THE COMPETITIVE MARKET FOR CORPORATE CONTROL IN SINGAPORE : MOTIVES AND IMPACT ON SHAREHOLDERS' WEALTH

Abstract

Past studies on mergers and acquisitions have identified a plethora of possible motives. This study focuses on two common motives in interfirm mergers and acquisitions, namely, the capture of financial synergy and the removal of managerial inefficiency, and analyses the impact of takeovers on the wealth of the shareholders of the acquiring firms. There are three parts in this study. The first part investigates the hypothesis that in a perfectly competitive equity market, no abnormal gains can be reaped by the shareholders of acquiring firms from takeover activities. The second part analyses the Inefficient Management Hypothesis which postulates that inefficiently managed companies are likely to be disciplined by the market. The third part builds upon the work of Myers and Majluf (1984) and Bruner (1988) who postulated that there exists a financial synergy motive through the exploitation of financial slacks in interfirm mergers and acquisitions. The findings support the Perfectly Competitive Market for Corporate Control. No positive abnormal returns were obtained by the shareholders of the acquiring firms in the announcement month. Target firms, generally, exhibit a negative drift in their risk-adjusted returns up to 10 months before the takeover event providing evidence to support the hypothesis that takeovers were mounted to remove managerial inefficiency. There was also evidence to imply that the acquiring firms were exploiting the financial slacks of the target firms to enhance shareholders' wealth. The empirical evidence obtained here did not support the work of Bruner (1988) using US data but is consistent with the works of Kim, et. al. (1977) and other researchers. Overall, the empirical evidence supports the existence of an efficient market for corporate control in Singapore.