Pascal Nguyen

Returns to acquirers of listed and unlisted targets: an empirical study of Australian bidders

Purpose This paper aims to evaluate the robustness of the listing effect in Australia, that is whether acquisitions of private firms create more value to the bidding firm’s shareholders than acquisitions of publicly listed firms. Design/methodology/approach The authors analyze the market reaction to the announcement of takeover bids initiated by Australian public firms on private and public targets over the period 1990-2011. The analysis controls for a wide range of bidder, deal and target country characteristics that are likely to correlate with the target’s listing status and acquirer abnormal returns. The authors also use a selection model to address the endogenous choice of the target’s listing status. Findings The results indicate that bidders experience significantly higher abnormal returns of about 1.7 per cent in the 11-day event window when the target is a private firm. The authors show that this result is broad-based and persistent. It does not appear to depend on whether the target is small or large; whether it is related or unrelated to the bidder’s industry; whether it is in the resources sector; and whether the transaction is domestic or cross-border. They find some evidence that bidder returns might be stronger for larger acquisitions, for unrelated targets, and in poor market conditions such as in the wake of the recent global financial crisis. Research limitations/implications The research would benefit from the inclusion of the bidding firm’s ownership and governance characteristics. Practical implications The results support the view that market frictions contribute to make private firms attractive targets. Originality/value The analysis confirms the pervasiveness of the listing effect in a market characterized by a lesser degree of competition, higher search costs and the significance of the natural resources sector.

Asset risk and leverage under information asymmetry

Purpose - The aim of this paper is to investigate whether higher asset risk can be associated with higher leverage and to provide a rationale for the relatively low debt ratios displayed by many firms. Design/methodology/approach - We model a game between an informed firm and uninformed lenders. The firm knows the risk of its assets, while lenders only know the minimum level of risk. We solve for the signaling equilibrium and derive explicit formulas for the firm’s cost of debt and optimal leverage. Findings - In contrast to the tradeoff theory of capital structure, we find that asset risk and leverage are positively (instead of negatively) related. Furthermore, leverage is lower than when lenders are informed about the firm’s risk. We illustrate these results with a numerical example. Practical implications - Low-risk firms can choose a lower leverage to signal their lower risk and reduce their cost of debt. High-risk firms may prefer to pay higher interest rates and use higher leverage. Originality/value - The paper is able to explain why some firms use surprisingly low leverage and do not appear to take advantage of their debt tax shields