8342937136

SHAMSHKR MOHAMAD AND ANNLAR MD. NASSIR

to the targei shareholders when itssharesare per-ceivcd to be overvalucd. When shares are offered by i he biddcr, the ultimategains to thc shareholders of the targetfirm willdepend on the valueof the sharesoffered, which is partly determined by the expected success or failnre of the acquisition at-tempt and if successful, the expected outcome in the post iakeover period.

It isassumcd that the bidder signals in forma? tion abotit its equity value through the form of payment it offers to the target shareholdersat the annotincement of the offer. I he bidder will olfer cash if it be!ieves that its shares are undervalued therebyavoidingsharingofthe potential incrcase in valuewith target shareholders.

I lansen (1987) suggests that if a target isbctter informed a bont itsown value andexpectsthisto be revealed only after the acquisition, it will prefe'ra share offer when it perceives itssharesare undcr-yaltied.

Fishman (1986) suggests that if the bidder is well informed about the potential contribulion of the target. it will of fer cash in acquisition to avoid sharing the heneflts with the target. I fowever,if the bidderisuncertainabout the targetsconti ilnition. the bidderwill prefer toofTeran ext hangę of shares to the target. I heseeombinedsuggestionsof Myers and Majlut (1984), Fishman (1986) and 1 lansen (1987) relating to the above information effect resultingfrominformationasymmetry between the bidders management and the market constitute the information hypothests*.

In the l S, I ravlos (1987) providedevidenceof significant differences in theabnormal returnsof bidders olTering shares and those offering cash.

I lis findingsconłirmed the prescnceof the information effect. He reported that the two-dayan-nouncementcitmulativeabnormal return of share financing bidding firms is significantly negative (CAR =-1.1%, Z =-5.07) but for bidders offering ( ash, it isnot signilit anth clifferent from/ero (CAR 0.24%.Z=1.I1).

Jensen and Ruhack (1983), reviewing theevi-denceof takeoveraetivity in the US,found that the returns to bidding firms’ shareholders in takeovers were posime, whereas those of mergers were /ero.

Nonę oft he empirical work discussed imestigated

differences due to the exchange medium. How-ever. the presence of the information effect is implied in the flndingsasmost takeoversin the US are financed by cash and mergers by exchange of shares.

Sm i t h (1986) and /\sq ui t h. Brun ner and Mullins (1987) show that in takeovers financed by new

equityissues, the share price return sto bidder firinj are significantly lower than in offers financed bj cash.

In the U.K., theonlypublished evidenceof the information effect on bidder returns in takeoversi$ reported by Franks, Harris and Mayers (1988). Their study showed that neither cash nor equity considerationsdisplayed significantabnormal re-turns to bidders' shareholders in the annourice-tnent month, but it is possible that information lcakage before thc announcemen l and/or the eon-founding effects of monthly returns could have obscured the effect of the form of payments or, bidder returns in their study.

If information effects are present, thechange in the bidding firm sshare price at the announcc-ment of the offer will reflect both the gains (oj losses) from the iakeover and the information effects. It isnot possible to separate the effect of thc form of payment perston the bidder s share price because the form of payment isalwaysannounced with the offer. It isthereforeassumed thattheeco-nornic effects of the takeover are the same for casli and share offers. By segregating the sample with respect to the form of payment and by comparing the dif ferences in the annotincement period returns, it will be possible to identify the effect of thc form of payment on the biddeCsshare price. If thc information hypolhesisholds, the returns to shareholders in cash offers will begreater than those in share offers at the annotincement of the offer.

Other things heing equal, the returns to l)id ding firms in cash offers are expected to be positiu and in share of fers to be negative at the announce! ment of the offer. due to the signalling eflec t.

The inf ormation hypothesis suggestedb\ Mvet> and Majhif is silem on the issue of combinatiod offers. It is assumed that the net effect of thc comhination offer on the bidder s share price dependson the weight of the cash and share por* tion in the offer. If the share portion isgreatertbat the cash portion,a negat i ve effect on the bidder share price tan beexpccted. If the cash portionb greater than the share portion a positive effect i* likely.-If the comhination offer eon sistsofan ecjuai portion of shares and cash, the net effect on thf bidder’s share price would not be significantlt different from zero.

DATA AND METHODOLOGY

Dala

I hedataanalysed in thisstudy isdrawn f rom public announcements of takeover proposals. Thu

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PERTANIKA VOL 1 t NO.l. 1991