Essays on mergers and acquisitions in China : are state owned enterprises sold at a discount and why?

Abstract

This thesis consists of two essays on the acquisitions of state-owned enterprises (SOEs) in China from the agency-cost perspective. In the first essay, I examine acquisitions of SOEs in China and ask whether SOEs are being fairly valued in the transactions. To answer this question, I compare the transaction values between SOE targets and non-SOE targets using a sample of acquisitions announced during the period of 1999-2014. I find that compared with non-SOE targets, SOE firms are being sold at a significant discount, based on either price multiples (for both public and private target firms) or the stocks’ pre-announcement market values (for public target firms). Turning to market reaction, I further document that the stocks of SOE target firms experience lower abnormal returns at the announcement of an acquisition proposal than those of non-SOE targets. I view these findings as evidence that state owned enterprises in China are being sold at a discount. It is worth noting that this discount effect of state control is prominent for smaller target firms.

To explore the reasons why SOEs are sold at a discount, in the second essay I further investigate the welfare of target firms’ CEOs surrounding acquisitions. In this examination, I first analyze the CEO turnover of listed target firms subsequent to the respective acquisition announcements within the same fiscal year. I find that CEOs of SOE targets are less likely to be replaced after an acquisition than are their non-SOE counterparts. This difference is greater when the acquisition does not lead to a change in firm control or when the CEO of the SOE target holds more stock shares. I then examine changes in CEO compensation from before to after an acquisition. While there is no meaningful difference in compensation for retained CEOs between SOE targets and non-SOE targets, the departed CEOs of SOE targets leave with significantly higher compensation than their non-SOE counterparts. Overall, my findings are consistent with the more severe agency problems in SOEs, relative to non-SOEs, which result in that SOE shares being sold at a discount while allowing the managers, who are motivated by self-interest and pursue private gains at a cost to shareholders, to benefit from reduced turnover or increased compensation upon departure.