Finance

This study investigated acquiring and target companies which were involved in mergers and acquisitions in the US between 2000 and 2006. Results of this study suggest that mergers and acquisitions lead to an increase in the wealth of shareholders of acquiring companies and a decrease in the wealth of shareholders of target companies. The study also finds that more value is created when companies which are well managed acquire companies that are poorly managed.

INTRODUCTION
The economic impact of mergers and acquisitions can be studied using share price data or studies of profits. The main objective of studies which use share price data is to analyze how the gains or losses to shares following the merger and or acquisition activity are distributed among the shareholders. These studies are often based on event study methodologies and the data used is associated with specific announcement periods. A number of studies which utilized share price data in order to evaluate whether mergers and acquisitions create value have been documented.  Majority of the studies show that the value of shareholder wealth of target companies is increased following mergers and acquisitions. On the other hand, there is a general decrease in the wealth of shareholders of the acquiring firms.

Using daily data of 196 companies, Asquith (1983) looked at the performance of companies which had taken part in mergers and acquisitions between 1962 and 1976. Results of this study showed that acquiring firms achieve positive returns 16 and 8 months before and after the merger announcement respectively. Their results also show that after these periods have elapsed, the companies attain negative returns which further decline 90 days after the end of the specified duration.

Dodd  Ruback (1977) found out that acquiring companies generally have reduced returns in the post acquisition period. According to their studies, such firms had a mean CAAR of -0.0591. Even so, the t-statistic was not significant. Their results also suggest that shareholders of target companies generally attain huge gains in their stocks, the mean of which is 20.58 for successful transactions. On average, their stocks also rise by nearly 19 for transactions which are not successful. Lagetieg (1978) assessed 149 mergers which involved firms listed in the New York Stock Exchange (NYSE). Their findings show that acquiring companies have large negative returns. These findings were corroborated by the study carried out by Malatesta (1983). In his study, Malatesta assessed 256 acquiring firms which took part in mergers and acquisitions for a period of 5 years beginning in 1969. As their results show, acquiring firms in the US generally have negative returns during the post acquisition period.

Dodd (1980) utilized the market model to evaluate 150 merger proposals made between 1970 and 1977 and discovered that shareholders of target firms benefit greatly on the day prior to the announcement and on the day when the actual announcement is made. On the day before the announcement, he found out that the stocks of shareholders of the target firms increased by up to 4.3. On the actual announcement day, the stocks of the shareholders of the target firm rose by 8.74.

Yet another study which demonstrated negative returns for acquiring firms in the post acquisition period was carried out by Magenheim  Mueller (1988). Besides demonstrating negative returns for the acquiring companies, their results also show that acquiring firms benefit more from tender offers than they do for mergers and acquisitions. Similar findings are reported by Bradley and Jarrell (1988). Negative returns for acquiring companies in the post acquisition period are also reported by Franks, Harris and Mayer (1988) who looked at 519 firms which took part in mergers and acquisitions in the US between 1955 and 1984.

Similarly, Frank, Harris and Titman (1991) evaluated 399 mergers and tender offers which were carried out for a 9 year period beginning in 1975. Their findings are consistent with other results as they show negative returns for acquiring companies and positive gains averaging 28 for shareholders of target firms.

A 10 decline in the value of shares of acquiring companies within the initial 5 years of the acquisition period was demonstrated by Agrawal, Jaffe and Mandelker (1992). They carried out a 32 year study and evaluated 1,164 samples. Whereas the shareholders experienced huge losses during the entire study period, the losses were more pronounced for transactions which were carried out before 1975 and after 1979. Even though the findings of the study by Loderer  Martins (1992) were not statistically significant, they pointed towards the same trend indicating large negative returns for shareholders of acquiring companies and positive returns for shareholders of target companies in the US. Their conclusion however is that shareholders of acquiring companies do not gain nor lose during mergers and acquisitions.

Jensen  Ruback (1993) record average gains of 17 to 34 for shareholders of target companies one month after the transaction. Loughran  Vijh (1997) utilized the buy-and-hold return technique of calculating the value of stocks and found out that there are positive gains associated with tender offers while losses are associated with mergers. The bias adjusted cumulative abnormal return (BCAR) method was used by Rau  Vermaelen (1998) to investigate a total of 3,500 mergers and tender offers transacted between 1980 and 1991. Their results show that shareholders attained negative abnormal returns 36 months into the post acquisition period. More recent studies which affirm these outcomes were conducted by Leth  Borg (2000), Mulherin (2000) and Kohers  Kohers (2000), DeLong (2001), and Houston et al (2001).

Studies utilizing profitability make use of accounting data and have also been extensively documented. Whereas there is considerable disagreement on the effect of mergers and acquisitions on the profitability of the companies involved, most studies find that mergers and acquisitions are associated with enhanced profitability of firms in the US. Studies by Healy, Palepu  Ruback (1997), Lev  Mandelkar (1972), and Weston  Masinghka (1971), show that mergers and acquisitions result in enhanced profitability for the firms involved.

Results of the study by Healy, Palepu  Rubeck (1997) also demonstrate that hostile takeovers generally result in poorer outcomes than do friendly takeovers. Stated differently, companies which take part in friendly takeovers generally exhibit higher profitability than those which take part in hostile takeovers. However, different results are found by Ravencraft  Scherer (1988). Their results show that firms which take part in mergers and acquisitions generally have reduced profits. These findings corroborate earlier findings obtained from the studies by Mandelker (1974), Smiley (1976) and Ellert (1976).

The question as to whether the acquisition of target firms that are not well managed by acquiring firms that are well managed leads to more value creation than others has been the subject of intense research over the past few years. The results obtained by such studies have been far from conclusive and the various outcomes are not in full agreement. In their research, Lang, Stulz, and Walkling (1989) used Tobins Q as a measure of how well managed a firm is. They measured the synergistic gains attained by target and acquirer firms and determined whether there was an association between the Tobins Q and the attained gains. According to their conclusions, the higher the acquirers Tobins Q and the lower the targets Tobins Q the higher the synergistic gains obtained. In other words, more value is created when well managed firms acquire poorly managed companies (Lang, Stultz  Walkling).

Different outcomes were reported by Bhagat, Dong, Hirshleifer, and Noah (2005). According to their study, synergistic gains resulting from mergers and acquisitions are not affected by the target companys Tobins Q. On the other hand though, their study suggests that the acquiring companys Tobins Q exerts a negative impact on these gains. The latter findings are similar to studies by Dong, Hirshleifer, Richardson, and Teoh (2005) and Moeller, Schlingemann, and Stulz (2004) who also report that the returns of acquiring firms are negatively affected by their Tobins Q.

A major criticism regarding the studies cited above was their use of the Tobins Q as a measure of how well a company is managed. This is because this measure is affected to a considerable extent by factors such as the misevaluation of the market, openings for investment and agency problems (Dong et al, 2005). To overcome these inherent weaknesses associated with Tobins Q, Wang  Fei (2007) utilized corporate proxy measures to determine whether synergistic gains are affected by how well they are run. In place of Tobins Q, they used shareholder rights and anti-takeover provisions (ATPs) as measures of how well or how poorly a company is managed.

Wang  Fei (2007) find that a higher level of synergy is attained in instances where the rights of the shareholders of the acquiring company are stronger than the rights of the shareholders of the target company.  Accordingly, their conclusion was that higher synergistic gains are attained when firms that have good corporate governance are bought off by firms with poor corporate governance. These gains are attained by shareholders of both the acquiring and target firms and the gains increase with increasing differences between the shareholder rights of both parties.

Several other investigators have examined the performance of companies following mergers and acquisitions using shareholder rights and ATPs as measure of how well run they are. According to Gompers, Ishii, and Metrick (2003), more value is created for companies whose shareholders have stronger rights and which have fewer anti-takeover provisions. Similar outcomes were reported by Bebchuk  Cohen (2004) and Bebchuk, Cohen  Ferrell (2004). A study by Core, Guay, and Rusticus (2005) suggests that firms whose shareholders have stronger rights and which have fewer anti-takeover provisions also manifest better market outcomes.

This thesis examined the impact of mergers and acquisitions on US companies between 2000 and 2006 in order to determine whether they helped in the creation of value. The focus of the thesis was on the role of corporate governance on the performance of these companies. The study did not utilize Tobins Q to measure corporate governance because of the reasons mentioned. Rather, shareholder-rights differences and anti-takeover provisions for each company were used.

Problem statement
Few studies have evaluated the impact of corporate governance on the performance of firms involved in mergers and acquisitions in the US. Most of the studies that have been carried out use Tobins Q to measure corporate governance, a tool that has been associated with imprecise results as it is encumbered with many weaknesses including misevaluation of the market, openings for investment and agency problems. Even those studies that utilize more powerful measures such as shareholder-rights differences and anti-takeover provisions (ATPs) are inconclusive and their outcomes are at variance with each other. Besides, most of these studies evaluate mergers and acquisitions which were carried out decades ago. There is thus need for more conclusive studies which utilize more credible corporate governance measures and which factor in acquisitions that were completed recently.

Purpose statement
The main purpose of this study was to determine whether corporate governance has an effect on the shareholder wealth of both target and acquirer firms in mergers and acquisitions carried out in the U.S between 2000 and 2006.

Aims and objectives

Aim
To determine the impact on shareholder wealth of corporate governance for both acquirer and target firms involved in mergers and acquisitions in the US between the period 2000 and 2006.

Objective 1.1
To calculate the mean announcement-period portfolio cumulative abnormal returns (PCAR), target cumulative abnormal returns (TCAR), acquirer cumulative abnormal returns (ACAR), the GIM indices and the PREM for companies involved in mergers and acquisitions in the U.S between the period 2000 and 2006.

Objective 1.2
To carry out statistical tests in order to determine whether there is a statistically significant difference between the PCAR, TCAR and ACAR on one hand and the GIM index and PREM on the other hand for both acquiring and target companies in the US between the period 2000 and 2006.

Hypotheses
Alternate hypothesis 1(Ha) 1
There is a statistically significant difference between the GIM index and the returns obtained by shareholders of acquiring companies in mergers and acquisitions carried out in the US between 2000 and 2006

Null hypothesis 1(Ho) 1
There is no statistically significant difference between the GIM index and the returns obtained by shareholders of acquiring companies in mergers and acquisitions carried out in the US between 2000 and 2006

Alternate hypothesis 2 (Ha) 2
There is a statistically significant difference between the GIM index and the returns obtained by shareholders of target companies in mergers and acquisitions carried out in the US between 2000 and 2006

Null hypothesis 2 (Ho) 2
There is no statistically significant difference between the GIM index and the returns obtained by shareholders of target companies in mergers and acquisitions carried out in the US between 2000 and 2006

Scope, limitations and delimitations
The scope of this research was limited to the study of the effect of corporate governance on the synergistic gains of firms involved in mergers carried out between 2000 and 2006 in the US. Use of domestic US firms was done so as to eliminate any dissimilarity in country-level governance that may have arisen if firms from different countries were used. The study did not explore the effect of censoring, changes in performance and dissimilar managerial abilities inherent in acquiring and target firms. As a result, the outcomes may have been affected by some degree of endogenicity bias.
A number of limitations were encountered and these included insufficient time, financial constraints, scarcity of literature and drawbacks related to the selected study design. With regard to delimitations, the inadequate time constrained the investigator to make do with a small sample size which could be effectively handled within the available time and this had the effect of reducing the validity of the study. Scarcity of recent literature also affected the research since this was a quantitative research utilizing event studies and the success of the research depended on obtaining a large sample of complete and accurate data in order to enable the researcher to come up with well reasoned and representative outcomes. Thus, the scarcity of complete data reduced the sample size.

Due to financial constraints, the investigator was unable to subscribe to premium content journals and databases to access the latest studies from authoritative figures. This could have introduced selection bias into the study and could have negatively affected the validity of this research. As pertains to the drawbacks related to the study design, the stringent inclusion and exclusion criteria also limited the number of available samples. Additionally, the evaluations made are largely associative and this may have weakened the conclusions. Finally, the outcomes obtained could have been greatly affected by the choice of event studies. As documented by several investigators, outcomes of event studies are greatly influenced by factors such as differences in time, the beta risk and the effect of company size, choice of the weighted indices, and the mean reversion effect (Kargin, 2001 Frank, Harris  Titman, 1991 Agrawal, Jaffe  Mandelker, 1992 Raj  Forsyth, 2002).

Organization of the thesis
This thesis has been divided into 4 chapters. Chapter 1 is the introduction chapter and is followed by chapter 2 which describes the methodology used in this study. Chapter 3 is the results section and chapter 4 is the conclusion chapter.

CHAPTER 2 RESEARCH METHODS
Nature of study
This study was conducted using the quantitative approach. Event studies were used to examine the impact on shareholder wealth of mergers and acquisitions. The quantitative approach was deemed to be the most suitable research approach for this particular study because of the following reasons
Replication. With quantitative studies, replication of the study by other investigators is entirely possible. Since the study can be easily replicated, the validity and reliability of the conclusions made are enhanced

The quantitative method enables the investigator to authoritatively evaluate dissimilarities across studies and diminishes the probability of over-interpretation of the differences

The quantitative approach is suitable because it allows the investigator to discover correlations between different variables, something which may be entirely impossible with other kinds of research methods
Unlike the less tractable record review studies, quantitative studies enable the investigator to study huge amounts of data

Event studies
As explained in the introduction chapter, event studies are powerful tools which are primarily used to assess the gains and or losses obtained by shareholders of companies involved in mergers and acquisitions during a specified announcement period. Event studies were preferred over accounting studies for the following reasons.

Unlike accounting studies which are highly unreliable because they change constantly due to changes in accounting decisions, event studies are more reliable as they are unaffected by such decisions
Event studies are usually premised on larger data sets and therefore offer a more credible approach and allow the generalization of the outcomes obtained

Accounting studies are largely affected by market misevaluation, agency problems and openings for investments, factors which distort the results. On the other hand, event studies which utilize shareholder-rights differences and ATPs are devoid of these weaknesses. (Wang, 2007 Lang, Stultz  Walkling, 1988)

Event studies are largely devoid of measurement errors which encumber many large studies
Event studies primarily assess cumulative abnormal returns of shareholders associated with firms engaging in mergers and or acquisitions. The main objective of this study was to evaluate the impact of corporate governance on the cumulative abnormal returns and by extension determine whether they are associated with value creation. Evidently therefore, event studies are best suited to fulfil the stated objective

Research questions
The study sought to answer the following research questions
RQ 1 is there a correlation between corporate governance and synergistic gains by acquiring companies in the US
RQ 2 is there a correlation between corporate governance and synergistic gains by target companies in the US

Statistical tests
Correlation between the dependent and independent variables was assessed using the 2-sample student t-test. The data was however initially subjected to the F test for variances in order to determine whether to assume equal or unequal variances.
Sample description

Source of Data
The data used in this research was obtained from the Securities Data Corporations (SDC) database. Financial data was obtained from COMPUSTAT and the CRSP database was used to look for 210 daily return stock data. The IRRC Database was used to determine the corporate governance ethos of the firms under study and their GIM indices derived from GIM. Data that is reviewed in the literature review section was obtained from databases such as JSTOR, Sagepub, ProQuest, and Ebcohost, search engines such as the Google Scholar were used to find literature. The snowball technique was used to discover other relevant literature and this was done by looking at the references and bibliography sections of the literature.

Inclusion criteria
The following criteria were used to select data for use in this study
The merger and acquisition activity must have taken place in the US or where both the target and acquiring companies are incorporated in the US. Use of domestic US firms was necessary so as to eliminate dissimilarities that may arise in country-level governance if firms from different countries were used.

The acquisition deal must have been concluded
The value of the transaction exceeded 1 million and was equal to or more than 1 of the market capitalization of the acquiring firm measured on the 6th trading day before the announcement day
Sufficient information was available in the CRSP, COMPUSTAT, GIN for the firms
Both the acquiring and target firms were included in the IRRC database of anti-takeover provisions. This was of particular importance as it would help determine the corporate governance level of the firm by determination of its GIN index

The acquiring firm had less than  a half of the stock in the target firm before the acquisition and more than half the stock after the acquisition

A total of 1,493 transactions met the set criteria. From this target population, sampling was done and 20 firms across the entire duration picked for study.

Sampling
The clustered weighted sampling method was used to select an equal number of firms which had taken part in mergers and acquisitions in the US for each respective year. Thereafter, the sample size was selected using random sampling. Excels random number generator was used to select the sample.

Variables
Independent variables
Governance parameters were defined by the independent variables (IVs). The following independent variables were used in this study

GIM index
The GIM index is a corporate governance index which was built by Gompers, Ishii, and Metrick (2003). The GIM index is used to measure the corporate governance level of firms as well as determine how strong their anti-takeover provisions are (Wang, 2007). According to their hypothesis, companies whose shareholders have greater rights and stronger anti-takeover provisions perform relatively well in the market and have higher market value than those whose shareholders have weaker rights.

According to Wang  Fie (2007), more value is created when firms which have better corporate governance acquire firms with poor corporate governance because the shareholder rights of the acquiring company become enforceable to the combined entity and override the target firms rights. The net result is that the assets of the target company are used in a more productive and efficient manner and this is what leads to the creation of more value. Conversely, poorer corporate governance is imposed on the combined entity where the acquiring company has weaker shareholder rights and this contributes to the inefficient and unproductive use of the assets of the firm thus destroying value. Therefore, higher value is created with increasing difference between the shareholder rights of acquiring and target firms.

The rights of the shareholders of acquiring firms and those of shareholders of target firms were measured using the GIM index. The indices for the firms which took part in mergers and acquisitions during the period of interests were obtained from GIM (2008). The GIM indices are computed by apportioning a point for each provision deemed to strengthen the managerial power and weaken the rights of the shareholders and deducting a point for each provision that is deemed to strengthen their rights. Consequently, shareholders of companies with higher GIM indices are seen to be weaker. This is because it is harder and more expensive for them to get rid of their managers. These firms also have smaller company value. Conversely, shareholders whose firms have weaker GIM are seen to be stronger as they can easily remove their managers.

Target Takeover premium (PREM)
The independent variable, PREM, is the takeover premium attained by the firms involved in the mergers and acquisitions. This variable was calculated as the quotient of the offer price to that of the share price of the target firm 7 days before the acquisition announcement less one (Appendix 1)

Dependent variables
Acquisition synergy
In this context, the acquisition synergy was defined as the portfolios CAAR. The acquisition synergy was computed based on the technique of Wang et al (2007). Briefly, a value weighted portfolio for the acquirer and target was computed for each firm. These weights were premised on the market capitalization of the firms as it stood 6 days before the first acquisition announcement was made. The weight of the target firm was further adjusted by subtracting the value of the target equity in possession of the acquiring firm from the market capitalization of the target firm before the announcement.

Portfolio Cumulative Abnormal Return (PCAR)
Market-model adjusted returns close to the announcement were used to calculate the portfolio CAAR.
Acquirer return (ACAR)
The acquirer returns were measured by calculating the 11-day acquirer CAAR (ACAR)
Target return (TCAR)
The 11-day target CAAR (or TCAR) were computed and used to estimate the target returns
Explanatory variables

Shareholder-rights differences
Dissimilarities in the rights of shareholders of acquiring firms and those of target firms were computed using the GIM indices. This difference was found by subtracting the acquirers GIM index from the targets GIM index. Evidently therefore, positive, negative and equivalent differences are observed where the targets GIM is higher than the acquirers, where the acquirers GIM is higher than the targets and where the 2 indices are equal respectively. A strong difference is indicative of stronger rights of the shareholders of acquiring firms compared to those of shareholders of target firms. It also indicates that the acquiring firm is in a position to attain greater efficiency from the assets of the target firm. Thus, it is quite plausible that the dissimilarities in the rights of the shareholders can have a positive impact on the acquisition synergy.

Rationale for the use of Shareholder-rights Differences
This study utilized GIM to calculate the difference in shareholder rights for shareholders of acquiring and target companies because of several reasons. First, use of the GIM enabled the investigator to overcome the weaknesses associated with Tobins Q. secondly, shareholder rights are largely unchanged throughout the acquisition period and are applicable for both acquirer and target firms. This is in contrast to other corporate governance facets such as size and composition of the companies board. As a result, use of differences in shareholder rights enabled the investigator to overcome endogenicity bias.

CHAPTER 4 DATA ANALYSIS AND FINDINGS
Sample distribution by announcement year
As explained in the previous chapter, Excels random number generator was used to select the sample for study after the weighted cluster sample had been chosen. The list of firms obtained using this technique is displayed in table 1 (appendix 1) together with the year of transaction, transaction amounts and acquirer market capitalization on the 6th trading day.

Shareholder-Rights Differences
The values of the dependent variable (GIM index) were obtained from the GIM database and the dissimilarities in the GIM indices determined by subtraction of the acquirer GIM from the target GIM. The outcomes are displayed in table 2 (appendix 2). As depicted in the table, the mean of the GIM difference was found to be -0.3, the standard deviation (SD) was 3.48 and the median was 0. These results are similar to those reported by Gompers, Ishii, and Metrick (2003) for the IRRC universe. These results are also very similar to the findings by Wang  Fie (2007) where the GIM difference was -0.3, the SD was 3.72 and the median was zero. Whereas the standard deviation is quite high, it is evident that the shareholder rights differences are zero for the median and very close to zero at the mean.  Correlation of the shareholder rights differences with the TCAR, PCAR, ACAR and PREM was also carried out (tables 9-13, appendix).

The results suggest that higher returns are attained where the differences in shareholder rights between the acquiring and target companies are higher. This conforms to the findings by Wang  Fie (2007) and supports the supposition that more value is created when acquiring firms are better managed than the target companies.

The Anti-takeover Premium (PREM) for the Target Firms
The anti-takeover premium (PREM) was derived from the data of 20 target firms which took part in mergers and acquisitions in the US between 2000 and 2006. All the firms were included in the IRRC ATP database before the transaction. The (PREM) for the target firms was calculated using the formula PREM  offer priceshare price-1. The results obtained are displayed in table 3 (appendix 2). The mean PREM was found to be 167.93 and, as shall be seen shortly, was much higher than the TCAR. This is in line with findings by other researchers such as Wang  Fei (2007) and Hartzell, Ofek  Yermack (2004). The SD for the PREM is high (624.9115) and the median is considerably small (-6.92663)

Acquisition synergy
As already explained, the acquisition synergy was computed based on the technique of Wang et al (2007). In short, a value weighted portfolio for the acquirer and target was computed for each firm. These weights were premised on the market capitalization of the firms as it stood 6 days before the first acquisition announcement was made. The weight of the target firm was further adjusted by subtracting the value of the target equity in possession of the acquiring firm from the market capitalization of the target firm before the announcement.

To obtain the ACAR, the 210 daily percentage returns were regressed with the 210 daily market returns. Using Excel, the summary output displayed in table 4 (appendix 2) was obtained. A line fit graph was plotted and the equation of the best fit line ascertained. The equation of the graph was determined to be y  -32942X 0.0593 and the value of R2 was 1. From the equation above therefore, the value of ACAR was found to be  0.0593 while the market correlated return was determined to be -32942.

Similarly, for the TCAR, the 210 daily stock returns were regressed with the market returns. The equation of the line was determined to be y  32063x  0.0619 and the value of R2 was found to be 1. Thus, the market correlated return  32063 while the AR  -0.0619 (table 5, appendix 2).
Having obtained the predicted Y values (i.e. expected abnormal return) the abnormal returns due to each transaction were calculated using the formula AR  Ra  Re. to get the cumulated abnormal returns for the acquirers (ACAR) and for the target (TCAR).The results obtained are tabulated table 6 and 7 (appendix 2)

The summary of the results are displayed in table 8 (appendix 2). The mean PCAR was found to be -3.565, the mean TCAR to be 5.93 and the mean ACAR to be -6.19. These figures are significant at the 95 CI and are consistent with findings by Wang  Fei (2007), Dong et al (2005), Lang et al (1989) and Bradley et al (1988) which report that merger and acquisitions lead to an increase in the shareholder wealth of target companies and a decrease in the wealth of shareholders of the acquiring firms.
The conclusion is that mergers and acquisitions carried out in the US between 2000 and 2006 lead to positive returns for shareholders of acquiring companies and negative returns for shareholders of target firms. This conclusion supports earlier findings by Dodd  Ruback (1977), Langetieg (1978), Dodd (1980), Jensen  Ruback (1983), Bradley, Desai  Kim (1988), Dennis  McConnell (1986), Lang, Stulz, Walkling (1989), Magenheim  Mueller (1988), Franks, Harris, Titman (1991), Houston et al, (2001), Mulherim  Boone (2000) and DeLong (2001).

Testing the correlation between corporate governance and synergistic gains
Determination of the correlation between corporate governance as manifested by the GIM indices, and PREM and abnormal returns as manifested by the PCAR, TCAR, and ACAR helped to provide answers to the research questions

Research Question 1
Is there a correlation between corporate governance and synergistic gains by acquiring companies in the US

In order to answer the research question above, the correlation between the cumulative abnormal returns of the acquiring companies under study and their GIM indices was tested using the two sample 2 test. Before the t-test was done however, the F-test was performed on the data in order to determine whether to assume equal or unequal variances. The F test was done at 95 confidence interval and the results obtained are summarized in table 9 (appendix 2). From the summary output obtained, P (Ff) one-tail  1.32E-24. Thus, it was assumed that the variances are not equal.

Using the 2 sample t-test for unequal variances, it was observed that P (Tt) two-tail  6.86E-13 (table 10, appendix 2). Since the value of p is less than 0.05, we reject the null hypothesis that there is no significant difference between the GIM index and the returns obtained by shareholders of acquiring companies. Therefore, we accept the hypothesis that there is a significant difference between the GIM indices of acquiring companies and the cumulative abnormal returns. Stated differently, corporate governance is a major determinant of value creation in acquiring firms during mergers and acquisitions.

Research question 2
Is there a correlation between corporate governance and synergistic gains by target companies in the US

In order to determine whether there is a correlation between corporate governance and synergistic gains by target companies involved in mergers and acquisitions in the US, the GIM indices of the companies under study were correlated with their computed cumulative abnormal returns. The values of PREM were also correlated against the abnormal returns. As with the previous statistical test, the F test was initially carried out in order to determine whether to assume equal or unequal variances. The results of the F-test are displayed in table 11 (appendix 2). From the table, it can be seen that P (Ff) one-tail  3.05E-21. Thus, it was assumed that the variances are not equal. Using the 2 sample t-test for unequal variances, the value of P (Tt) two-tail was determined to be 9.74E-13 (table 12, appendix 2).
Since the value of p is less than 0.05, we reject the null hypothesis that there is no significant difference between the GIM index and the returns obtained by shareholders of target companies in the US. Therefore, we accept the hypothesis that there is a significant difference between the GIM indices of target companies and the cumulative abnormal returns. Stated differently, corporate governance is a major determinant of value creation in target firms during mergers and acquisitions.

The 2 sample t-test was also carried out in order to determine the correlation between the abnormal returns and PREM and the following results obtained are tabulated in table 13 (appendix 2). As is evident, P (Tt) two-tail  0.075565. Since the value of p is much bigger than 0.05, we accept the null hypothesis that there is no significant difference between the PREM and the returns obtained by shareholders of target companies in the US. Therefore, we accept the hypothesis that there is a significant difference between the PREM of target companies and the cumulative abnormal returns.

Chapter 5
Theoretical Framework
The study voluntary disclosures by companies could have its theoretical framework based upon two major theories that are principal-agent theory and legitimacy theory. Principal-agency theory implies that managers of companies are working for the shareholders as their agents who are responsible for managing business operations and undertaking decisions that may not necessarily increase the value of shareholders however they are required to perform in such a manner that situations arising from conflict of interests between managers and shareholders are avoided (Kiel and Nicholson 2003). It is further suggested that adequate control mechanism needs to be in place to ensure effective monitoring of decision making processes and information that is generated within organizations is well documented (Shleifer and Vishny 1997). Mostly, principal-agent theory has taken a view of investors being the principal however this has been opposed by several researchers who suggest that the agency theory should further be extended to the stakeholder theory that seems more logical and relevant to an understanding of managerial role and the affects of the business decisions made by managers on  the interests of a larger group of stakeholders (Shankman 1999). Corporations are not operating in isolation in fact their decisions have consequences for all stakeholders. These effects could be considered human specific or the society in which businesses operate. The impact on the society could result from the use of resources, utilization of the social capital, implications of environmental hazards and effects such as toxic emissions and waste polluting the natural resources and also from dealing with third parties other than just investors such as creditors and suppliers (Bhasa 2004). Thus, all parties who are directly or indirectly related to the business may require information regarding the business activities and their impact on areas concerned (Parsa and Chong 2007).

Legitimacy theory has been widely used for explaining the extent of voluntary disclosures by companies. Studies by Ashforth and Gibbs (1990) and (DiMaggio and Powell (1991) suggest legitimacy is achieved by organizations when they conform to the social norms and values that are held by the culture and society they operate in and have affect on. As stakeholders perception of the legitimization of organizations becomes more evidently proven then businesses can expect to perform better and be able to extract resources from a particular setup (Elsbach and Sutton 1992). Different studies have indicated that managers of companies employ various assertive, tacit, and defensive strategies techniques to yield a better view amongst stakeholders regarding performance of the business processes and their affects on the overall society (Deegan, Rankin and Voght 2000). One of the ways that managers attempt to influence stakeholders view of the business is through increased voluntary disclosure. This voluntary disclosure becomes an support element of the financial statements prepared by companies for their annual reports and is tactically prepared so that it deals with the possible challenges to the legitimacy of the organizations generated from the opinions of the stakeholders and general public (Brown and Deegan (1998) Patten (1992)). It is further suggested by Arndt and Bigelow (2000) that managers tactically disclose additional information if they feel that organizations legitimacy is at threat that could result in withdrawal of resources from their suppliers. Such additional information can serve the purpose of receiving support from stakeholders and bringing more transparency in to the business decisions and internal management of resources (Liu and Taylor 2008). Thus, the legitimacy theory holds a viewpoint that a viewpoint that all participants including organizations, managers, analysts and stakeholders are part of larger, institutionalized cultural framework that allows them to exert pressures on each other to perform in an acceptable manner and provide information that could actually help outsiders understand the scope of the business activities and their impact on various stakeholders interests (Suchman 1995).      

In addition to these theories there are other plausible explanations for voluntary disclosures that are considered important for building a stronger framework for the proposed study. Elliott and Jacobson (1994) viewed lower cost of acquiring capital as primary reasons for additional information disclosure. They are of the opinion that by providing additional information companies can actually curtail the existence of information asymmetry that assists them in reducing the transaction costs and making shares more attractive. Ghazali (2008) suggests that companies have incentive of making additional disclosures despite of its primary costs of competitive disadvantage and information production costs. They can have access to better opportunities of raising equity or debt thus reducing their cost of capital. Moreover, it is suggested that those companies that are performing better than others may be willingly making additional disclosures as a means of signaling to the market of their good performance (Akerlof 1970) and also companies that have bad news about the business are more inclined towards disclosing additional information to observe reaction from the market whereas those having good news withhold information (Dye 1985).

One of the determinants for scaling the extent of voluntary disclosure by companies is the companies ownership structure. Eng and Mak (2003) are of the opinion that there is a positive impact of lower managerial ownership and high levels of government ownership on the disclosures made by companies. Furthermore, they suggest that there is a negative correlation between shareholders by non-executive directors and disclosures. Another research conducted by to assess the scope of voluntary disclosures by Hong Kong and Singapore firms suggests that the existence of outside ownership places a greater emphasis on voluntary disclosures are the opinion that .  Moreover, a research conducted of 500 Malaysian companies by Muniandy (2009) was aimed at determining the relationship between various corporate governance characteristics and their effects on the scope of voluntary disclosures made by these companies. The research revealed that a negative correlation exists between CEO duality and voluntary disclosure. Another attribute of corporate governance that is existence of executive director share ownership has a negative effect on the voluntary disclosure. In addition to this the research suggests that a positive relationship could be observed between the proportion of independent non-executive directors on board of directors and audit committees with the level of voluntary disclosures provided by companies. It is also suggested that due to the present of an independent chairman of board of directors, companies tend to make additional voluntary disclosures. Furthermore, it is considered that these factors affecting the corporate governance structure of a company need to be supported with the existence of strong regulatory framework to induce greater disclosures by companies (Muniandy 2009). The results presented in these studies are similar to those by Gul and Leung (2004) and Jianguo and Huafang (2007) who presented similar findings suggesting that CEO duality results voluntary disclosures being minimal as compared to other companies. However, this situation improves where the proportion of independent directors is higher on the BoD. Another research by Jianguo and Huafang (2007) examining the voluntary disclosures by Chinese companies suggest that the existence of higher blockholder (major shareholdings) ownership and foreign listingshares ownership puts greater emphasis on the voluntary disclosure by companies. Furthermore, managerial ownership, state ownership and legal person ownership (Jianguo and Huafang 2007) put lesser emphasis on disclosures by companies

REGRESSION
In controlling for all known determinants of bidder returns, we are cognizant that some bidder and deal characteristics could be endogenously determined. Potential candidates include
Tobins Q, which could proxy for firm performance leverage, which can be chosen to control free cash flow free cash flow, which is highly correlated with firm performance and method of payment, which Faccio and Masulis (2005) find is related to bidder financial condition and ownership structure. The presence of such variables in the regressions could potentially bias the coefficient estimates of our governance indices. Therefore, we first estimate a set of regressions that are largely free of the endogeneity associated with these variables. Specifically, we substitute industry-median Tobins Q, leverage, and free cash flow for their firm-level counterparts following Gillan, Hartzell, and Starks (2003) and exclude MA-currency-related variables since we are unable to find industry-level surrogates for them. We initially omit the Diversifying indicator as a regressor, since we show in later analysis that it is endogenously determined. We also drop the Tender offer indicator since its coefficient estimate, albeit positive as in Moeller et al. (2004), is never significant in our analyses and it could be endogenous as well.

I  present estimates for our initial regression model of bidder returns. The t-statistics are adjusted for heteroskedasticity and bidder clustering. The dependent variable is the five-day CAR around each acquisition announcement. The key explanatory variables are the four

Anti-takeover provision indices introduced earlier. Since they are highly correlated with each other, we separately examine their effects on bidder returns. We find that all four ATP indices are negatively related to CAR and statistically significant, which supports the hypothesis that managers at firms with more ATPs on average make poorer acquisitions. We also find that the explanatory power of the models is quite similar with adjusted R2 ranging from 4.8 to 5.

Having excluded from our regressions all firm traits and deal characteristics that are clearly endogenously determined, we conclude that our finding of a significant negative ATP effect does not appear to be driven by any obvious endogeneity associated with these explanatory variables.23

Baseline regressions
The results from our baseline regressions, controlling for all the bidder traits and deal characteristics described in Section A-3, regardless of whether they are potentially endogenous or not. All four ATP indices have significantly negative coefficients, indicating that the findings in Table 5 are not due to the omission of many bidder and deal characteristics included in earlier studies of bidder announcement returns. The coefficient estimate of the GIM index is -0.099 with a t-statistic of 2.26, indicating that each additional antitakeover provision reduces bidder shareholder value by about 0.1. Given that a typical dictatorship firm has 10 more provisions than a typical democracy firm, the former will underperform the latter by approximately 1, a nontrivial number considering the short 5-day event window.

The BCF index used in regression (2) appears to have a larger and more significant impact on bidder returns. It has a coefficient of -0.326, and is significant at the 0.1 level. In other words, the addition of one more ATP to the BCF index lowers bidder returns by about 0.33, which is more than three times the effect realized from adding one more ATP to the GIM index. This result is consistent with BCFs finding that the six ATPs that they identified are among the most important ATPs in terms of effects on firm value and stock returns. However, further research is warranted to assess whether BCFs claim holds for other major firm decisions.

It also should be pointed out that the mean value of the GIM index is 9.45, while for the BCF index it is 2.24, which could also in part explain the larger parameter estimate of the BCF index, though not its higher significance level. The results for model (3) indicate that for our analysis of corporate acquisition decisions, an index composed of a staggered board and poison pill does as well as the BCF index used in model (2), on the basis of the significance of the indexs negative effect on bidder returns and the overall regressions adjusted R2. Finally, we find that acquirers with staggered boards experience abnormal returns approximately 0.58 lower than those experienced by acquirers without staggered boards. For the average bidder in our sample, this translates into a loss of close to 30 million in shareholder value.

For our control variables, both the magnitude and statistical significance of the parameter estimates are fairly stable across the four model specifications. Most of the parameter estimates for the control variables are qualitatively consistent with the findings of Moeller et al. (2004), especially for their large-acquirer subsample. Specifically, we observe that (i) bidder size and Tobins Q have a significant negative effect on bidder announcement returns (ii) leverage and operating cash flow have no significant effects on bidder returns (iii) industry MA activity, which is a proxy for potential competitive bidders, has a significant negative effect on bidder returns and (iv) bidder returns are higher, albeit insignificantly, for tender offers and non-diversifying acquisitions. We also find that bidder returns are lower in deals combining two high-tech companies and this effect becomes stronger as relative deal size rises.

My acquisition classification scheme decomposes our sample into six deal types based on MA currency and target ownership status. It yields very significant parameter estimates for all five indicators included in the regressions. Given that the indicator for acquisitions of subsidiary targets with stock currency is excluded from the regressions to avoid perfect multicollinearity, the signs and magnitudes of these parameter estimates provide us with some interesting observations. Since all five coefficients are negative, we draw the conclusion that acquisitions of subsidiary targets with stock-financing, the omitted deal type, generate the highest bidder returns. Ordering the five coefficients from lowest to highest in terms of shareholder acquisition gains, we find that the least profitable deals are (i) partially or fully stock-financed public targets, followed by (ii  iii) cash-financed public targets and cash-financed private targets, (iv) partially or fully stock-financed private targets, and finally (v) cash-financed subsidiary targets. Holding the method of payment constant, public-target acquisitions are associated with the lowest abnormal returns, while subsidiary-target acquisitions are associated with the highest, with private-target acquisitions in between, echoing the findings in Moeller et al.(2004). Holding constant target ownership status, stock financing increases bidder returns in deals involving private or subsidiary targets, confirming and extending the evidence reported in Chang (1998) and Fuller et al. (2002), while the reverse is true in deals involving public targets.

So far our results suggest that managers who are more vulnerable to the market for corporate control make better acquisitions. However, we have not controlled for other governance mechanisms that could mitigate the conflict of interest between managers and shareholders. This omission is especially problematic given possible interdependencies among various control mechanisms found in studies by Pound (1992), Gillan, Hartzell, and Starks (2003), and Cremers and Nair (2004). In this section, we investigate whether the observed difference in average MA announcement returns between high and low ATP index firms can be explained by cross-sectional differences in product market competition, CEO equity incentives, institutional ownership, or board characteristics.

Endogeneity
As is the case for many corporate governance studies, endogeneity issues prevent us from concluding that ATPs cause managers to make bad acquisitions. One form of the endogeneity problem is reverse causality, i.e., rather than ATPs leading to bad acquisitions, it could be that managers planning to pursue empire building or make unprofitable acquisitions may first adopt ATPs to preclude being disciplined by the market for corporate control.

To examine this possibility, we focus on a subsample of bidders that went public prior to 1990, after which institutional investors began to consistently vote against staggered boards and other takeover defenses (Bebchuk and Cohen (2004)).36 For these firms, the reverse-causality scenario is unrealistic, since most of their important ATPs, especially staggered boards, are adopted in the
1980s, while the acquisitions we examine take place in the 1990s, and primarily the late 90s. We find that our full-sample results continue to hold and are actually stronger in this subsample.
The other form of the endogeneity problem is an omitted variable bias. The concern is that some unobservable bidder traits could be responsible for both the level of takeover protection in a firm and the profitability of its acquisitions. One factor, which may have this property, is management quality. It is conceivable that bad CEOs both make poor acquisitions and adopt ATPs to entrench themselves. To address this concern, we follow Morck, Shleifer, and Vishny (1990) and measure bidder CEO quality by industry-adjusted operating performance over the three years prior to the acquisition announcement.
Estimates presented in Table 10 show that bidder announcement returns are significantly and positively related to past firm performance, which suggests that CEOs of better quality do make better acquisitions for their shareholders. This is in line with the results in Morck, Shleifer, and Vishny (1990). More importantly, we continue to find significantly negative coefficients for the four ATP indices we consider. Therefore, our earlier results do not appear to be driven by management quality.
In our analysis, we control for a broad range of attributes of management and board of directors, the primary decision makers in acquisitions and takeover defense initiatives. Yet, this can not completely rule out the possibility of an omitted variables problem. For example, a particular type of corporate culture, which is difficult if not impossible to capture empirically, could somehow be causally related to a certain level of anti-takeover protection and certain kinds of acquisitions. While this possibility exists in virtually any empirical study, we have controlled for a much wider array of bidder and deal characteristics than prior studies examining bidder announcement returns.

Sensitivity tests
Our results are robust to the following alternative specifications of our empirical tests, beyond those mentioned previously (i) we measure abnormal announcement returns over several other event windows including event days (-1, 1), (-1, 0), (0, 1), and (-5, 5) (ii) we raise the minimum relative deal size to 5 (iii) we only examine the first acquisition made by each bidder during our sample period, despite the fact that our earlier results adjust for firm clustering (iv) we include withdrawn acquisitions (v) we expand our sample to include transactions where acquirers post-acquisition shareholdings are less than 100, but more than 50 of target shares (vi) we exclude acquisitions when the acquirers initial shareholdings are between 40 and 50, 30 to 50 and 20 to 50. (vii) We control for bidders pre-acquisition ownership in the target (viii) we introduce two regulated industry indicators, one for bidders in the defense, transportation, and utility industries and the other for bidders in the financial services industry (ix) We exclude bidders in the defense, transportation, utility, and financial industries (x) we add controls for bidder CEO age and tenure38 (xi) in place of all-cash-deal and stock-deal indicators, we control for the percentage of deal value paid by stock, which is a continuous variable ranging from 0 to 1 (xii) we exclude acquisitions made in the bubble period, i.e., years 1999 and 2000 (xiii) We exclude large-loss acquisitions or large-gain acquisitions or both, where we follow Moeller et al. (2005) in defining large-loss (or gain) acquisitions as those that generate more than 1 billion loss (or gain) for bidder shareholders over the event window (xiv) we scale bidders free cash flow by deal value rather than total assets, or interact bidders free cash flow with an binary variable that is equal to one (zero) if the bidders Tobins Q is below (above) sample median (xv) we include as regressors several indicator variables for bidders incorporated in states with stronger state takeover protections, specifically Indiana, Massachusetts, Ohio, and Pennsylvania, and a separate indicator for bidders incorporated in Delaware (xvi) we include as regressors indicator variables for cases where bidder managers hold more than 20, 30, or 40 of common stock (xvii) following Harford (1999), we control for bidder excess cash holding (xviii) we control for bidder industry-median volatility and bidder industry homogeneity, which is measured in the same way as in Parrino (1997) and (xix) to address the endogeneity concern associated with the diversification indicator, we estimate a Heckman two-step model where in the second-stage bidder return regressions, we include the inverse Mills ratio derived from the probit model estimates of the likelihood of a diversifying acquisition presented in Table 9. Our results continue to hold when we repeat all of our analyses in a quantile regression framework to reduce the influence of potential outliers. We also estimate a probit model where the dependent variable is equal to 1 if an acquisition is associated with positive bidder return and is zero otherwise and the explanatory variables are identical to those used in Table 6. We find that all four ATP indices have significant and negative effects on the probability of an acquisition announcement generating positive CAR.

Chapter 5
The analysis will take the form of qualitative research where different companies identified on the basis of the identified attributes of corporate governance will be compared with each other locally and internationally for the level and scope of voluntary disclosures made by them. The results from the US companies will be compared with the results from the UK companies and generalization of findings will be made to cover a larger group of companies operating in two countries. The analysis will also identify the differences in the content of such disclosures by companies operating under different accounting regimes. Finally, recommendations will be made in regards to the present convergence process between FASB and IASB regarding voluntary disclosures by companies.  

CHAPTER 6 CONCLUSION
This empirical study sought to determine the impact of corporate governance on value creation in both acquiring and target firms in the US.  The research was quantitative in nature and used event studies. A total of 20 firms from a target of 1, 493 mergers and acquisitions performed in the US between 2000 and 206 were randomly selected and sampled. The market model was used to calculate the abnormal returns using 210 daily returns obtained from the SDC database. The value-weighted method was used to calculate the portfolio cumulative abnormal returns (PCAR). Regressed data was used to determine the expected returns and this was used in the calculation of the target and acquirer cumulative abnormal returns (TCAR and ACAR). Market indices were obtained form the CRSP database. The GIM indices were used as variables for corporate governance and the abnormal returns were also correlated with PREM.

Correlation between the GIM indices and the TCAR and ACAR and between the PREM and TCAR was tested using the 2 sample t-test assuming unequal variances at a confidence interval of 95. Results of the study indicate that there is a strong correlation between corporate governance and the TCAR (p 3.05E-21) and ACAR (p  9.74E-13). However, no correlation between PREM and TCAR was found (p  0.075565). The conclusion was that shareholders of acquiring companies attain higher gains in their wealth than do shareholders of target firms. It was also concluded that more value is created in instances where the acquiring company is well managed and the target firm is poorly managed.