabilities The behaviour of some firms to pay out less of their earnings in order to maintain enough financial slack (retained earnings) to exploit future growth opportunities as they arise, has led to the dividend payout hypothesis: H5: High payout ratios will lead to a decreased likelihood of acquisition. The obvious explanatory variable suggested by this hypothesis is: 16. Dividend Payout Ratio Rectification of capital structure problems is an obvious motivation for takeovers. However, there has been some argument as to the impact of low or high leverage on acquisition likelihood. This paper proposes a hypothesis known as the inefficient financial structure hypothesis from which the following hypothesis is derived. H6: High leverage will lead to a decreased likelihood of acquisition. The explanatory variables suggested by this hypothesis include: 17. Net Gearing (Short Term Debt + Long Term Debt)/Shareholders Equity 18. Net Interest Cover (EBIT/Interest Expense) 19. Total Liabilities/Total Assets 20. Long Term Debt/Total Assets The existence of Merger and Acquisition (M&A) activity waves, where takeovers are clustered in wave-like profiles, have been proposed as indicators of changing levels of M&A activity over time. It has been argued that the identification of M&A waves, with the corresponding improved likelihood of acquisition when the wave is surging, captures the effect of the rate of takeover activity at specific points in time, and serves as valuable input into takeover prediction models. Consistent with M&A activity waves and their explanation as a motivation for takeovers is the industry disturbance hypothesis: 8 H7: Industry merger and acquisition activity will lead to an increased likelihood of acquisition. An industry relative ratio of takeover activity is suggested by this hypothesis: 21. The numerator is the total bids launched in a given year, while the denominator is the average number of bids launched across all the industries in the ASX. Size will have an impact on the likelihood of acquisition. It seems plausible that smaller firms will have a greater likelihood of acquisition due to larger firms generally having fewer bidding firms with the resources to acquire them. This gives rise to the following hypothesis: H8: The size of a firm will be negatively related to the likelihood of acquisition. Explanatory variables that can be employed to control for size include: 21. Log (Total Assets) 22. Net Assets 4. Data and Method The data requirements for the variables defined above are derived from the financial statements and balance sheet date price information for Australian listed companies. The financial statement information was sourced from the AspectHuntley data base which includes annual financial statement data for all ASX listed companies between 1995 and 2006. The database includes industry classifications for all firms included in the construction of industry relative ratios. Lists of takeover bids and their respective success were obtained from the Connect4 database. This information enabled the construction of variables for relative merger activity between industries. Additionally, stock prices from the relevant balance dates of all companies were sourced from the AspectHuntley online database, the SIRCA Core Price Data Set and Yahoo! Finance. 4.1 The Discrete Choice Modelling Framework The modelling procedure used is the nominal logit model, made popular in the bankruptcy prediction literature by Ohlson (1980) and, subsequently, in the takeover prediction literature by Palepu (1986). Logit models are commonly utilised for dichotomous state problems. The model is given by equations [1] to [3] below. 9 [3] The logit model was developed to overcome the rigidities of the Linear Probability Model in the presence of a binary dependent variable. Equations [1] and [2] show the existence of a linear relationship between the log-odds ratio (otherwise known as the logit Li) and the explanatory variables. However, the relationship between the probability of the event and acquisition likelihood is non-linear. This non-linear relationship has a major advantage that is demonstrated in equation [3]. Equation [3] measures the change in the probability of the event as a result of a small increment in the explanatory variables, . When the probability of the event is high or low, the incremental impact of a change in an explanatory variable on the likelihood of the event will be compressed, requiring a large change in the explanatory variables to change the classification of the observation. If a firm is clearly classified as a target or non-target, a large change in the explanatory variables is required to change its classification. 4.2 Sampling Schema Two samples were used in the model building and evaluation procedure. They were selected to mimic the problem faced by a practitioner attempting to predict takeover targets into the future. The first sample was used to estimate the model and to conduct in-sample classification. It was referred to as the Estimation Sample. This sample was based on financial data for the 2001 and 2002 financial years for firms that became takeover targets, as well as selected non-targets, between January, 2003 and D

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Ultimo aggiornamento 2014-02-23
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Ultimo aggiornamento 2013-01-18
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