Testing the Inefficient Management Hypothesis: Are United Kingdom Mergers and Acquisitions Disciplinary?

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Auzius Kazombo Mwale
Department of Accounting & Finance
Testing the inefficient management hypothesis: Are United Kingdom mergers and acquisitions disciplinary? This thesis is provided in fulfilment of the requirements
of the degree of Doctor of Philosophy at The University of Stirling May 2007
ACKNOWLEDGEMENTS
I would like to thank various people to whom I am indebted for assisting me in producing this thesis. I am greatly indebted to Professor Robin Limmack for assisting me with the groundwork for this study. I am greatly indebted to Dr Kevin Campbell, my principal supervisor for his continuous support and guidance throughout the period of study. I would to thank the Faculty of Management and the Department of Accounting and Finance at the University of Stirling for moral support, without which completion of this study on time would not be achieved. I would like to thank Roy Baker, the research assistant in the Department for assisting with office back up. This thesis is dedicated to all my teachers, especially Mr Chagwesha, who taught me to read and write in my first grade class way back in 1967. I would like to thank God, and members of my family for the support I received during my difficult hours throughout the duration of my stay at University of Stirling. i

ABSTRACT
A large body of research has examined the impact of takeovers on corporate performance. Although there has been a considerable volume of research on the wealth effects of takeovers to date, there has been very little evidence on the disciplinary role. The aim of this study is to contribute to the takeover debate by examining whether UK takeovers are disciplinary. This study replicates previous findings on whether the market for corporate control benefits firm managers or whether it is an avenue to maximise shareholder wealth. This study examines 153 UK takeover bids in the period 1990 to 1997. This period was chosen because it coincides with the publication of the Cadbury Report in 1992 when issues of corporate governance were raised and prescriptive recommendations were made to safeguard shareholder investment. In this study, results based on the evaluation of the share price suggest that targets of a takeover bid under-perform in the period prior to the bid. Accounting results also suggest that targets under-perform in the same period and this is consistent with the view that takeovers perform a disciplinary function when assets are reallocated to their most productive use. However, post bid share price performance shows modest improvement while accounting results suggest that managers of bidding firms fail to improve the operating performance of the combined firm. The findings of this study therefore dispel the notion that takeover bids are made in shareholders’ interests. The results suggest that UK takeovers are not disciplinary, but are undertaken to generate short-term economic benefits to managers at the expense of shareholders. ii

TABLE OF CONTENTS
ACKNOWLEDGEMENTS i
ABSTRACT ii
TABLE OF CONTENTS iii
LISTOFTABLES vi
LIST OF FIGURES (CHARTS) viii
CHAPTER 1 INTRODUCTION 1
1.1 STUDYOVERVIEW 1
1.2 MOTIVATION 3
1.3 RESEARCH OBJECTIVES 4
1.4 SIGNIFICANCE OF THE STUDY 5
1.5 RESEARCH METHODOLOGY 5
1.6 CHAPTER ORGANISATION 6
CHAPTER 2 MOTIVES AND CLASSIFICATION OF
TAKEOVER BIDS 7
2.1 CHAPTER OBJECTIVES 7
2.2 JUSTIFICATION FOR TAKEOVER BIDS 7
2.3 MOTIVES FOR DISCIPLINARY BIDS 14
2.4 CLASSIFICATION OF TAKEOVER BIDS AND DEVELOPMENT OF HYPOTHESES 17 2.5 REVIEW OF MARKET EVIDENCE 20
2.6 REVIEW OF ACCOUNTING EVIDENCE 27
2.7 SUMMARYAND CONCLUSIONS 35
CHAPTER 3 SAMPLE AND METHODOLOGY 38
3.1 CHAPTER OBJECTIVES 38
iii
3.2 DESCRIPTION OF DATA AND SAMPLE SELECTION 38
3.3 EVENT STUDY METHODOLOGY 43
3.4 MODELS FOR GENERATING NORMAL RETURNS 46
3.5 ABNORMAL PERFORMANCE 52
3.6 STATISTICAL TESTING 52
3.7 PITFALLS OF CUMULATIVE ABNORMAL RETURNS
METHOD 54
3.8 OPERATING PERFORMANCE 56
3.9 DISTINGUISHING OPERATING CASH FLOW FROM...
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