Research On The M&A Performance Of Chinese’s Listed Companies

Merger and acquisition is not only a strategy of development for a company’s risingand expansion, efficiency improvement and competitiveness enhancement but also animportant means of industrial reconstructing, optimization of resource allocation and thecultivation of strong national industry. In recent years, China’s capital market is developingrapidly, but almost two thirds of the M&A activities do not create values for the companies,instead the performance of the M&A companies meets a substantial decline. In his “FreeCash Flow Theory”, Jenson holds that in the system of the separation of ownership andmanaging rights of modern enterprises, information asymmetry between shareholders andthe management occurs and the interest between them is not entirely consistent. Therefore,when a company holds a large amount of free cash flow but there are few investopportunities, the management are more likely to adopt some investment actions for theirown interest which undermine the company’s development, though, and M&A is the mostcommon way. The western scholars conduct a lot of empirical tests on the “Free Cash FlowTheory”, but the corelational studies in China are few. Therefore, the empirical study onthe M&A performance of Chinese listed companies based on the free cash flow theory isquite significant.This paper selects the M&A activities of67companies meeting the filter criteria inShanghai and Beijing as samples. Using the standardized methodology, the theoretical partredefines the concepts of M&A, M&A performance and free cash flow and analyzes thefeatures of China’s M&A market and the current situation of the agency problems of thefree cash flow. The empirical research part adopts the factor analysis methodology to builda comprehensive score model to measure the M&A performance; through the correlationanalysis and examination, the correlation between the M&A performance of the acquiringcompanies and their cash flow holding is found out; Mann-Whitney U Nonparametric testand the multiple linear regression analysis are adopted respectively to do the single factoranalysis and the multivariate analysis to the companies’ M&A. It turns out that the M&Aperformance of the acquiring company is negatively related to the free cash flow holding before its acquisition, but it passes the significance test only in the year of acquisition; theM&A performance of the acquiring company is positively related to the debt asset ratio;there is no significance relation between the M&A performance of the acquiring companyand the management’s shareholding ratio and the first majority shareholder’s shareholdingratio.This paper shows that in the short run, the problem of the agency of the free cashflow in Chinese capital market exists indeed; but in the long run, it does not get the datasupport. The “control effect” of debt is verified in this paper, which indicates that a seriesof reforms to financial market especially to the former state-owned banks yields results anddebt’s restraining force to the companies tends to be “strong”. The corporate governance ofChinese listed companies yields little, so it leaves much to be desired for the performancebetween the incentives of the management and the governance function of equity structure.The non-state-owned companies more tend to “hollowing” the target companies than“supporting” them, which causes that there is no significant difference in the M&Aperformance between the non-state-owned companies and the state-owned companies.The innovative point of this paper is to combine the sequence of the enterprise’sresidual claim, the source of the enterprise’s cash flow (enterprise operation cash flow,shareholder free cash flow and the creditor cash flow), and the form of the free cash (stock,flux and increment) and so on to redefine the concept of the free cash flow; define theconcept of the M&A performance in terms of “efficiency” and “revenue”; and the factoranalysis adopts operating profit ratio, increase rate of main business revenue and capitalappreciation rate to build a comprehensive score model to measure the M&A performanceso as to reflect the enterprise growth in a multidimensional and exact way.