Takeovers, Asset Acquisition And Corporate Performance

The impact of takeover on corporate performance has long been a focus of economics. However, no conclusive results have been reached so far. From the viewpoint of research design, the disagreements have resulted from two main aspects: choice of performance measure and models of abnormal performance. Based on the review of existing literature, the paper compares the three main measures of performance that researchers might consider in studies of performance: market-based performance measure, cash-flow-based performance measure and accounting earnings, and shows that the operating income is more powerful than other performance measures. However, there is always a substantial amount of corporate restructurings following takeovers and they might have significant impacts on performance. As a result, the paper employs the operating income that makes allowances for restructuring proceeds.The event studies we reviewed usually use one or both of the two different benchmarks to measuring abnormal operating performance: industry median (mean), and matched firms. We employ both of the approaches to investigating the post-takeover performance. We find that the restructuring actions, especially those with the new controlling shareholders, significantly improve the subsequent operating performance. Accounting for restructuring proceeds, the paper suggests that operating performance deteriorates following corporate takeovers relative to industry-median firms. But when using the performance, size and industry matched firms as benchmark, we find no evidence that there is subsequent deterioration of operating performance. Based on mathematical deduction, the paper further indicates that the abnormal operating performance relative to industry median (mean) tells us more about its competitive advantage among its industry members, than the impact of the event. However, using the performance, size and industry matched firms as benchmark, the takeover-induced improvements could be well specified. We also analyze the determinants ofmethods of payment in corporate acquisitions (cash versus free transfer). Among other findings, the result shows that the incidence of restructurings is larger following cash acquisition than free transfer.The main academic contributions of the paper are provided as follows. First, we use the operating income that makes allowances for restructuring proceeds, which is better than those used in previous studies. Second, we find that in Chinese stock market, only the performance-matched firms can be used as benchmark to investigate the takeover-induced improvements, and the generally employed industry median (mean) approach is likely to be biased. Finally, various studies conclude that performance is higher for cash acquisition in Chinese stock market. The paper suggests that the greater performance improvement experienced following cash acquisition is in fact resulted from the different restructuring proceeds between the two methods of payment.The two main limitations of the paper are also provided as follows. First, due to availability of data, only performance of the year immediately prior to the takeover is used as the pre-takeover performance, which could not perfectly reflect the history of the performance. Second, most of the new controlling shareholders are non-listed state-owned firms or official administrators of state-owned assets, whose public information are very rare, and hence the paper solely explores the impact of takeover on the target firms. Similarly, in the analysis of the exchange medium of acquisition, we mainly focused on the characteristics of the target firms.