J. Harold Mulherin

The impact of industry shocks on takeover and restructuring activity

Abstract We study industry-level patterns in takeover and restructuring activity during the 1982–1989 period. Across 51 industries, we find significant differences in both the rate and time-series clustering of these activities. The interindustry patterns in the rate of takeovers and restructurings are directly related to the economic shocks borne by the sample industries. These results support the argument that much of the takeover activity during the 1980s was driven by broad fundamental factors and have general implications for the stock price spillover effects of takeover announcements, corporate performance following takeovers, and the timing of takeover waves.

Comparing Acquisitions and Divestitures

We study the acquisition and divestiture activity of a sample of 1,305 firms from 59 industries during the 1990-99 period. Consistent with the importance of restructuring activity during the 1990s, we find that half of the sample firms are acquired or engage in a major divestiture. Consistent with the notion that economic change is a source of the observed restructuring activity, we find significant industry clustering in both acquisitions and divestitures. We also study the announcement effects of the two forms of restructuring and find that both acquisitions and divestitures in the 1990s increase shareholder wealth. Moreover, the wealth effects for both acquisitions and divestitures are directly related to the relative size of the event. The symmetric, positive wealth effects for acquisitions and divestitures are consistent with a synergistic explanation for both forms of restructuring and are inconsistent with non-synergistic models based on entrenchment, empire building and hubris. JEL classification: G14, G34

How Are Firms Sold

As measured by the number of bidders that publicly attempt to acquire a target, the takeover arena in the 1990s appears noncompetitive. However, we provide novel data on the pre-public, private takeover process that indicates that public takeover activity is only the tip of the iceberg of actual takeover competition during the 1990s. We show a highly competitive market where half of the targets are auctioned among multiple bidders, while the remainder negotiate with a single bidder. In event study analysis, we find that the wealth effects for target shareholders are comparable in auctions and negotiations. Copyright 2007 by The American Finance Association.

The Government as a Shareholder: A Case from the United States

We study a sample of U.S. corporations in which the federal government held 35–100 percent of the outstanding common stock for between 1 and 23 years during and following World War II. We find that although the firms experienced abnormally high turnover among corporate board members, the tenure of senior management was relatively stable. Moreover, the performance of the government‐owned companies was not significantly different than that of private‐sector firms in the same industry. Hence, the interim government custodianship of the firms in our case does not have the effects normally attributed to government ownership.

The Effects of Splitting on the Ex: A Microstructure Reconciliation

Our research investigates stock splits: why they happen, how they affect shareholder wealth, and whether they enhance liquidity for splitting firms. Prior research has not reached a clear-cut answer as to the role of stock splits. While there is definitely a favorable stock price reaction to the announcement of splits, the reason for the positive announcement return is not well-determined. Conventional wisdom suggests that the benefit of splits comes from improved share liquidity; yet empirical evidence has produced ambiguous results on liquidity. More detailed theoretical arguments pose stock splits as part of a strategy used by management to signal value, yet such arguments seem overly complex for such a basic management decision. Moreover, in spite of complex explanations, an anomaly remains: splitting firms also experience positive returns on the split execution day. This event is known well in advance, so any associated favorable information should already be priced into the stock.

Do auctions induce a winner's curse? New evidence from the corporate takeover market☆

We test for the winners curse in the corporate takeover market by comparing bidder returns in auctions versus negotiations. Our sample entails 308 takeovers that were announced in the 1989 to 1999 period. Our classification of auctions and negotiations comes from a unique data set on the private sales process that occurs prior to the public announcement of a takeover. We find that the returns to bidders in auctions are similar to the returns to bidders in negotiations. The results hold after controlling for size and deal characteristics that have been shown to affect bidder returns. The results are also robust to a variety of proxies for takeover competition. Our results do not support the existence of a winners curse in the corporate takeover market. Roll (1986) provides a provocative model of the takeover process in which overconfident managers at bidding firms fall prey to the winners curse when acquiring other publicly traded corporations. He contends that his model is as consistent with the evidence on the returns to bidders in takeovers as other models based on synergy or disciplinary motives. Thaler (1988) builds on Rolls (1986) model to argue that the non-positive return to bidders is consistent with a winners curse in the takeover market. Moeller, Schlingemann, and Stulz (2004) conclude that the apparent overpayment by large bidders in corporate takeovers could stem from the factors described in Rolls (1986) model. While possibly consistent with the overall data on bidder returns, a more direct test of the winners curse in the corporate takeover market would analyze the effect of takeover competition on bidder returns. For example, laboratory experiments such as Kagel and Levin (1986) contrast the effects on bidding of a large number of bidders versus a small number of bidders. In the corporate takeover setting, the basic question is: Do bidders fare worse when they participate in an auction for a target than when they negotiate with a target on a one-on-one basis? We address this question with a novel data set on auctions and negotiations in corporate takeovers. For a sample of 308 takeovers announced in the 1989 to 1999 period, we use information from SEC filings to determine the competitiveness of the private sales process that occurs prior to any public announcement of the takeover. This private sales process, which is described by Herzel and Shepro (1990) and Wasserstein (2000) and formally modeled by Hansen (2001), …

Proxy contests and corporate change: implications for shareholder wealth

Abstract We study the shareholder wealth effects of 270 proxy contests for board seats in the 1979–1994 period. We find that proxy contests create value, with the bulk of the wealth gains stemming from firms that are acquired. Restricting analysis to firms listed on Compustat imparts a downward bias on estimated wealth effects because such a restriction excludes a sizable fraction of the firms acquired during the proxy contest. For firms that are not acquired, the occurrence of management turnover has a significant, positive effect on shareholder wealth because firms replacing management are more likely to restructure following the contest.

The complexity of price discovery in an efficient market: the stock market reaction to the Challenger crash

We provide evidence on the speed and accuracy of price discovery by studying stock returns and trading volume surrounding the crash of the space shuttle Challenger. While the event was widely observed, it took several months for an esteemed panel to determine which of the mechanical components failed during the launch. By contrast, in the period immediately following the crash, securities trading in the four main shuttle contractors seemingly singled out the firm that manufactured the faulty component. We show that price discovery occurred without large trading profits and that much of the price discovery occurred during a trading halt of the firm responsible for the faulty component. Finally, although we document what are arguably quick and accurate movements of the market, we are unable to detect the actual manner in which particular informed traders induced price discovery.

The Stock Price Response to Pension Terminations and the Relation of Terminations with Corporate Takeovers

i The defined benefit pension plans of U.S. corporations represent a sizable fraction of the wealth in the U.S. economy. A forthcoming book edited by Turner and Beller [32] estimates that defined benefit pension plans had over

Sources of Gains in Corporate Mergers: Refined Tests from a Neglected Industry

1 trillion in assets as of year-end 1987. This compares with the