Dmytro Osiichuk

The paper is looking into possible links between the stated goals of acquisitions and subsequent operating performance relying on M&A transaction data of listed Chinese companies. Empirical analysis runs through two stages: first, pre-screening to identify goals with the highest predictive power and then multivariate cross-section regression models. The results suggest that most transactions fail to achieve meaningful improvements in operating performance. Goals have a weak predictive power across diverse performance measures. The declared goal of expanding into new or foreign markets is positively associated with sales growth. In combination with intended operational strengthening, it is also associated with higher return on capital, though the association does not survive correction for multiple testing and is only partially confirmed under propensity score-matched specification. Other goals exhibit intermittent associative links with some of the performance indicators, but not with others. Goals may signal the type of challenges that the company may be facing upon completing the transaction but do not predict subsequent performance, nor do they allow them to distinguish potentially successful transactions from the failed ones.

The goal of the study is to inquire into how longer tenure on the board may undermine directors’ independence and distort the efficiency of executive compensation mechanisms. Our empirical findings based on an international panel database and static panel regression modeling demonstrate that director tenure is positively associated with executive compensation with the effect being amplified by the degree of managerial capture of the board. Longer director tenure is also shown to reduce the sensitivity of executive compensation to negative earnings surprises while simultaneously contributing to the lower overall probability of management departures even in the event of a negative earnings surprise. Board independence is evidenced to play no significant role in intermediating the studied relationships. Overall, while postulating the existence of an independence–tenure tradeoff, the paper posits a need for revision of the currently applicable formal criteria of board independence in order for them to accommodate the possible impact of director tenure on the quality of corporate oversight. The present study extends upon the existing literature by expanding the geographical scale of the sample and focusing on indirect symptoms of reduced supervisory effectiveness of the boards.

The paper aims at elucidating and solving the methodological problems around the estimation of the cost of capital in the project finance settings. By convention, capital budgeting analysts evaluate project finance ventures using the free cash flow for equity (FCFE) method, whereby cash flows, including cash, whose distribution is limited by debt covenants, are discounted with the project’s cost of equity. We argue that this approach is erroneous. From the standpoint of the sponsor company, only distributable cash flows should be taken into consideration when evaluating project finance ventures. In turn, the discount rate should be equal to the weighted average cost of capital of the sponsor, which should reflect the financing of the venture from the sponsor’s capital mix. In the case of full recourse to the sponsor, the WACC of the sponsor needs to be adjusted to reflect the change in capital structure as a result of shifting the credit risk to the sponsor’s balance sheet. Failure to adhere to the guidelines outlined in this paper may lead to the undervaluation of investment projects and suboptimal allocation of investment budgets, particularly in large corporations that use their capital invested to inject equity into subsidiary SPVs.

The study presents a comparative analysis of the financial standing of renewable- and conventional-energy-generating companies domiciled in the European Union, and explores factors contributing to their operating performance and financing needs. The comparative analysis of electricity-generating companies demonstrates that renewable energy providers have steadily improved their financial standing and appear well-prepared to compete with conventional energy generation from fossil fuels. Relying on univariate statistical tests, we demonstrate that, at present, renewable energy companies generate a significantly higher return on assets and make larger investment outlays than their conventional peers. Univariate cross-sectional tests confirm that they also enjoy access to cheaper equity and more plentiful debt financing thanks to a shift in the priorities of financial institutions and capital markets. We posit that, besides the cumbersome permit system, the biggest challenge to the operating performance of renewable energy firms could reside in the restrictive revenue caps, price regulation, and renewable firms’ exposure to spot market price fluctuations. The econometric analysis based on multivariate panel regression models demonstrates that the profitability and financing needs of renewable energy companies are more sensitive to electricity prices than those of conventional energy firms. We conclude that higher energy prices and greater reliance on market pricing mechanisms could significantly boost the performance of the renewable energy sector.

In a quest for economies of scale, access to technologies, and, most importantly, expansion of market share, Chinese public companies have been engaged in several consecutive waves of mergers and acquisitions (M&As) involving mostly domestically domiciled non-listed targets from the same or adjacent industries. Relying on a comprehensive panel dataset of 7,998 transactions completed between 1993 and 2020 by 2,842 publicly listed acquirers domiciled in China, the paper attempts to establish whether M&A deals allow acquirers to improve their market share and, consequently, their relative market position. We use dynamic panel regression and ordered logit models to establish and quantify the link between deal characteristics and the post-deal market share of the combined entities. Our empirical findings demonstrate that corporate consolidations exercise no significant impact on the relative competitive positioning of firms. Only acquisitions by industry leaders produce a sizeable increase in the latter’s market share and lead to higher industry concentration. Most consolidations occur among outsiders exhibiting a high degree of similarity, relatively lower profitability, and stagnant market shares within the more competitive industries with higher rates of firm creation. These consolidations, often in the form of mergers, are not effective in advancing the combined entities’ competitive positioning. Despite the fact that the bulk of corporate consolidations appears unlikely to constitute a threat to competition in the medium term, careful regulatory oversight may be warranted within the currently fragmented and highly commoditized industries, which appear likely to consolidate at the fastest pace. JEL Classification: G30, G32.

Purpose: While the existing studies largely suggest that valuation uncertainty benefits acquirers, who apply discounts to targets' value attributable to information asymmetry, the authors argue that the opposite may be the case.Design/methodology/approach: Through multivariate econometric analysis of transaction data, the authors establish the link between the degree of valuation uncertainty measured by targets' track of public listing and acquisition premia. The authors use text-mining tools to measure acquirer–target similarity and control for its role in intermediating the posited empirical relationships.Findings: Having analyzed 618 acquisitions involving listed targets from China, the authors find that acquirers pay higher valuation premia for the more recently listed and relatively younger companies than for those with a longer history since floatation. Similar patterns apply to valuation multiples. Higher valuations are partially attributable to premia for control, as acquirers are likelier to buy a majority stake in the recently listed firms, especially if the latter are similar to them. Such transactions take less time to complete and involve a transfer of larger share blocks despite the higher degree of information asymmetry and a frequent lack of targets' operational profitability. The authors also observe a significant premium for target–acquirer similarity: acquirers appear to rush deal completion due to possible overestimation of targets' potential and familiarity bias.Originality/value: The authors show that acquisition premia may be driven by acquirers' proclivity to place risky investment bets on the growth potential of opaque targets. This pattern may partially explain frequent failures of mergers and acquisitions (M&A).

Purpose: The article investigates the patterns of asset impairment recognition in search of signs of “big bath” earnings management practices across an internationally diversified sample of public companies. It also elucidates the incentives that may underlie such practices and explores possible safeguards embedded in the existing corporate governance mechanisms.Design/methodology/approach: The article applied static panel and binary logit models to an international firm-level panel dataset of 1045 public companies observed between 2003 and 2018.Findings: Our empirical results suggest that recognition of asset impairment has no determinate impact on earnings volatility. Investigating the possibility of “big bath” earnings management practices, the authors found no impact of asset impairment recognition on total senior executive compensation in firms, which pay performance-based remuneration. The quality of corporate governance has appeared to impact the firms’ intertemporal proclivity to recognize asset impairment with those having the more entrenched and management-controlled boards being more likely to time impairment recognition by delaying it during exceptionally good and exceptionally bad years. While generally unlikely, recognition of asset impairment in a period with a recorded negative operating performance is found to be closely associated with key executive departures.Originality/value: The article corroborates the salient role of corporate governance mechanisms in shaping the intertemporal patterns of asset impairment recognition. The possible remedies to the phenomenon should be derived therefrom.

Firms employing former or incumbent members of management and supervisory boards of commercial banks exhibit higher acquisitiveness. The presence of bank-associated officers increases firms’ proclivity to engage in serial, cross-industry, and cross-border acquisitions. Firms employing bank-associated officers buy targets with lower complementarity. They are also significantly more likely to settle transactions in cash, especially their first acquisition. While all firms experience acquisition-related increases in leverage, the latter is higher in firms employing bank-associated officers, particularly those associated with state-owned banks. Acquisitions completed by banker-employing firms record lower short-term shareholder returns than the remainder of the research sample.

By studying M&A deals completed by European energy and power companies between 2002 and 2021, the paper inquires into the impact of corporate consolidation on the competitive positioning of individual energy firms and the concentration of market power on the national energy markets in the EU countries. Our evidence suggests that the European energy market may be moving towards a greater concentration of market power as market leaders are shown to primarily acquire their peers from national markets, while outsiders are more likely to diversify into non-energy sectors, which may further endanger their competitive positioning in the future. We also find that M&As allow energy and power companies to substantially increase their market share within national markets. The said impact is stronger in case of cross-border deals, including those within and outside of the EU. At the same time, only cross-border deals are associated with sufficiently strong revenue growth to advance firms’ relative positioning within national markets. The relative positioning of firms in the EU market remains unaffected by M&A activities, which may be indicative of extreme rigidity and segmentation of the EU market. While at the country level, M&As are found to contribute to a reduction in market concentration measured by a number of indicators, this negative link is documented to be entirely driven by non-core acquisitions involving targets from non-energy industries.

Purpose: The study aims at inquiring into the relationship between acquirer–target business similarity and mergers and acquisitions (M&A) transaction outcomes.Design/methodology/approach: Relying on textual analysis of acquirers' and targets' business descriptions from M&A transaction synopses, the authors establish that posttransaction operating outcomes are negatively associated with acquirer–target business similarity.Findings: While similar business profiles allow for optimization of overheads, sales growth and margins demonstrate better dynamics when acquirers and targets are more dissimilar, which allows for greater competitive gains. On average, targets are more dissimilar from acquirers than acquirers are from their competitors. The degree of competition within acquirers' industries and acquirer–competitors' business similarity are found to be positively associated with the likelihood of engaging in serial horizontal acquisitions involving more similar targets, mostly from the domestic market. Competitive pressure is evidenced to push acquirers for a faster completion of acquisition process. Cross-border acquisitions are found to be associated with lower acquirer–target and acquirer–competitors' similarity, which suggests that Chinese companies expand overseas primarily for strategic reasons of gaining a competitive edge rather than to simply improve sales.Originality/value: The paper contributes to the limited pool of empirical literature relying on text mining techniques to establish the determinants of M&A transaction outcomes. The methodology used in the study outperforms the conventional techniques of operationalization of business similarities through General Industry Classification Standard (GICS) industry matching. The study investigates the intermediating role of intraindustry competition in fostering firms' acquisitiveness.