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Published in: Review of Quantitative Finance and Accounting 4/2023

06-03-2023 | Original Research

Common institutional ownership and mergers and acquisitions outcomes

Author: Fan Xia

Published in: Review of Quantitative Finance and Accounting | Issue 4/2023

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Abstract

Institutional owners frequently invest in a diversified portfolio of firms to avoid firm-specific risks. I investigate the particular scenario in which the institutional owners have shares in both the acquiring and the acquired target firms of an M&A deal. Using a quasi-experimental approach, I find that the acquirer pays less premium and performs better after the M&A effectiveness when the ratio between the value owned by common institutional shareholders in the acquirer and the value held by the same shareholders in the target firm is higher. The value paid is higher, and the performance worsens when this ratio is lower. The results suggest the common institutional owners can obtain benefits from promoting and implementing such M&A deals as a secondary compensation for their lack of control, usually at the expense of the controlling shareholders.

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Footnotes
1
Xia (2007) discusses this problem of common institutional owners’ relative value in the acquiring and the acquired firms, but he assumes the target firms’ percentages owned by the common institutional owners is constant due to the lack of data. Similarly, Goranova, Dharwadkar, and Brandes (2010) discuss the interests of common institutional owners in the target firms, but do not include them in the hypothesis, and do no measure them in the empirical models and tests.
 
2
In the sample of this paper, the median percentage of the price more than the target’s equity market value is 52.29%.
 
3
Price includes the assumed liabilities, if any.
 
4
Because most of the acquirers are larger than the target, the value ratio is divided by 100. The Log of RCIO is also attempted without any significant change found in the conclusions.
 
5
Other time spans, such as the first half and the second half of these years, are also attempted with no change in the major conclusions found.
 
6
In full purchases, the acquiring firm has no shares in the acquired target firm before the deal, but 100% shares of the target after the deal.
 
7
Calculation based on the CRSP Daily Stock database.
 
8
Form 13f only requires institutions who have no less than $100 million market value to report. As a result, if there are no common institutional owners in the data, it is possible there are common institutional owners who own less than $100 million in either or both the acquirer and the target.
 
9
The correlations in Table 2 show a potential multicollinearity issue caused by the positive correlations among LogAcqTA, LogTgtTA, NCIO, PctCIOAcq, and PctCIOTgt. To study this issue, the data sample is separated into two parts by the median of LogTgtTA (4.668). In the lower half sub-sample, the RCIO coefficient estimate is − 0.015 (p-value = 0.005); in the upper half sub-sample, the estimate is − 0.232 (p-value = 0.050). Although the statistical significance in the upper half sub-sample is weaker, these results are consistent with the findings using the full data sample.
 
10
Although the hypotheses in this paper suggest one-sided tests, the two-sided tests were also performed for reference.
 
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Metadata
Title
Common institutional ownership and mergers and acquisitions outcomes
Author
Fan Xia
Publication date
06-03-2023
Publisher
Springer US
Published in
Review of Quantitative Finance and Accounting / Issue 4/2023
Print ISSN: 0924-865X
Electronic ISSN: 1573-7179
DOI
https://doi.org/10.1007/s11156-023-01134-7

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