An empirical and analytical study of chinese mergers and acquisitions

Over the last several years (and especially since China's admission to the World Trade Organisation in 2001) merger and acquisition (M&A) activities in China have increased significantly as a result of the rapid growth in the Chinese economy and the measures which the Chinese government has taken to modernise the laws and regulations which govern its securities markets. Despite this, only a few researchers have studied M&A activities in China in any depth. Moreover, such research as has been conducted on Chinese M&A activities is mainly concerned with the laws and regulations affecting the area and not with their economic consequences. Hence, the particular concern of this dissertation is with the economic benefits that accrue to the shareholders of Chinese acquiring and target firms from the M&A activities that have occurred in the People s Republic of China over the last twenty years. In particular, our study encompasses a theoretical, institutional and empirical analysis of Chinese M&A activities. M&A activities in China are governed by a number of laws and regulations of which the Takeover Measures, 2006, is undoubtedly the most important. Our analysis in the early part of the dissertation summarises the legal framework under which M&A activities are conducted in China. In particular, the Takeover Measures, 2006 aim to make Chinese laws in the M&A area more compatible with best international practice. Furthermore, a new Anti-Monopoly Law, which addresses the anti-trust issues associated with mergers and acquisitions came into force on 1 August 2008. Amongst other things, this new Anti-Monopoly Law addresses issues of anti-trust and declaration thresholds in M&A activities in China. Besides these issues, the early chapters of the dissertation summarise the Chinese laws dealing with cross-border mergers and acquisitions, the laws relating to the issue of new shares, the laws relating to share swap transactions and the important provisions affecting the regulation of special purpose companies (SPCs). The dissertation then turns to an empirical analysis of the economic benefits which accrue to the shareholders of Chinese target and Chinese acquiring firms as a result of their M&A activities. Our analysis is based on the standard market model methodology using both the Dimson (1979) and Ordinary Least Squares (OLS) estimates of equity betas. We also employ an hitherto unused nonparametric testing procedure based on the Corrado (1989) rank test in order to enhance the robustness of our empirical analysis. Suffice it to say that the empirical analysis summarised in the dissertation shows that there are significant abnormal returns around the takeover announcement date for the holders of equity securities in Chinese target firms. This is a result which mirrors much of the empirical research conducted on M&A activities in western economies. Interestingly, however, a significant proportion of these abnormal returns decay away within a few weeks following the takeover announcement date. In contrast, there are few, if any, economic benefits for the holders of equity securities in Chinese acquiring firms from their M&A activities. In this respect our results for Chinese acquiring firms are very similar to those obtained by researchers for western acquiring firms, although there are some important differences. In particular, there appear to be statistically significant and positive abnormal returns for shareholders of Chinese acquiring firms around the takeover announcement date but these generally decay away over the next ten to fifteen trading days thereby leaving the shareholders of Chinese acquiring firms with no significant benefits from their M&A activities. We provide some possible explanations for this phenomenon by linking our empirical results with the Chinese political, economic and capital systems. A fundamental decision the directors of acquiring firms must make is whether the mode of consideration for takeovers ought to be in cash or some alternative medium of exchange. Prior research in western countries shows that the mode of consideration used in takeovers can have a significant impact on the abnormal returns which accrue to the shareholders of both acquiring and target firms. Our empirical analysis of this issue shows that when the mode of consideration is purely in cash the abnormal returns which accrue to the shareholders of Chinese target firms around the takeover announcement date are positive and significantly different from zero. In contrast, there are no economic benefits (and indeed, probably economic losses) for the shareholders of Chinese target firms when the consideration for takeovers is other than purely in cash. For Chinese acquiring firms there are significant positive abnormal returns when the consideration for takeovers is other than purely in cash. However, when cash is used as the sole mode of consideration by Chinese acquiring firms there are very few, if any, economic benefits for their shareholders. The concluding sections of the dissertation note that our calculation of the abnormal returns that accrue to firms involved in Chinese M&A activities is based exclusively on the standard market model - which is empirical counterpart of the Capital Asset Pricing Model (CAPM). In recent years, however, Fama and French (1992, 1993, 1995, 1996) amongst other authors have suggested that the CAPM has serious deficiencies and that these deficiencies flow through to the standard market model on which the empirical analysis of Chinese M&A activities summarised in this dissertation is based. We show, however, that the Fama and French Asset Pricing Model (1992, 1993, 1995, 1996) has numerous deficiencies of its own and that to base the calculation of abnormal returns upon this model has the potential to lead to a seriously flawed analysis of the abnormal returns which accrue to the shareholders of Chinese firms involved in M&A activities and on which our empirical analysis is based. Key Words: M&A activities, Modified Corrado test, Corrado test, Patell test, average abnormal returns (AARs), cumulative average abnormal returns (CAARs), mode of consideration, A shareholders, B shareholders, H shareholders, Chinese target firms, Chinese acquiring firms.