5.6 Results and Discussions
5.6.14 Managerial Discretion and Acquirers’ Profitability in M&A Transactions…156
5.6.13 Regression Results
5.6.14 Managerial Discretion and Acquirers’ Profitability in M&A Transactions
The results of the present investigation as shown in Table 5.8 below show a coefficient which is negative and statistically significant at 10% for the relationship that exist between the managerial discretion and M&A interaction on one hand and its impact on the acquirers’
profitability levels on another, thereby confirming hypothesis H5.3 of this study. However, this weakly statistically significant result suggests that, managerial discretion which is proxied by the number of shares owned by management does not have a substantial impact on these acquirer firms’ performances as far as their profitability levels are concerned. The possible reason for this could be that, managerial holdings in most of these firms may be low which will not afford them enough power to use their discretions to undertake investments like M&As to realise positive returns for their respective firms. This result is consistent with the views of Brush et. Al. (2000) that, negative implication exists between managerial discretion and firms’ performances. It is, however, contrary to Chang and Wong (2003)’s suggestion that, a positive relationship exists between managerial discretion and firm’s performance if a firm has higher ownership concentration, and that managerial discretion is unrelated to firm performance if firm has lower ownership concentration.
Turning to the control variables, results of the study reveals the coefficient of the acquirers’
total assets to be positive and statistically significant at 5% for the relationship existing between the acquirers’ total assets and profitability levels. This implies that, improvements in total assets of acquirers from the emerging markets result in increases in their profitability levels. This suggests that, acquirer firms from the emerging markets need to put strategies in place to ensure continuous growth in their assets for sustainable growth in profits.
The coefficient for total debt levels of the acquirers is negative and statistically significant at 1%. This means that, as these firms’ debt levels increase, they hold back their appetites to undertake investment projects such as M&As and possibly engage in other activities that will help them to improve on their high debt levels to increase profit levels. Broadly, this result seems to be in agreement with Akinlo and Asaolu (2012)’s assertion that, profitability and debt have a negative relationship. It is also consistent with Andersson and Minnema (2018)’s claim that, leverage has a significant negative relationship with profitability. The result,
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therefore, suggests that, the acquirer firms may be relying on external debt to fund their activities and this may run contrary to the pecking-order theory, which suggests that firms mainly use internal financing over external financing to achieve higher profitability.
Lastly, the coefficient for Tobin’s q (proxy for the acquirers’ growth opportunity) is positive and also highly statistically significant. This suggests that, growth strategies these firms adopt have an impact on their profitability levels. These strategies could be organic where they grow through their own internal resources or by inorganic means, example of it is acquisitions. Consistent with Dickerson et al. (1997), a firm’s profitability increases by almost 6.9% if it doubles its internal growth rate compared to a mere 0.2% increase in profitability if growth is by means of acquisitions.
Table 5.8: Impact of managerial discretion on profit levels of acquirer firms from the emerging markets in M&A transactions.
Variable Coefficient Std. Error t-Statistic Prob.
C 6.655 3.121 2.132 0.035 MGROWN*DMA -0.891 0.529 -1.684 0.094*
LTASSETS 0.693 0.269 2.577 0.011**
DEBT -2.893 0.662 -4.367 0.000***
TQ 5.126 1.056 4.854 0.000***
Adjusted R2 =0.24 F- statistic (12.872) Probability (.0.0000)
D.W statistic(1.9) Source: Author's estimation, 2018, based on data collected.
Notes: *significant at 10%, ** significant at 5%, *** significant at 1%.
5.7 Chapter Summary
This chapter investigated the relationship between M&As and managerial ownership as a driver of M&A transactions executed by emerging market firms. In this chapter, the study also investigated whether acquirers’ managerial ownership also influences their decisions regarding the sizes of target firms they pursue in acquisition transactions. Further, the chapter explored the impact of managerial discretion on profit levels of emerging market acquirers in their acquisition pursuits. To achieve this, the study used insiders share percentages outstanding as a measure of managerial ownership, where M&A was measured as one (1) if a firm executed a deal and zero (0) otherwise. Firms’ sizes were also coded as one (1) if an
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acquired firm was smaller and zero (0) otherwise. The coding and classification of the target firms into smaller and larger firms were done based on their relative sizes with their respective acquirers by dividing the total deal value of each transaction by the total assets of the acquirer and multiplied by 100% (Park & Jang, 2011). This was done to enable us to identify the various firm sizes these acquirers become interested in acquiring during acquisition transactions.
Using probit regression analysis, we found the coefficient of managerial ownership to be positive but statistically insignificant with M&As, suggesting that, managerial share ownerships in emerging market acquirer firms do not drive these firms into M&A deals.
Further, the result of whether managerial share ownerships influence the acquirers’ decisions about sizes of target firms they pursue during M&A transactions was negative and statistically insignificant. This shows that, managerial share ownerships do not influence the acquirers in their decisions regarding the acquisition of smaller-sized targets in M&A transactions.
Based on the findings, the study concludes that, managerial ownership of firms in the emerging markets, neither motivate them to undertake acquisition deals nor influence their decisions on the sizes of targets they pursue. To the best of the researcher’s knowledge, this is the first study on influence of managerial ownership on M&As by emerging market acquirers and sizes of target firms they become interested in pursuing during merger deals. The result from this study indicates that, a percentage change in managerial share ownership of the firms is only 4% more likely to motivate these acquirers to engage in investment project such as M&As. This value of 4%, however, falls short of what Faccio and Masulis (2005) and Herman (1981) suggest could allow managers to have control over a firm and its investment decisions like M&As. Faccio and Masulis suggest that managerial holdings of more than 20%
can make managers have total control over a company and have the ability and power to effectively influence the firm’s investment decisions, including mergers and acquisitions while Herman also suggests a 5% ownership level as a focal stake beyond which ownership can have substantial influence on decisions to undertake any investments by firms. The implication of these findings is that, for managers to have absolute control over firms and be able to influence investments decisions such as M&As especially in the emerging markets, their ownership percentage should be above the suggested significant level of 20%.
Lastly, findings from the study also reveal that, managerial discretion have a negative impact on acquirer firms’ performances as far as their profitability levels are concerned. However, the result suggests that, it is the acquirers’ total assets and their Tobin’s q representing the
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ability them to grow that have positive influence on their profitability levels while their total debt also affects the firms’ profit levels negatively.
The next chapter ends our investigations on the three main objectives for this thesis by exploring whether acquirer firms from the emerging markets benefit from M&A transactions they execute in terms of growth in profits (ROAs) and improvement in growth opportunities (Tobin’s q).
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CHAPTER SIX
MERGERS AND ACQUISITIONS AND FIRMS’ VALUE GROWTH IN
EMERGING MARKETS