Defined Contribution Pension Risk and Mergers and Acquisitions: Evidence from United Kingdom

72 Pages Posted: 7 Jul 2020 Last revised: 8 Jul 2020

See all articles by Shantaram P. Hegde

Shantaram P. Hegde

University of Connecticut- Finance Department

Sudi Sudarsanam

affiliation not provided to SSRN

Naaguesh Appadu

Cass Business School- Faculty of Finance and Mergers & Acquisitions Research Centre

Date Written: May 15, 2020

Abstract

The extant empirical evidence suggests that defined benefit (DB) pension obligations, deficits, and costs increase corporate leverage and cost of capital, reduce corporate investment and aggravate valuation uncertainties. In the M & A context, DB schemes of target firms may reduce the takeover likelihood and bidder DB schemes may influence payment currency choice and reduce shareholder value. However, the impact of defined contribution (DC) pension scheme risk on M & A has not been explicitly investigated so far inspite of the increasing and substantial shift from DB to DC schemes by firms. In a sample of 138 takeover bids for United Kingdom (UK) listed companies during 2002-12, we find that bidder and target DC costs decrease the likelihood of takeovers, influence percentage of cash and stock offered as consideration, and diminish shareholder value gains on merger announcements. Further, the negative economic impact of DC scheme risk on synergistic value from mergers is even larger than that of DB scheme risk. These results are robust to potential biases due to self-selection by merger partners and endogeneity of payment currency choice. Our analysis indicates that DC scheme risk significantly and pervasively affects the takeover decision, target selection, payment currency choice and shareholder wealth and should not be neglected in view of the growing trend away from DB to DC schemes.

Keywords: Mergers and acquisitions; shareholders value; pension scheme risk, payment method

JEL Classification: G34, J3

Suggested Citation

Hegde, Shantaram P. and Sudarsanam, Sudi and Appadu, Naaguesh, Defined Contribution Pension Risk and Mergers and Acquisitions: Evidence from United Kingdom (May 15, 2020). University of Connecticut School of Business Research Paper No. 20-07, Available at SSRN: https://ssrn.com/abstract=3602206 or http://dx.doi.org/10.2139/ssrn.3602206

Shantaram P. Hegde (Contact Author)

University of Connecticut- Finance Department ( email )

School of Business
2100 Hillside Road
Storrs, CT 06269
United States
860-486-5135 (Phone)

Sudi Sudarsanam

affiliation not provided to SSRN

No Address Available

Naaguesh Appadu

Cass Business School- Faculty of Finance and Mergers & Acquisitions Research Centre

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