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  5. Corporate Finance: Mergers and Acquisitions
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Corporate Finance: Mergers and Acquisitions

Paper Session

Saturday, Jan. 6, 2024 10:15 AM - 12:15 PM (CST)

Marriott Rivercenter, Grand Ballroom Salon C
Hosted By: American Finance Association
  • Chair: Zhe Wang, Pennsylvania State University

The Incentives of SPAC Sponsors

Felix Feng
,
University of Washington
Thomas Nohel
,
Loyola University-Chicago
Xuan Tian
,
Tsinghua University
Wenyu Wang
,
Indiana University
Wu Yufeng
,
University of Illinois

Abstract

The market of Special Purpose Acquisition Companies (SPACs) has exploded in recent years, yet its volatile performance calls into question the implications of this unique business model and particularly the incentives of the SPAC sponsors on the welfare of SPAC shareholders. This paper quantitatively studies the incentives of the SPAC sponsors and their impact on SPAC investor welfare. We estimate a structural model featuring the strategic interactions between sponsors, targets, and investors using a hand-collected dataset with rich information such as sponsor concessions, earnouts, redemptions, etc. Agency costs appear pervasive: the inter-quintile range of returns reaches 19% for deals sorted on the extent of agency conflict. Tying more of the sponsor’s promote to earnouts and improving information transparency each significantly improve investors’ welfare, while curtailing the issuance of warrants yields only modest improvement.

Negotiation, Auction, or Negotiauction?! Evidence from the Field

Tingting Liu
,
Iowa State University
Micah Officer
,
Loyola Marymount University
Danni Tu
,
Southern Illinois University-Carbondale

Abstract

We bridge theoretical negotiation and auction literature with real-world practice using a rich, hand-collected bid-level dataset covering high-stakes merger negotiations totaling nearly $5 trillion. Notably, full-scale private auctions are not common in selling firms, and many deals starting as auctions switch to negotiations with a single buyer at a later stage. The process often shifts, highlighting the fluid nature. Initiating bidders typically value the target higher and become the eventual winning bidders. Negotiations take about two-to-four months, involving two-to-six offers, with delays related to information asymmetry and valuation uncertainty. Interestingly, final premiums remain similar regardless of bid frequency. About 44% of targets counteroffer, usually settling at a midpoint between their and the bidder’s price. Our findings call for further developments in theories that consider the inherent interconnectedness between auctions and negotiations in real-world scenarios.

Relationship-Specific Investments and Firms’ Boundaries: Evidence from Textual Analysis of Patents

Jan Bena
,
University of British Columbia
Isil Erel
,
Ohio State University
Daisy Wang
,
Ohio State University
Michael Weisbach
,
Ohio State University

Abstract

The hold-up problem can impair firms’ abilities to make relationship-specific investments through contracts. Ownership changes can mitigate this problem. To evaluate changes in the specificity of human capital investments, we perform textual analyses of patents filed by lead inventors from both acquirer and target firms before and after acquisitions. Inventors whose human capital is highly complementary with the patent portfolios of their acquisition partners are more likely to stay with the combined firm post-deal and subsequently make their investments more specific to the partner’s assets. As ownership of another firm results in increasingly specific investments to that firm’s assets, contracting issues related to relationship-specific investments is a motive for acquisitions.

Identifying the Real Effects of the M&A Market on Target Firms

Elizabeth Berger
,
University of Houston
David De Angelis
,
University of Houston
Gustavo Grullon
,
Rice University

Abstract

This paper provides causal evidence of the effects of the M&A market on target firms' corporate policies. Using antitrust regulatory thresholds to link the probability of a takeover to the size of the firm, we find evidence that firms intentionally reduce their size to elicit a takeover bid. They do so by limiting asset growth and increasing their payouts when they have excess cash. The treatment effect is stronger among firms with greater control over their market value and incentives to cash out via a merger. Our results reveal that antitrust exemptions can create perverse incentives that limit growth.

Discussant(s)
Barney Hartman-Glaser
,
University of California-Los Angeles
Leonce Bargeron
,
University of Kentucky
Stefan Lewellen
,
Pennsylvania State University
Kai Li
,
University of British Columbia
JEL Classifications
  • G3 - Corporate Finance and Governance