Essays on mergers and acquisitions: acquisition target prediction, CEO deal experience on deal performance, and value creation on a massive scale
This thesis examines three important issues in the financial literature strand of M&As. The first analysis regards the field of acquisition target prediction (ATP) and the construction of profitable investment strategies based on identifying prospective targets and investing in their stock. The study introduces novel predictors, which connect market conditions to individual firm targetiveness, but the prediction accuracy does not seem to materially improve when compared to the literature. However, the investment performance of predicted targets is firmly positive, resembling the performance magnitude of actual targets. In a novel construct of rolling estimation, the model seems to have low intertemporality, suggesting opportunistic performance in both prediction accuracy and importance of predicting factors.\ud The second analysis regards the effect of CEO deal experience on deal performance. Based on manually collected data, the CEO experience at the time of the appointment in the firm seems to be insignificant for the returns around the announcement, but long-run returns form an inverse U-shaped relationship with experience, suggesting positive effects from modest experience and exponentially decreasing effects for more experienced CEOs. The significance only for long-run returns suggests that investors have yet to account for the effects of experience on deal performance. As for the relationship pattern, the shift is attributed to the different behaviour expected by CEOs with different levels of experience. Inexperienced CEOs are alert and cautious, deliberating on the appropriate course of action, while more experienced CEOs may rely on their past experience, ignoring the special circumstances of each deal and applying their intuition indiscriminately. The latter behaviour can be classified as overconfident and hubristic.\ud The third analysis focuses on the value creation of large deals (> $500 mil) in the aftermath of the 2008 crisis. For the first time in academic literature, the general population of deals creates positive and significant wealth for acquirer shareholders. This outcome stands contrary to the status quo of the several decades leading up to the crisis, when the average deal was value-destroying for the acquirer. The improvement in returns holds for any type of deal that has been reported to lead to adverse stock performance. This market-wide shift connects to the recent financial crisis of 2008. The economic meltdown brought a stream of regulations in the U.S. market in an attempt to prevent the re-enactment of a similar crisis. The Dodd-Frank act improved several aspects of reporting and accountability for listed firms. The stunning improvement in corporate governance metrics and the ample testing for the effect of different factors suggest that superior corporate governance is the main factor for the new deal-performance standard.