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Essays on corporate risk management and stock offers in mergers Zhao, Longkai

Abstract

This dissertation consists of three essays in the area of corporate risk management and stock offer forms in mergers and acquisitions. In Essay One, I discuss the effect of information on corporate risk management decisions when the information is asymmetric between the insider and the market. I suggest an explanation for previous contradiction between existing theories and empirical findings, which states that fewer small firms choose to hedge. Considering two different scenarios of information revelation to the market, I find hedging cost is not the main reason preventing firms from hedging. Rather asymmetric information plays the decisive role in a firm s risk management policy. One of the empirical implications is that cash flows with high variances may discourage firms from hedging even when they face high financial distress costs. Essay Two discusses different stock offer forms in mergers and acquisitions: fixed ratio, fixed value and collar agreement. In a theoretical model, I argue that the information revealed between merger agreement and completion can play an important role in determination of optimal forms. A collar offer is the optimal choice for a leading firm when it is uninformed of the following firm's value in the negotiation process. A collar offer increases the probability that a merger can be accepted by different types of following firms. I also find that the collar feature is more socially desirable because of its efficiency in utilizing positive synergy from mergers. Empirical findings of the announcement effects of stock offer forms are documented in Essay Three using a sample with detailed information of collar offers. When the endogeneity problem is dealt with a two-stage probit least square model, I find the average abnormal return of target firms in collar offers is significantly higher than that in other stock offers, and the average abnormal return of acquiring firms in fixed value stock offers is higher than that in fixed ratio stock offers. I also find that the likelihood of collar offers is increasing with the relative size of target firm to acquiring firm, when the relative size is small. But it decreases when the relative size is large. The evidence supports the hypothesis that the prior objective of acquiring firms in mergers is control rights rather than value maximization.

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