Research review on financial market driven Mergers-管理科学与工程论坛

Research Review on Financial Market Driven MergersYu Yu1Jian Qiong Wang2(School of Economics and Management ,Southwest Jiaotong University, ChengDu ,SiChuan 610031)Abstract: Merger motivation theories could be divided into traditional merger motivation theories and merger wave theories in accordance with prevalent segmentation. After review merger wave theories literatures delicately, we found that financial market is an extraordinary important driver of aggregate merger activities. According to this new perspective, there are six viewpoints in this research fields: (1)stock market price drives mergers; (2)Tobin's Q drives mergers; (3)capital liquidity drives mergers; (4)multi-financial factors drive mergers; (5)valuation deviation drives mergers; (6)reference point effect drives mergers. This paper reviewed these six viewpoints in details, meanwhile, proposed a new theoretical analysis framework of merger wave motivation theories.Keywords: Merger motivation, Merger wave theory , Market timing theory ,Tobin's Q theoryIntroductionMerger mitivation theories could be divided into: traditional merger motivation theory and merger wave theory. Traditional merger motivation theory include efficiency theory, agency theory, hubris theory, market forces theory, information theory and so on. Traditional merger motivation theories appears early, It analyzed mergers motivation from the perspective of individual company and manager,pointed out that pursuit of efficiency, increase market forces and discovery low-cost assets; managers hubris, psychological deviation were The main driving factors of mergers. From 21st century, more and more researchers found that merger and acquisition activities not random walk events, it always shown a periodic wave form, and different industry has different characteristics. Traditional merger motivation theory cann’t explain these phenomena, the merger wave theories came into being, it tries to explain the merger wave occuring from external macro-environment changes. The theoretical system includes industry shock theory, Tobin's Q theory and market timing theory. Industry shock theory suggests technological innovation or industry deregulation drive merger wave, some scholars believed that the industry shock alone is not enough to trigger a merger wave, abundant capital liquidity is the merger wave real driving force.Tobin's Q theory indicated industry shock and other factors caused the Q value discrete, high Q value company merger the low Q one. Market timing theory suggests that the stock market valuation deviation drive merger wave.Merger is an important investment activity of financial markets,we can found Correlation between financial markets factors and the aggregate merger activities from merger wave theory, abundant mobility of capital may drive the merger wave; industry shocks led to Tobin's Q value changes, and then drive the merger wave; stock prices deviation from fundamental value is also an important trigger of merger wave. In addition to the aforementioned three theories about the association between financial markets and aggregate merger activities, there are others three viewpoints: stock market prices drive mergers; reference point effects drive mergers; multi-financial factors drive mergers. These six viewpoints can be divided into two camps, traditional financial theory viewpoints and behavioral finance theory viewpoints. In this paper, wecomments related theories in details from the two perspectives.1 Traditional financial theory viewpointsTraditional financial theory assumed that market is efficient and investors are rational, mergers and acquisitions create wealth1.1 Stock market price drives mergers and acquisitions1.1.1 Support stock market price drives mergers’ literatures.Clarke and Ioannidis (1996) [20] study the relevance between two indicators of merger activities and the London stock market index by econometric methods. Study results shown that the stock market price and aggregate merger activities Granger related. Clark et al (1988) [9]found significant correlation between aggregate merger activities and the S & P price index in same period in manufacturing and mining industry. Haquea et al (2006) [12]using Canadian data empirical test the causal relationship between mergers and stock price. Most studies only test mergers and stock price relationship, this paper expanded the relationship between mergers and stock market price index, interest rate, expect to explain changes in capital markets affect the aggregate merger activities in depth, The results shown that there is two-way causal relationship between mergers and stock price. Edmans et al (2012) [1] used the redemption of mutual funds as the price variable, the mergers activities under powerful influence of the market price (trigger effect). The market price per decreased by 25%, the possibility of mergers increased by 7%, the unconditional probability of mergers grew 6%. The conclusion of the study was different from the results of previous studies, they believed that only a weak link between stock price and mergers.1.1.2Against stock market prices drives mergers’ literaturesGeroski (1984) [19] found the relationship between aggregate merger activities and stock price index is not stable by empirical research, the Granger causality test results also shown that there wasn’t Granger causality between aggregate merger activities and stock price index. The empirical results shown that there were more fundamentals and stock price index to determine whether the merger wave occurred.Merger is a transaction of company business control. Transaction price is the core element of trading activity, the acquirer bid price and target Accepted price will directly determine whether the takeover completed.When the targets were listed companies, stock prices will directly affect the merger pricing; If targets were non-listed companies, the stock market prices would also serve as an important reference factor for merger pricing.Therefore, the changes in stock market prices may affect the acquirer bid prices and the target accepted prices, and thus ,may affect whether merger activity occurred and the number of mergers .1.2 Tobin's Q drives mergers and acquisitions1.2.1Support Q theory’s literaturesBarber et al. (1995) [4]analysed 1962 Fortune 500 companies, initiated merger activities in 1963-1968 period, the monopoly and non-monopoly, hostility and friendly were analyzed. The analysis found that hostile takeovers which occurred in the sixth merger wave had very significant merger motive, that is, Q value of company may be the most important motive of hostile takeover. Monopolistic mergers and acquisitions shown obviously merger motive, the acquirers were always looking for firms with low Q value, which is similar to the hostile takeover. Jovanovic and Rousseau (2002) [3]argued the company Q values rise, the probability of mergers and acquisitions increasing. Compared with direct investment, the rise of the Q value impact the company’s merger activities more. Possible because of mergers and acquisitions is a high fixed costs and low variablecosts activities. Dong et al (2006) [18] tested market timing theory and Q theory. Q theory more in line with the empirical data in the pre-1990 period than the 1990-2000 period. In the 1990-2000 period than in the pre-1990 period is more in line with the theory of market timing.1.2.2Against Q theory’s literaturesShou Hai Ding (2006) [21] considered the marginal Q value of corporate assets is an important deterninant factor of investment. Whether followed Q theory could reflect a country's overall rational level of investment decisions.The study measured the relationship between Chinese investment and Q values, the results shown Tobin Q theory isn’t in line with Chinese market, on the contrary, there are many Chinese investors irrational investments anti-Tobin Q theory. Industry differences, monopoly protection and speculation may be caused the phenomena.Tobin's Q theory suggested that high Q value company acquire low Q value one. The higher Q value the greater likelihood of mergers. When the the company Q value is greater than 1, the company has a strong impulse to mergers. Q value reflected market price of unit replacement cost, Relatively undeveloped Chinese financial market compared with developed Western markets,Chinese investors are not mature, thus ,whether investors evaluating corporate’s Q value , Correctly and makeing merger decision by Q value are very doubtful. At same time corporate brand assets and other intangible assets are often the corporate’s core assets, there is greater flexibility in valuation of brand assets and other intangible assets, which will make the Q value difficulty to calculate. We argues that the merger wave occuring attributed to a simple Q value change is not in line with the actual market, especially in Chinese immature financial markets. 1.3 Capital liquidity drives mergers and acquisitionsHarford (2005) [8] found economic, regulatory control, technology shocks may lead to industry merger wave. Whether the industry shock trigger a merger wave depends on whether there is sufficient Capital liquidity.Capital liquidity is strong trigger of merger wave, even if there is no industry shock. Alexandridis et al (2012) [7] examined the characteristics of the sixth merger wave in 2003-2007, the test results supported the capital liquidity drive merger wave. In the sixth merger wave,acquirers stock price was overvalued lower than the targets, more mergers be paid by cash.In addition, the market for corporate control was lack of competition, acquirers expressed more rational, managers shown less excessive optimism, the lower level of merger bid premium. These phenomenas shown investors are becoming more cautious and attend rational decision-making.However, the transactions destroyed shareholders’ value not less than the merger wave of the 1990s.Capital market liquidity abundant means that corporate finance easily or corporate has a large number of idle fund. Then in such a favorable financial environment, corporates can expand the internal investments or external investments.The liquidity driven mergers viewpoint contain a basic logic that when corporates easily finance or have sufficient fund, mergers and acquisitions are the first choice of investment .this logic aren’t consistent with actual market.1.4 Multi-financial factors drive mergers and acquisitionsMitchell and Mulherinb (1996) [15] studied 51 industries’ mergers and acquisitions behavioral patterns by 1982-1989 data, found that the incidence of mergers and mergers time aggregation characteristics are significant differences between industries. The incidence of cross-industry mergers directly related to the economic shock. The empirical results support the eighth merger wave was driven by a wide range of fundamentals. Martynova and Renneboog (2005) [14] reviewed a large number of corporate control market literatures.They suggested different mergerwave has different merger mode and profitability. But all the waves also similarities,the merger waves often followed the technology and industry shock.The merger waves tended to occur in a positive and powerful economic and political environments, and rapid credit expansion and stock market boom periods. In the end of the merger wave, mergers and acquisitions were often driven by irrational, self-interested management decisions.Shao Xiang Tang(2007) [22] examined the GDP growth rate, stock price, exchange rate, money supply, interest rates and China's aggregate merger activities correlations. The results show that the economic cycle has a strong positive correlation with the merger cycle. stock prices, money supply, interest rates with aggregate merger activities exist long-run equilibrium relationship.In short term, interest rate negatively correlated to the aggregate merger activities.Thus,interest rates and the economic cycle are the main drivers of Chinese market merger waves. Chuan Rui Fu (2012) [6]tested correlation of Chinese aggregate merger activities and financial markets, the study found, between aggregate merger activities and the stock price index ,real interest rates have long-term cointegration relationship. The stock price index and the real interest rate are the Granger cause of the aggregate merger activities.In short term,the price index positive impulse aggregate merger activities, real interest rate impulse aggregate merger activities negative after positive .Dilemma of the viewpoint is that many financial factors relate to merger activities.Different researchers use different financial factors, financial factors selected lack of standard, there is a big uncertainty.Thus, severely reducing this point of view reliability.2 Behavioral finance theory viewpointsThere are two Behavioral finance theory viewpoints, one assumes market is invalid, another one assumes investors are irrational.2.1Valuation deviation drives mergers and acquisitionsShleifer and Vishny (2003)[2]argued the stock market valuation deviation drive the merger wave.Market overvaluated and paid by stock or market undervalued and paid by cash, the aggregate merger activities substantial increasing.The theory is commonly abbreviated to market timing theory.Around merger wave market timing theory, produced a series of empirical researchs. Kropf et al (2005) [16] tested market timing theory empirically, they decomposed M / B into three components: company pricing deviation from short term industry pricing; industry level, short-term and long-term pricing deviation; long-term pricing and book value differences. The empirical results strong support Shleifer and Vishny [2003] theoretical prediction ,valuation deviation driven acquisitions. Gugler et al (2009) [10] examined the four merger wave motivation theories.The industrial shock hypothesis and Q theory these assume mergers and acquisitions to create wealth, not well explain the pattern of mergers and acquisitions. In contrast, the other two theories, market timing theory and manager hubris assumptions those didn’t assume mergers and acquisitions to create wealth, in line with the pattern of the merger wave. Bei Tang (2010) [5] used M/B as an indicator to measure market valuation deviation level .empirically test the relationship between M/B ,cash flow and the aggregate merger activities.The study found that market valuation deviation significant impact on aggregate merger activities.The valuation higher the merger activities growth faster.Sufficient cash flow companies are more likely to initiate inefficient M & A activities than tight cash flow companies. Bi and Gregory (2011) [23] studied the 1985-2004 merger cases in the United Kingdom.They found that the high valuation of the stock plays a very important role in the choice of payment medium.The study supported high valuation of stockmarket drive acquisitions, and affect payment medium choice.The conclusion did n’t support Q theory. Gugler et al (2012)[11]distinguished stock market impact merger decisions from other factors impact merger decisions by testing listed companies and non-listed company merger modes.If economic environment has changed,according to the neoclassical theory predictions,both listed companies and non-listed companies are supposed to happen merger wave.The study shown a significant difference between listed and non-listed companies in merger modes, this finding is consistent with merger wave behavior theory.Market timing theory suggests when market overvaluated and paid by stock or market undervalued and paid by cash, aggregate merger activities growth significant. In Chinese M&A market,due to severe financial controls, cash payment is overwhelming dominant.more than 88.2% listed companies’ merger activities be paid by cash from 1998 to 2011. Thus, Chinese stock market overvaluation will isn’t necessarily bring a merger wave.On the other hand,there is a few stock market undervaluation in Chinese financial market.it is difficult to empirical test market timing theory by Chinese data.So,this paper predict market timing theory of merger wave may be lack of explanatory power to China's financial markets.Market timing theory also cann’t explain the following questions too, when the stock price is overvalued, rational managers acquired relative low overvalued corporates by stock. W hy rational managers don’t choose to repurchase corporate bonds, invest in other real assets or issue more stocks to obtain greater benefits?2.2 The reference point effect drives mergers and acquisitionsBaker et al (2012) [13] pointed out that the target company previous stock prices peak will affect several aspects of merger activities. Acquirer bid often relate to recent target price peak. When the acquirer bid more than the recent target price peak, the possibility of mergers transactions jumped significantly. When market returns are high, the targets companies easily ask acquirers bid in accordance with the recent peak price, the merger wave will occur. Both acquirers and targets maybe use recent peak price as a reference point or anchor to simplify complex merger decision-making process.Reference point effects driving acquisitions viewpoint considered investors are irrational, they used the recent peak of price as a reference point for merger decision making. The anchor effect interferes with their decision-making process. This paper highly agree with the viewpoint of behavioral finance perspective of reference point effects driving acquisitions viewpoint.Especially Chinese financial markets borned of the planned economy, period of market-oriented is very short, the degree of market inefficient and investors irrational are higher than mature west markets.Study the motives of merger wave in China under the assumptions of market inefficient and investors irrational ,may be able to interpret driving force of merger waves in depth, but also more in line with actual Chinese financial market.3.the past and future of merger wave motivation theoriesAfter entering the 1970s, west researchers found that aggregate merger activities are always in the form of waves, and each wave has different industry distribution characteristics. From individual enterprise perspective cann’t explain this phenomenon, the merger wave motivation theory came into being. Gort (1969)[17]linked industry shocks with merger waves, gradually formed industry shock theory. Then, Barber et al. (1995) [4]proposed Q value driven merger wave. Industry shock theory and Q theory belong to neoclassical theories, the theories assumed that managers seek to maximize shareholder value, mergers create wealth, but in the empirical level, has been insufficient evidence to support wealth creation viewpoint . With the rise of behavioralfinance theory, Shleifer and Vishny (2003) [2]argued a market timing theory, which supposed that market is invalid, investors are rational. When the market valuate deviation, the rational investors seek to maximize companies’ benefits that promote merger wave to occurr. Market timing theory has a strong explanatory power to w estern mature markets’ merger waves. The theory's success lies on introduction of behavioral finance analysis paradigm. Baker et al. (2012) [13]try to explain merger wave motives from the reference point effect perspective, the theory argued that investors' decisions are influenced by the anchoring effect.Overall, merger wave motivation theories are developing from traditional financial theories to behavioral finance theories;under the framework of behavioral finance, from the assumption of market invalid and investors rational to the assumption of market invalid and investors irrational. Chinese capital market was established in a short time, investors’ irrational behaviors are more than western mature markets. merger wav e motivation theory’s new trend is in line with Chinese market reality. we believe this new trend is the new direction which Chinese M & A researchers need to make efforts to exploration.Reference[1]Alex Edmans.,Itay Goldstein., Wei Jiang.The Real Effects of Financial Markets: The Impact of Prices on Takeovers[J]. The Journal of Finance , 2012Vol. LXVII:993-971.[2]Andrei Shleifer.,Robert W. 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