Performance and Characteristics of Acquiring Firms in the Chinese Stock Markets

Due to the share segmentation system, tender offers in the Chinese stock markets are very rare. We investigate the performance and characteristics of acquiring firms on 1148 M&A on the two Chinese stock markets from 1998 to 2003, where a listed company acquires stocks or assets from another target firm which most often is not listed. Using the market model, the CAPM model and the buy-and-hold method, we find significantly positive abnormal returns before (6 months) and upon M&A announcements, while the long-run abnormal returns (6 months) after M&A are insignificant. Within our sample, cash is the dominant payment method and the competition during M&A is low. The cross-sectional analysis on acquirers' market performance upon announcements shows that 1) the political advantages of acquiring firms (the higher state ownership and stronger government connections) have a significantly positive impact on the acquiring firm's performance, while the economic advantages (acquirers' pre-merger profitability or industry relatedness between acquirers and target firms) do not; 2) cross-province M&A implies more choices on the resource of the merger and possibly stronger government connections (the central government rather than the local government), and therefore creates more value to acquiring firms; 3) the power balance between the second to tenth shareholders and the top shareholder has a significantly positive impact to acquirers' returns, due to the possible better corporate governance; and 4) cash payment impacts positively and regulation development impacts negatively on the value of acquiring firms during M&A, respectively. Finally, although the market reacts positively on the M&A announcements, a quick check on the profitability change of acquiring firms before and after merger indicates that M&A does not improve the fundamentals of acquiring firms, at least not in the short-run.