An empirical analysis of some determinants of the target shareholder premium in takeovers
Article Abstract:
While a considerable amount of research in Australia, the United States and elsewhere shows that takeovers create value for target shareholders, there is relatively little research investigating the explanations for cross-sectional differences in the size of the premium paid to target shareholders. This paper tests various arguments proposed to explain some of the sources of this premium. One such explanation is the removal of inefficient target management. Takeovers have been recognized as a mechanism that allows management teams to compete for the right to manage corporate assets. We test the associations between bidder and target managerial ownership (proxied by director's holdings), the prior performance of the bidder and target and the size of the premium paid to target shareholders. Other potential influences on the premium include a reduction in the agency costs of free cash flow and the provision of financial slack or reserve borrowing capacity to the target firm by the bidder. Using a sample of seventy-eight Australian takeovers occurring between 1981 and 1989 our tests indicate that the provision of financial slack to the target is associated with a significantly higher premium, while high bidder ownership results in a significantly lower premium. The premium is found to be positively related to the performance of the bidder in the period prior to the bid. The tests disclose an association between the agency costs of free cash flow and the target premium which is inconsistent with the theory, and reveal only weak evidence that the takeover premium is higher when inefficient target management is removed. (Reprinted by permission of the publisher.)
Publication Name: Accounting and Finance
Subject: Business
ISSN: 0810-5391
Year: 1995
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Market perception of goodwill: some empirical evidence
Article Abstract:
Recent research has focused on the market perception of goodwill as an asset in the determination of a company's valuation. It also looked at whether the market places as high a value on goodwill as an asset as on other assets. It was found that the market includes goodwill when valuing a concern. The market also values goodwill at least as highly as other assets.
Publication Name: Accounting and Business Research
Subject: Business
ISSN: 0001-4788
Year: 1995
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