The Interrelationships Of Financial Environment、Agency Problem And Bidder Abnormal Returns

Abstract: It is generally believed that the performance of M&A is closely related to the externalfinancial environment. Therefore, it is inferred that agency problem not only infect biddingfirms’ value in a direct way but also in an indirect way, by interacting with external financialenvironment. Based on a sample of236M&A cases, this paper thoroughly studies theinterrelationships of agency problem, financial environment and bidder abnormal announcementperiod returns, from perspectives of management hubris behavior, free cash flow and the shareproportion the chief shareholder holds. Empirical results show that, overall, bidding firm gains apositive abnormal return around the announcement and favorite financial environment bringspositive impact on the performance of M&A. Besides, inverse relations are found betweenbidder abnormal returns and acquiring firms’ previous performance and free cash flow, but apositive relation between bidder abnormal returns and the share proportion which the chiefshareholder holds. Moreover, empirical regressions show complementation relations betweenfinancial environment and acquiring firms’ previous performance and free cash flow, and asubstitution relation between financial environment and the share proportion the chiefshareholder holds. It is suggested that, under the background of the unique financial environmentin China, agency hypothesis can explain the performance of M&A to a great extant, and favoriteexternal financial environment can improve the performance by limiting the management’sagency motive.