The wealth effects, mood and outcome of UK takeover bids: An empirical analysis using a simultaneous equations approach

The primary objective of this thesis is to investigate whether or not UK takeover bids create wealth gains for the shareholders of the companies involved and what determines the size of these gains. However, as previous empirical research has shown one of the factors influencing the creation of wealth is the mood of a bid, in other words if the bid is hostile or friendly. Due to the fact that previous empirical evidence also suggests the existence of an interdependence among wealth, mood and outcome of bids we develop a simultaneous equations model whereby we explore the determinants of these three factors. Thus, the other two goals of this thesis are to find what determines the mood and outcome of takeover bids. A large sample of 354 completed and failed takeover bids during the 1963-1989 period was initially used to generate the wealth gains measured in the form of abnormal returns and estimated by event study methodology. Then we used multiple regression analysis to test a range of hypotheses selected from the industrial economics and finance literature with respect to the main objectives of this thesis. The results obtained show first that target shareholders capture large gains, while bidder shareholders experience small losses around the period of bids announcement. This leads to a small increase of the value of the combined firm. Second, we detect that short run factors reflecting characteristics of the bid process, such as the mood, explain better the wealth created in takeovers than long term strategic factors. However, we find some evidence of managerial and financial synergies. Third, we find that the wealth and mood variables are mutually dependent on each other thereby justifying our simultaneous equations approach. Fourth, we discover that the agency problem exists on both target and bidder but its impact is mitigated by disciplinary bids. This finding gives some support for the argument that hostile bids reflect the disciplinary device that the market uses to correct managerial failure. Fifth, our results suggest that the mood, the level of managerial ownership in the target company and the size of bid premium are crucial in determining the outcome of bids