Mergers and acquisitions issues in a transitional market : evidence from China
Mergers and acquisitions and corporate governance are two extensively researched areas in finance. However, these areas have been studied separately and carried out mainly in developed and mature markets. Therefore, there is limited evidence on the link between mergers and acquisitions transactions and corporate governance mechanisms. Specifically, empirical evidence based on Chinese settings is comparatively limited. This study integrates and examines mergers and acquisitions incidences and, corporate governance mechanisms using a unique dataset from China.The study uses a unique dataset of Chinese firms involved in merger and acquisition activities between 2002 and 2011. The short-term daily abnormal returns are calculated using cumulative abnormal returns. Given the controversies surrounding long-term returns computation, two alternative methods are used, the buy-and-hold abnormal returns and calendar-time-portfolio returns to calculate bidder returns. Instrumental variables estimation method is used to investigate the relation between bidder returns and corporate governance.In the short-term, this study’s findings suggest that stock prices react instantaneously to ‘new’ information as investors perceive higher potential synergetic gains from the consolidation of fragmented firms. Analysis of the factors driving the price changes shows that state and legal-person ownership are associated with low returns. Adding independent directors on corporate boards does not necessarily improve management monitoring. Interestingly, combining the role of CEO and chairperson is associated with high bidder returns due to the socio-political life of Chinese which is consistent with stewardship theory. In the long-term, the short-term gains are reversed based on actual performance of the resultant firm two years after acquisition. Analysis of the factors driving the price differences shows that ownership structure and independent directors are associated with low bidder returns.The study highlights the need for the state to play a supportive role that helps the market to run on its own and formulate sound corporate governance policies that not only involves compliance but promotes a culture and climate of consistency, responsibility, accountability, fairness, transparency and effectiveness. It also highlights that where the state doubles up as player and regulator, M&A activity may be driven by political and social rather than be economically motivated.
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