The Impact of Mergers and Acquisition Activity on the Time Series Variation in the Stock Size Premium

• Název práce v češtině: Vliv fúzní a akviziční aktivity na změnu velikostní prémie akcií v čase
• Název v anglickém jazyce: The Impact of Mergers and Acquisition Activity on the Time Series Variation in the Stock Size Premium
• Klíčová slova: oceňování aktiv, velikostní prémie, fúze a akvizice, fúzní vlny, riziko
• Klíčová slova anglicky: asset pricing; size premium; mergers and acquisitions; merger waves; risk
• Akademický rok vypsání: 2017/2018
• Typ práce: diplomová práce
• Jazyk práce: angličtina
• Ústav: Institut ekonomických studií (23-IES)
• Vedoucí / školitel: doc. Bc. Jiří Novák, M.Sc., Ph.D.
• Řešitel: skrytý - zadáno vedoucím/školitelem
• Datum přihlášení: 21.10.2017
• Datum zadání: 21.10.2017
• Datum a čas obhajoby: 20.06.2018 08:30
• Místo konání obhajoby: Opletalova - Opletalova 26, O105, Opletalova - místn. č. 105
• Datum odevzdání elektronické podoby: 11.05.2018
• Datum proběhlé obhajoby: 20.06.2018
• Oponenti: doc. PhDr. Adam Geršl, Ph.D.

Seznam odborné literatury

Alexandridis, G., Fuller, K.P., Terhaar, L. and Travlos, N.G., 2013. Deal size, acquisition premia and shareholder gains. Journal of Corporate Finance, 20, pp.1-13.
Andrade, G., Mitchell, M.L. and Stafford, E., 2001. New evidence and perspectives on mergers.
Banz, R.W., 1981. The relationship between return and market value of common stocks. Journal of financial economics, 9(1), pp.3-18.
Bennett, B., & Dam, R. (2017). Merger Activity, Stock Prices, and Measuring Gains from M&A.
Berk, J.B., 1995. A critique of size-related anomalies. The Review of Financial Studies, 8(2), pp.275-286.
Cremers, K. J. M., Nair, V. B., & John, K. (2009). Takeovers and the Cross-Section of Returns. Review of Financial Studies, 22(4), 1409–1445.
Doran, J. S., Jiang, D., & Peterson, D. R. (2012). Gambling Preference and the New Year Effect of Assets with Lottery Features*. Review of Finance, 16(3), 685–731.
Fama, E.F. and French, K.R., 1992. The cross‐section of expected stock returns. the Journal of Finance, 47(2), pp.427-465.
Martynova, M., & Renneboog, L. (2008). A century of corporate takeovers: What have we learned and where do we stand? Journal of Banking & Finance, 32(10), 2148–2177.
Palepu, K.G., 1986. Predicting takeover targets: A methodological and empirical analysis. Journal of accounting and economics, 8(1), pp.3-35.
van Dijk, M. A. (2011). Is size dead? A review of the size effect in equity returns. Journal of Banking & Finance, 35(12), 3263–3274.

Předběžná náplň práce

Research question and motivation
The main goal of our research is to test whether the explanation of size premium could stem from mergers and acquisitions. This relationship has not been tested yet, or at least we have not identified any article that would test such relationship directly.
Stock size premium was observed already in 1980s (Banz 1981) and despite its common use in financial practice, it is still missing a complete and widely accepted theoretical explanation (van Dijk 2011). We have identified five major empirical findings in existing literature on merger and acquisitions, which all together establish a strong argumentation basis for explanation of size premium. We aim to test whether there is any potential link between stock size premium and takeover activity.
Contribution
We have identified five major empirical findings in existing literature on merger and acquisitions, which all together establish a strong argumentation basis for explanation of size premium.
We hypothesize that an increase in takeover activity should result in return increase in differences between small and large firms for the following reasons. Small firms receive half as much takeover premium (average of 54%) than large firms (35%) (Alexandridis et al. 2013), small firms have higher likelihood to be acquired than large firms (Palepu 1986), and takeover activity ranges from 2% to 9% in terms of deal count to total number of listed firms as well as in terms of deal value to total market capitalization. Additionally, large takeovers oftentimes destroy value for the acquirer, which results in decrease in large stock returns (Martynova & Renneboog 2008). And lastly, takeovers fit well into the explanation of January effect of size premium provided by Doran et al (2012). They succeed in explaining the January effect by the behavior of retail investors who hold 50-70% of the stock market. Retail investors incline to buy stocks with lottery-like payoffs in the beginning of a year. We claim that stocks having higher likelihood to be taken over belong to the category of lottery-like stocks due to high acquisition premiums paid to them.
Methodology
We use a dataset available at professor Kenneth French’s website for size premium and several measures of takeover activity. We obtained annual dataset of realized deal count and deal value from SDC Thomson Reuters and monthly data of announced and realized deal count and deal value from Bloomberg Terminal.
To test our hypothesis, we estimate the relationship in two forms, contemporaneously and based on anticipated takeover activity. The idea behind the second form is that the takeovers are anticipated to a certain degree and information leakages lead to run-up premiums of takeover targets (Bennett & Dam 2017), therefore, the premiums are realized ahead of takeover activity. In particular, we estimate whether size premium in one month can be explained by an increase in takeover activity in the following months.

Předběžná náplň práce v anglickém jazyce

Research question and motivation
The main goal of our research is to test whether the explanation of size premium could stem from mergers and acquisitions. This relationship has not been tested yet, or at least we have not identified any article that would test such relationship directly.
Stock size premium was observed already in 1980s (Banz 1981) and despite its common use in financial practice, it is still missing a complete and widely accepted theoretical explanation (van Dijk 2011). We have identified five major empirical findings in existing literature on merger and acquisitions, which all together establish a strong argumentation basis for explanation of size premium. We aim to test whether there is any potential link between stock size premium and takeover activity.
Contribution
We have identified five major empirical findings in existing literature on merger and acquisitions, which all together establish a strong argumentation basis for explanation of size premium.
We hypothesize that an increase in takeover activity should result in return increase in differences between small and large firms for the following reasons. Small firms receive half as much takeover premium (average of 54%) than large firms (35%) (Alexandridis et al. 2013), small firms have higher likelihood to be acquired than large firms (Palepu 1986), and takeover activity ranges from 2% to 9% in terms of deal count to total number of listed firms as well as in terms of deal value to total market capitalization. Additionally, large takeovers oftentimes destroy value for the acquirer, which results in decrease in large stock returns (Martynova & Renneboog 2008). And lastly, takeovers fit well into the explanation of January effect of size premium provided by Doran et al (2012). They succeed in explaining the January effect by the behavior of retail investors who hold 50-70% of the stock market. Retail investors incline to buy stocks with lottery-like payoffs in the beginning of a year. We claim that stocks having higher likelihood to be taken over belong to the category of lottery-like stocks due to high acquisition premiums paid to them.
Methodology
We use a dataset available at professor Kenneth French’s website for size premium and several measures of takeover activity. We obtained annual dataset of realized deal count and deal value from SDC Thomson Reuters and monthly data of announced and realized deal count and deal value from Bloomberg Terminal.
To test our hypothesis, we estimate the relationship in two forms, contemporaneously and based on anticipated takeover activity. The idea behind the second form is that the takeovers are anticipated to a certain degree and information leakages lead to run-up premiums of takeover targets (Bennett & Dam 2017), therefore, the premiums are realized ahead of takeover activity. In particular, we estimate whether size premium in one month can be explained by an increase in takeover activity in the following months.