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Market reaction to tender offers: Insights from China

  • 1.

    International Institute of Finance, School of Management, University of Science and Technology of China, Hefei 230601, China

  • 2.

    Department of Statistics and Finance, School of Management, University of Science and Technology of China, Hefei 230026, China

Cite this:
https://doi.org/10.52396/JUST-2021-0172
  • Received Date: 30 July 2021
  • Rev Recd Date: 03 September 2021
  • Publish Date: 31 December 2021
    Abstract

  • Abstract

    This article studies the tender offers of Chinese A-share listed companies. We apply the nonparametric method and the piecewise-linear regression model to indicate that the pricing of offers has an anchoring effect. We find that the historical returns positively affect the post-offer price premium. Besides, We use the logistic regression model to find that historical returns significantly influence the success rate of the acquisition. We adopt the event study methods to show that the abnormal return and the abnormal trading volume reach their peaks on the announcement day, revealing the possible existence of informed traders in tender offers.

    Abstract

    This article studies the tender offers of Chinese A-share listed companies. We apply the nonparametric method and the piecewise-linear regression model to indicate that the pricing of offers has an anchoring effect. We find that the historical returns positively affect the post-offer price premium. Besides, We use the logistic regression model to find that historical returns significantly influence the success rate of the acquisition. We adopt the event study methods to show that the abnormal return and the abnormal trading volume reach their peaks on the announcement day, revealing the possible existence of informed traders in tender offers.
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    • References(45)
  • [1]
    Booth R A. The problem with Federal Tender Offer Law. Calif. L. Rev., 1989, 77: 707-776.
    [2]
    Schwartz A. Search theory and the tender offer auction. The Journal of Law, Economics, and Organization, 1986, 2(2): 229-253.
    [3]
    Bradley M. Interfirm tender offers and the market for corporate control. Journal of Business, 1980, 53(4): 345-376.
    [4]
    Jarrell G A, Poulsen A B. Stock trading before the announcement of tender offers: Insider trading or market anticipation. The Journal of Law, Economics, and Organization, 1989, 5(2): 225-248.
    [5]
    Schwert G W. Markup pricing in mergers and acquisitions. Journal of Financial Economics, 1996, 41 (2): 153-192.
    [6]
    Genesove D, Mayer C. Loss aversion and seller behavior: Evidence from the housing market. The Quarterly Journal of Economics, 2001, 116 (4): 1233-1260.
    [7]
    Baker M, Pan X, Wurgler J. The effect of reference point prices onmergers and acquisitions. Journal of Financial Economics, 2012, 106 (1): 49-71.
    [8]
    George T J, Hwang C Y, Li Y. 2015. Anchoring, the 52-week high and post earnings announcement drift. https://ssrn.com/abstract=2391455.
    [9]
    Ma Q, Wang H, Zhang W. Trading against anchoring. Review of Behavioral Finance, 2017, 9(3): 242-261.
    [10]
    Jetter M, Walker J K. Anchoring in financial decision-making: Evidence from Jeopardy! Journal of Economic Behavior & Organization, 2017, 141: 164-176.
    [11]
    Ma Q, Whidbee D A, Zhang W. Acquirer reference prices and acquisition performance. Journal of Financial Economics, 2019, 132 (1): 175-199.
    [12]
    Neale M A, Bazerman M H. Cognition and Rationality in Negotiation. New York: Free Press, 1991.
    [13]
    Loughran T, Ritter J R. Why don’t issuers get upset about leaving money on the table in IPOs? The Review of Financial Studies, 2002, 15 (2): 413-444.
    [14]
    Diamond P, Vartiainen H. Behavioral Economics and Its Applications. Princeton, NJ: Princeton University Press, 2007.
    [15]
    Hart O, Moore J. Contracts as reference points. The Quarterly Journal of Economics, 2008, 123 (1): 1-48.
    [16]
    Baker M, Xuan Y. Under new management: Equity issues and the attribution of past returns. Journal of Financial Economics, 2016, 121 (1): 66-78.
    [17]
    Dodd P, Ruback R. Tender offers and stockholder returns: An empirical analysis. Journal of Financial Economics, 1977, 5 (3): 351-373.
    [18]
    Fowler K L, Schmidt D R. Determinants of tender offer post-acquisition financial performance. Strategic Management Journal, 1989, 10 (4): 339-350.
    [19]
    Dann L Y, Masulis R W, Mayers D. Repurchase tender offers and earnings information. Journal of Accounting and Economics, 1991, 14 (3): 217-251.
    [20]
    Hutson E. Price volatility in stocks subject to tender offers. In: Mergers and Acquisitions. London: Palgrave Macmillan, 2007: 96-117.
    [21]
    Branch B, Yang T. Estimating the profit potential of risk arbitrage opportunities. Pan-Pacific Journal of Business Research, 2010, 1: 22-40.
    [22]
    Easterbrook F H, Fischel D R. The proper role of a target’s management in responding to a tender offer. Harvard Law Review, 1981: 1161-1204.
    [23]
    Jensen M C, Ruback R S. The market for corporate control: The scientific evidence. Journal of Financial Economics, 1983, 11 (1-4): 5-50.
    [24]
    Walkling R A. Predicting tender offer success: A logistic analysis. Journal of Financial and Quantitative Analysis, 1985, 20(4): 461-478.
    [25]
    Walkling R A, Edmister R O. Determinants of tender offer premiums. Financial Analysts Journal, 1985, 41 (1): 27-37.
    [26]
    Hsieh J, Walkling R A. Determinants and implications of arbitrage holdings in acquisitions. Journal of Financial Economics, 2005, 77 (3): 605-648.
    [27]
    Afsharipour A. Paying to break up: The metamorphosis of reverse termination fees. https://ssrn.com/abstract=1443613.
    [28]
    Butler F C, Sauska P. Mergers and acquisitions: Termination fees and acquisition deal completion. Journal of Managerial Issues, 2014, 44-54.
    [29]
    Huang Y S, Walkling R A. Target abnormal returns associated with acquisition announcements: Payment, acquisition form, and managerial resistance. Journal of Financial Economics, 1987, 19 (2): 329-349.
    [30]
    Byrd J W, Hickman K A. Do outside directors monitor managers? Evidence from tender offer bids. Journal of Financial Economics, 1992, 32 (2): 195-221.
    [31]
    Bradley D J, Morgan A G, Wolf J G. Analyst behavior surrounding tender offer announcements. Journal of Financial Research, 2007, 30 (1): 1-19.
    [32]
    Heinen R. Long run abnormal return of Euro area acquirers. Groningen, Nederlands: University of Groningen, 2009.
    [33]
    Kwon Y, Minji S. Merger process and shareholder wealth: Evidence from public tender offer in Korea. https://ssrn.com/abstract=1916559.
    [34]
    Lee K Y, Chung K H. Liquidity and returns to target shareholders in the market for corporate control: Evidence from the US markets. Journal of Business Finance & Accounting, 2013, 40 (1-2): 142-171.
    [35]
    Yaghoubi R, Locke S, Gibb J. Acquisition returns: Does industry matter? Studies in Economics and Finance, 2014, 31(3): 309-324.
    [36]
    Harris M, Raviv A. Corporate control contests and capital structure. Journal of Financial Economics, 1988, 20: 55-86.
    [37]
    Betton S, Eckbo B E, Thorburn K S. Corporate takeovers. In: Handbook of Corporate Finance: Empirical Corporate Finance. Amsterdam: North Holland, 2008: 291-430.
    [38]
    Dong M, Hirshleifer D, Richardson S, et al. Does investor misvaluation drive the takeover market? The Journal of Finance, 2006, 61 (2): 725-762.
    [39]
    Cain C A, Macias A,Sanchez J. Can targets benefit from negotiations? Evidence from auctions and negotiations.Social Science Electronic Publishing,2010,2(10):1849-1850.
    [40]
    Offenberg D, Pirinsky C. How do acquirers choose between mergers and tender offers? Journal of Financial Economics, 2015, 116 (2): 331-348.
    [41]
    Campbell J Y, Thompson S B. Predicting excess stock returns out of sample: Can anything beat the historical average? The Review of Financial Studies, 2008, 21 (4): 1509-1531.
    [42]
    Barclay M J, Holderness C G. Private benefits from control of public corporations. Journal of Financial Economics, 1989, 25 (2): 371-395.
    [43]
    Brown S J, Warner J B. Measuring security price performance. Journal of Financial Economics, 1980, 8 (3): 205-258.
    [44]
    Bris A. Do insider trading laws work? European Financial Management, 2005, 11 (3): 267-312.
    [45]
    Cornett M M, Tehranian H. Changes in corporate performance associated with bank acquisitions. Journal of Financial Economics, 1992, 31 (2): 211-234.
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    [1]
    Booth R A. The problem with Federal Tender Offer Law. Calif. L. Rev., 1989, 77: 707-776.
    [2]
    Schwartz A. Search theory and the tender offer auction. The Journal of Law, Economics, and Organization, 1986, 2(2): 229-253.
    [3]
    Bradley M. Interfirm tender offers and the market for corporate control. Journal of Business, 1980, 53(4): 345-376.
    [4]
    Jarrell G A, Poulsen A B. Stock trading before the announcement of tender offers: Insider trading or market anticipation. The Journal of Law, Economics, and Organization, 1989, 5(2): 225-248.
    [5]
    Schwert G W. Markup pricing in mergers and acquisitions. Journal of Financial Economics, 1996, 41 (2): 153-192.
    [6]
    Genesove D, Mayer C. Loss aversion and seller behavior: Evidence from the housing market. The Quarterly Journal of Economics, 2001, 116 (4): 1233-1260.
    [7]
    Baker M, Pan X, Wurgler J. The effect of reference point prices onmergers and acquisitions. Journal of Financial Economics, 2012, 106 (1): 49-71.
    [8]
    George T J, Hwang C Y, Li Y. 2015. Anchoring, the 52-week high and post earnings announcement drift. https://ssrn.com/abstract=2391455.
    [9]
    Ma Q, Wang H, Zhang W. Trading against anchoring. Review of Behavioral Finance, 2017, 9(3): 242-261.
    [10]
    Jetter M, Walker J K. Anchoring in financial decision-making: Evidence from Jeopardy! Journal of Economic Behavior & Organization, 2017, 141: 164-176.
    [11]
    Ma Q, Whidbee D A, Zhang W. Acquirer reference prices and acquisition performance. Journal of Financial Economics, 2019, 132 (1): 175-199.
    [12]
    Neale M A, Bazerman M H. Cognition and Rationality in Negotiation. New York: Free Press, 1991.
    [13]
    Loughran T, Ritter J R. Why don’t issuers get upset about leaving money on the table in IPOs? The Review of Financial Studies, 2002, 15 (2): 413-444.
    [14]
    Diamond P, Vartiainen H. Behavioral Economics and Its Applications. Princeton, NJ: Princeton University Press, 2007.
    [15]
    Hart O, Moore J. Contracts as reference points. The Quarterly Journal of Economics, 2008, 123 (1): 1-48.
    [16]
    Baker M, Xuan Y. Under new management: Equity issues and the attribution of past returns. Journal of Financial Economics, 2016, 121 (1): 66-78.
    [17]
    Dodd P, Ruback R. Tender offers and stockholder returns: An empirical analysis. Journal of Financial Economics, 1977, 5 (3): 351-373.
    [18]
    Fowler K L, Schmidt D R. Determinants of tender offer post-acquisition financial performance. Strategic Management Journal, 1989, 10 (4): 339-350.
    [19]
    Dann L Y, Masulis R W, Mayers D. Repurchase tender offers and earnings information. Journal of Accounting and Economics, 1991, 14 (3): 217-251.
    [20]
    Hutson E. Price volatility in stocks subject to tender offers. In: Mergers and Acquisitions. London: Palgrave Macmillan, 2007: 96-117.
    [21]
    Branch B, Yang T. Estimating the profit potential of risk arbitrage opportunities. Pan-Pacific Journal of Business Research, 2010, 1: 22-40.
    [22]
    Easterbrook F H, Fischel D R. The proper role of a target’s management in responding to a tender offer. Harvard Law Review, 1981: 1161-1204.
    [23]
    Jensen M C, Ruback R S. The market for corporate control: The scientific evidence. Journal of Financial Economics, 1983, 11 (1-4): 5-50.
    [24]
    Walkling R A. Predicting tender offer success: A logistic analysis. Journal of Financial and Quantitative Analysis, 1985, 20(4): 461-478.
    [25]
    Walkling R A, Edmister R O. Determinants of tender offer premiums. Financial Analysts Journal, 1985, 41 (1): 27-37.
    [26]
    Hsieh J, Walkling R A. Determinants and implications of arbitrage holdings in acquisitions. Journal of Financial Economics, 2005, 77 (3): 605-648.
    [27]
    Afsharipour A. Paying to break up: The metamorphosis of reverse termination fees. https://ssrn.com/abstract=1443613.
    [28]
    Butler F C, Sauska P. Mergers and acquisitions: Termination fees and acquisition deal completion. Journal of Managerial Issues, 2014, 44-54.
    [29]
    Huang Y S, Walkling R A. Target abnormal returns associated with acquisition announcements: Payment, acquisition form, and managerial resistance. Journal of Financial Economics, 1987, 19 (2): 329-349.
    [30]
    Byrd J W, Hickman K A. Do outside directors monitor managers? Evidence from tender offer bids. Journal of Financial Economics, 1992, 32 (2): 195-221.
    [31]
    Bradley D J, Morgan A G, Wolf J G. Analyst behavior surrounding tender offer announcements. Journal of Financial Research, 2007, 30 (1): 1-19.
    [32]
    Heinen R. Long run abnormal return of Euro area acquirers. Groningen, Nederlands: University of Groningen, 2009.
    [33]
    Kwon Y, Minji S. Merger process and shareholder wealth: Evidence from public tender offer in Korea. https://ssrn.com/abstract=1916559.
    [34]
    Lee K Y, Chung K H. Liquidity and returns to target shareholders in the market for corporate control: Evidence from the US markets. Journal of Business Finance & Accounting, 2013, 40 (1-2): 142-171.
    [35]
    Yaghoubi R, Locke S, Gibb J. Acquisition returns: Does industry matter? Studies in Economics and Finance, 2014, 31(3): 309-324.
    [36]
    Harris M, Raviv A. Corporate control contests and capital structure. Journal of Financial Economics, 1988, 20: 55-86.
    [37]
    Betton S, Eckbo B E, Thorburn K S. Corporate takeovers. In: Handbook of Corporate Finance: Empirical Corporate Finance. Amsterdam: North Holland, 2008: 291-430.
    [38]
    Dong M, Hirshleifer D, Richardson S, et al. Does investor misvaluation drive the takeover market? The Journal of Finance, 2006, 61 (2): 725-762.
    [39]
    Cain C A, Macias A,Sanchez J. Can targets benefit from negotiations? Evidence from auctions and negotiations.Social Science Electronic Publishing,2010,2(10):1849-1850.
    [40]
    Offenberg D, Pirinsky C. How do acquirers choose between mergers and tender offers? Journal of Financial Economics, 2015, 116 (2): 331-348.
    [41]
    Campbell J Y, Thompson S B. Predicting excess stock returns out of sample: Can anything beat the historical average? The Review of Financial Studies, 2008, 21 (4): 1509-1531.
    [42]
    Barclay M J, Holderness C G. Private benefits from control of public corporations. Journal of Financial Economics, 1989, 25 (2): 371-395.
    [43]
    Brown S J, Warner J B. Measuring security price performance. Journal of Financial Economics, 1980, 8 (3): 205-258.
    [44]
    Bris A. Do insider trading laws work? European Financial Management, 2005, 11 (3): 267-312.
    [45]
    Cornett M M, Tehranian H. Changes in corporate performance associated with bank acquisitions. Journal of Financial Economics, 1992, 31 (2): 211-234.
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