Firm Size, Takeover Profitability, and the Effectiveness of the Market for Corporate Control: Does the Absence of Anti-Takeover Provisions Make a Difference?

49 Pages Posted: 2 Mar 2010 Last revised: 3 Sep 2012

See all articles by Mark Humphery-Jenner

Mark Humphery-Jenner

UNSW Business School; Financial Research Network (FIRN)

Ronan Powell

University College Dublin (UCD) - Michael Smurfit Graduate School of Business

Date Written: 2011

Abstract

The market for corporate control is generally regarded as an important disciplinary mechanism in well developed economies. Entrenchment mechanisms commonly used by US firms in the form of anti-takeover provisions (ATPs) may offer some protection from disciplinary action, facilitating entrenchment and value-reducing behavior. One manifestation of entrenchment is poor acquisitions, with the literature reporting significant losses to large acquirers, and to acquirers with a higher number of ATPs. We examine the profitability of acquisitions in Australia, a market where US-style ATPs are prohibited. The results show that unlike their US counterparts, large Australian acquirers earn significant value for their shareholders, both in terms of announcement returns and long-run operating performance improvements. Takeover premiums are also substantially lower than those reported for the US and UK, and do not differ between large and small acquirers. Premiums are also positively correlated with long-run operating performance, indicating that they reflect real synergies, as opposed to hubris or overpayment. We also find that bidders who destroy value in takeovers are likely to be subsequently acquired. However, unlike US evidence, larger acquirers are just as likely to be targeted for takeover as smaller acquirers, indicating that size is not an effective impediment to the disciplining function of the market for corporate control in Australia. The findings are robust to several econometric issues common to the type of models used in our analysis.

Keywords: Size Effect, Corporate Control, Takeovers, Empire Building, Entrenchment

JEL Classification: G30, G32, G34

Suggested Citation

Humphery-Jenner, Mark and Powell, Ronan G., Firm Size, Takeover Profitability, and the Effectiveness of the Market for Corporate Control: Does the Absence of Anti-Takeover Provisions Make a Difference? (2011). Journal of Corporate Finance, Vol. 17, No. 3, 2011, UNSW Australian School of Business Research Paper No. 2012 BFIN 12, Available at SSRN: https://ssrn.com/abstract=1562240

Mark Humphery-Jenner (Contact Author)

UNSW Business School ( email )

UNSW Business School
High St
Sydney, NSW 2052
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Ronan G. Powell

University College Dublin (UCD) - Michael Smurfit Graduate School of Business ( email )

Blackrock, Co. Dublin
Ireland

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