Performance and Characteristics of Acquiring Firms in the Chinese Stock Markets

Abstract:     
Due to the share segmentation system, tender offers in the Chinese stock markets are very rare. We investigate the performance and characteristics of acquiring firms on 1148 M&A on the two Chinese stock markets from 1998 to 2003, where a listed company acquires stocks or assets from another target firm which most often is not listed. Using the market model, the CAPM model and the buy-and-hold method, we find significantly positive abnormal returns before (6 months) and upon M&A announcements, while the long-run abnormal returns (6 months) after M&A are insignificant. Within our sample, cash is the dominant payment method and the competition during M&A is low. The cross-sectional analysis on acquirers' market performance upon announcements shows that 1) the political advantages of acquiring firms (the higher state ownership and stronger government connections) have a significantly positive impact on the acquiring firm's performance, while the economic advantages (acquirers' pre-merger profitability or industry relatedness between acquirers and target firms) do not; 2) cross-province M&A implies more choices on the resource of the merger and possibly stronger government connections (the central government rather than the local government), and therefore creates more value to acquiring firms; 3) the power balance between the second to tenth shareholders and the top shareholder has a significantly positive impact to acquirers' returns, due to the possible better corporate governance; and 4) cash payment impacts positively and regulation development impacts negatively on the value of acquiring firms during M&A, respectively. Finally, although the market reacts positively on the M&A announcements, a quick check on the profitability change of acquiring firms before and after merger indicates that M&A does not improve the fundamentals of acquiring firms, at least not in the short-run.

Keywords: M&A, acquiring firms, China

JEL Classifications: G34

Working Paper Series