8342937134

Pcrtanikal4(l). 93-100(1991)

Means of Payment and Bidding Firms' Stock Returns in the UK:

a Test of ‘Information Hypothesis’

SHAMSHER MOHAMAD and ANNUAR MD. NASSIR

Depa rt men tofA ccou n ti ng a n d Fi n a n ce Faculty ofEconomics and Management Univerńti Pertanian Malaysia 43400 UPMSerdang, SelangorDarniEhsan, Malaysia.

Keywords: bidding firms, share offers, cash offers, abnormal returns, information hypothesis'.

ABSTRAK

Kertasini mengkaji peranan bentuk pembayaran untuk menghuraikan pulangan terhadap firma-ftrma di United Kingdom yangrnembeli/mengambilalih syarikat melalui tawaransaharndon tunaipada masapengumuman tawaran lersebut. Nasil penyelidikan menunjukkan firma-firma yang rnembeli /mengambil alih syarikat dengan menawarkan saharn mengalamipulangan abńormalyuangnegatif dan signifikan semasapengumuman. Didapatijugaperbezaan diantara pulangan abnormal tawaran tunai dan tawaran saharn adalah positijdan signifikan. Kedua-dua hasil penyelidikan adalah konsisten dengan saranan hipotesis maklumat.

ABSTRACT

This paper explores the role of the means oj payment in explaining the returns to U.K. bidding firms in shareand cash offers at the announcement of the offer. The findings rwcal that bid der firms that madę share ojfers expeńence signigicantly negatweabrwnnalreturns at theannouncement period and that thedifference in abnormal returns between cash and share offers arepositioe and significant. Both findings are consistent with the information hypothesis

INTRODUCTION

Compared to the US, there is little published evidence in the U.K. on the announcement period returns of firms involved in takeovers. Earlier studiesbyNcwbould (1970),Utton (1974),Singh (1971), Franks, Broylesand Hecth (1977), Barnes (1974), Firth (1980) and Dodd and Quek (1985) centredon mergers rather than takeovers. There isa technicaldifference between a tnerger, which is a negotiated deal and a takeover which is a surpi ise attack on the target management through a direct appeal by bidder to the target shareholders to sell theirsharesatapreinium to the market price. The lack of published evidence on takeovers could be due to the lackofadatabaseon such activitiesand/ or the lackofdemand forempirical studieson the subject as regulators in the U.K. do not depend on empirical evidence to guide regulatory policy formation (English 1987).

i his paper intends to explore the behaviour of announcement period returnsofbiddersinvolved in takeoversin the U.K. during the period 1985 to 1988. In particular, it examines the validity of the

Information hypothesis’ assuggested by Myersand Majluf (1984) on bidder returns in cash and share offers.

INFORMATION HYPOTHESIS

In complete markets with symmetric information and in the absence of taxe$, shareholdersshould be indifferent to the means of payments used in takeovers.

The share price response should refiect any changes in the fundamental value$ induced by the takeover. However, the presence of a non-neutral tax system and ihe constraints imposed by the Takeover ('.ode mayencourage the useof particular types of payment in takeovers (Franks, Harris andMayers 1988).

In the US, Myers and Majluf (1984) have sug-gested that because ofinformational asymmetries, the form of payment offered by bidders in take-overs provides a signal to investors of the estimated value of the bidder’s shares. They postulate that a bidder is better informed about the true value of its shares and will tend to offer an exchange of shares