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 Corporate governance and bidder returns: Evidence from China’s domestic
mergers and acquisitions

Abstract

This paper examines the effects of corporate governance on domestic mergers and acquisitions around
announcement (short term) and following announcement (long term). Using a sample of 1,921 events
representing 1,059 unique Chinese listed firms between 2001 and 2010, we find that market responses
differ in ways which suggest a difference in market’s assessment of announcements from the
perspectives of short term and long term. Bidders obtain significant positive abnormal returns over the
five-day event period but suffer significant wealth losses two years following the deal announcement.
Further analyses on factors driving the price difference show that executive ownership (positive) and
state ownership (negative) exert opposite effects on the announcement period returns. Board
independence measured by the composite corporate governance index exerts a significant, positive
effect on shareholder wealth. The returns also differ by method of payment with positive (negative)
effects from stock (cash) financing. Furthermore, bidding firms from the same region and with high
Tobin’s q are associated with low abnormal returns. Long-term regression analyses show that the
positive impact of executive ownership remains. Small firms perform better than large firms. Large
deals have a negative effect on abnormal returns and prior acquisition experience is associated with
higher abnormal returns. The study highlights the need for the state to accelerate the share structure
reform and, formulate policies that encourage executive ownership and sound corporate governance.
It also highlights the importance of non-economic factors as motivators of Chinese mergers and
acquisitions activity.

Keywords: Abnormal returns, board structure, corporate governance, mergers and acquisitions,
ownership structure.

Track: Corporate governance

Word count: 12,806.

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1 Introduction

This article focuses on two extensively researched and yet highly controversial areas in
finance and accounting, namely mergers and acquisitions (M&A) and corporate governance.
M&A has been a hot topic in both capital markets and academia mainly because of its
unprecedented growth in both the number and value of transactions involved, and its effect
on the wealth of parties involved. M&A have become an important socio-economic
phenomenon and a dominant growth strategy for many corporations around the world. A
review of the M&A trend worldwide over the period between 1995 and 2010 shows that the
number of deals has increased by 59.9% while value has increased by 176.5% (DePamphilis,
2012). In China, M&A have been and continue growing at phenomenal rates since its
introduction in 1993. According to a report by Baird, R. W. and Company (2011), from the
year 2001 to 2009, China’s M&A activity grew at the rate of 20.5% compounded annually
and in 2010 domestic M&A deals rose by 12% over 2009, reflecting healthy economic
fundamentals and a slightly larger risk appetite among acquirers. The number of M&A
transactions had reached 4, 104 and the total transaction value had reached US$ 182 billion in
2010. Whether shareholders obtain wealth gains from firms engaging in M&A is a question
that needs some answers.
Evidence from prior studies suggests that, in the short term, the average return for bidding
firm shareholders is mixed and inconclusive. Some studies find negligible positive returns,
others small loses and at best break even (Sudarsanam & Mahate, 2006; King et al., 2004).
Findings from long term studies are also inconclusive but suggest negative stock performance
which is very sensitive to the methodology used (Lyon et al., 1999; Dutta & Jog, 2009). Tuch
& O’Sullivan (2007) noted that “despite the disappointing evidence on bidder performance,
there is no evidence that past failure to generate positive shareholder returns has had an
impact on the volume of merger and acquisition activity” (p.142). Failure of M&A deals
(estimated to range between 60-80% (McCarthy, 2011)) to create value for the shareholders
has been attributed to the divergence of interests between managers and shareholders
(Bhaumik & Selarka, 2012). Interestingly, United States (US) and United Kingdom (UK)
have been the sites of most of these studies (Wang & Cheung, 2009).
Despite the growing importance of M&A as a growth strategy in emerging economies,
studies from these economies are still relatively few and contrast with the findings of those in
the US and UK (Ma & Tian, 2009). Research from emerging economies indicates that
bidding firm shareholders obtain positive abnormal returns (Chi et al., 2011; Li et al., 2011;
Kumar & Panneerselvam, 2009). The differences may be explained by the differences in
institutional settings between developed and emerging economies.
A number of explanations have been put forward to explain why M&A fail but these have
been considered to be far from complete (McCarthy & Dolfsma, 2012). For example, the
payment method, size of the acquirer firm, relative size of the bidder, transaction value,
listing status of the target firm, degree of relatedness between target and the bidder are some
of the well-known M&A performance drivers. Recently, researchers have come to recognise
the need for a more eclectic examination of the role corporate governance plays in
influencing M&A performance (Kroll et al., 2008). It is common wisdom that effective
corporate governance structure plays an important role in limiting the incentive for firm
managers to engage in value-destroying M&A. But this has not received much attention in
previous studies and there is therefore, only limited evidence on the link between M&A
transactions and corporate governance mechanisms (Cosh et al., 2008; Brewers III et al.,
2010). The present study fills a gap in the literature by examining the influence of Chinese
2
listed firms’ corporate governance mechanisms on shareholder wealth performance around
and following M&A announcement.
Compared to M&A deals in US and UK, deals in China are different in many ways. First, US
and UK have developed and mature capital markets. In China, M&A began only in 1993 and
became popular in the late 1990s after the establishment of the two stock exchanges,
Shanghai and Shenzhen Stock Exchanges, in 1991 and 1992 respectively and the
promulgation of the Company Law in 1993. Second, the ownership structure in the US and
UK is diffused and the conflict of interest is mainly between managers and the widely
dispersed and weak shareholders. Ownership structure in China, however, is characterised by
ownership concentration. In 2008, of the 1,604 listed firms on Shanghai and Shenzhen Stock
Exchanges, the top five shareholders controlled about 51% of the total outstanding share
(Liang and Useem, 2009). The conflict of interest is dominantly between the controlling
shareholders and minority shareholders, which often lead to expropriation of minority
shareholders by means of investing corporate resources in projects that maximise majority
shareholders’ interests.
Third, in China the state dominates shareholding in listed firms. This problem has evolved
from the planned economy principles where the state once wholly owned and controlled most
of the business enterprises. Additionally, most of senior managers come from state-owned
enterprises with almost two-thirds of the directors appointed directly and indirectly by the
state (Liang and Useem, 2009). Thus, decisions of management and board of directors will
represent the interests of the controlling and large shareholders who appoint them (Firth et
al., 2008). Accordingly, there is a very small presence of private investors. Chen et al. (2009)
find that at the end of 2004, management, foreign and employee share ownership represented
less than 2% of listed firms’ outstanding shares.
Fourth, political connectedness also plays a pivotal role in influencing M&A activities in
China. Connectedness in China is mainly due to what Faccio (2006) calls closet relationship
between firms and politicians and/or political parties. The involvement of the state as both
regulator and player stifles competition leading to weak market for corporate control and
board structures. Managers do not feel compelled to maximise shareholder value but
maximise social welfare. The independence of independent directors becomes questionable.
Huyghebaert and Wang (2010) argue that the appointment of independent directors is only a
window dressing exercise to comply with the law. Zhou et al. (2012) note that politically
connected firms get government support to acquire target firms in industries under state
control. Politically connected firms may also enjoy favourable financial support provided by
the four largest state-owned banks in the form of privileged bank loans and subsidies.
In this paper, we address the following issues: (1) are M&A associated with value creation
for bidding firms around and following M&A announcement; (2) what are the effects of
internal corporate governance mechanisms on bidder abnormal returns around and following
M&A announcement; and (3) what are the effects of firm-specific and deal-specific
characteristics on bidder abnormal returns around and following M&A announcement.
By examining 1,921 successful M&A deals between 2001 and 2010, we find that on average
shareholders of bidder firms gain positive abnormal returns within five days (-2, +2) around
the announcement date but later suffer wealth losses twenty-four months (+1, +24) following
deals announcement. Our results show that, in the short term, the market responds favourably
to the announcement made by firms where executives own shares supporting the agency
argument that appropriate incentives for managers can reduce agency problems associated
with M&A activities. The announcement associated with firms where the state own shares
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generate negative excess returns consistent with the widely held view that state ownership
destroys corporate value. We, however, find no evidence to suggest that legal person
ownership is associated with significant value effects in the context of China. Interestingly,
we find that individual board governance variables do not have an impact on abnormal
returns. Nevertheless, board independence measured by the composite governance index
exerts a significant, positive effect on shareholder wealth. When we look at the long-term
impact of corporate governance measures on abnormal returns, we find that relationships
change over time except for executive shares. Executive share ownership continues to exert a
significant positive influence on the bidder abnormal returns while state ownership and
corporate governance index lose their significance effect as well as change in impact
direction. These results still hold after we control for a range of variables representing firm
and deal characteristics.
The rest of this paper is structured as follows. Section 2 reviews literature on shareholder
wealth effects and corporate governance mechanisms, as well as develops the hypotheses for
this study. Section 3 discusses the data and methodology. Section 4 discusses empirical
results. Section 5 contains the conclusions and policy implications.

2 Literature Review and hypotheses

2.1 M&A motives
Several explanations have been put forward in an attempt to explain the rationale behind
firms engaging in M&A activities. Explanations identified from literature have been grouped
into neoclassical and behavioural theories (Mueller and Yurtoglu, 2007) or synergy, hubris
and agency motives (Hitt et al., 2001). Under neoclassical theories, where the markets are
efficient and managers acting rationally, then M&A should create value for the shareholders
due to synergies (Gaughan, 2010). Synergetic gains are realised through improved
operational efficiency, increased market power and more efficient use of human capital. In
this respect, managers aim to maximise shareholder value suggesting that both target and
bidding firms gain during the M&A activity in the short term (Berkovitch and Narayanan,
1993). The returns to bidding firms’ shareholders in the long term should be normal as the
market corrects itself over time as additional information becomes available (Oler et al.,
2008).
Under the behavioural theories, where the markets are not efficient and managers acting
irrationally, M&A destroy value. Explanation for value destruction is based on two
foundations. Managers may acquire other firms as a result of miscalculation through
overconfidence (hubris) resulting in overpayment (Weitzel and McCarthy, 2011; Roll, 1986;
Wang and Hickson, 2009). Or, the bidding firm managers may fail to recognise potential
economic gains from an acquisition because personal motives dominate their preferences
(Campbell et al., 2011). In this regard, M&A tend to intensify the already existing conflict of
interest (agency) between managers and shareholders in modern firms. The behavioural
theories predict that bidding firm shareholders lose value in the long term but not when the
M&A is announced.

2.2 Wealth effects around M&A announcement (short term)

Evidence from prior studies suggest that target firm shareholders obtain significant positive
abnormal returns around M&A announcement date (see e.g. Campa and Hernando, 2004;

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Ward and Jong-In, 2002; Bruner, 2002). However, empirical findings for bidders are not
clear. Bidders in general experience negative cumulative abnormal returns (CAR) (see e.g.
Swanstrom, 2006; Bauguess and Stegemoller, 2008, Cosh et al., 2006, Byrd and Hickman,
1992). Some prior studies find slightly positive abnormal returns to bidders (see e.g. Masulis
et al., 2007; Jong et al., 2007; Datta et al., 2001; Ben-Amar and Andre, 2006). Other studies
consider the combined return for the bidder and target firms. In a review of six studies Campa
and Hernando (2004) find that in almost all the studies, the combined return for bidder and
target firms is positive. This finding indicates that negative returns to bidders may be an
indication of wealth transfer from bidders to targets (Fuller et al., 2002).
Most research on M&A in China is limited and narrow or is based on small sample sizes. Li
and Chen (2002) in a study of 349 events between 1999 and 2000, find positive returns for
bidder firms and negative returns for targets, which they attribute to state intervention in the
process and the private firm liquidity discount. Similarly, Song et al. (2008) record positive
and significant returns around announcement date from a study of 23 acquisitions announced
between 1998 and 2007. Chi et al. (2011) examine the performance and characteristics of
bidding firms on 1,148 Chinese acquisitions from 1998 to 2003, and find positive abnormal
returns of 0.27% over a three-day event window. Chi et al. (2011) research also highlights
that the political advantages of bidding firms have a significantly positive impact on the
bidders’ performance, while the economic advantages do not. By contrast, Zhang (2003)
using a sample of 1,216 deals announced between 1993 and 2002, find negative returns and
conclude that hubris and agency hypotheses explain why bidding companies lose value.
Given that the Chinese government is heavily involved in the M&A process as both owner
and regulator and the private firm liquidity discount, it is hypothesised, in its null form, that:
H1.1: Bidder abnormal returns around M&A announcement are positive and significant.

2.3 Wealth effects following M&A announcement (long term)

Recent research studies on stock performance following M&A announcement record either
insignificant or negative abnormal returns in the long-term for bidders (Tuch and O’Sullivan,
2007). There are no agreed explanations for the negative abnormal returns in the long-term.
In their review of long-term stock performance, Jensen and Ruback (1983) reiterated that the,
“explanation of these post-event negative abnormal returns is currently an unsettled issue” (p.
22). One notable development over the years was the constant criticism levelled against
methodologies applied in measuring long-term abnormal returns by notable researchers such
as Kothari and Warner (1997), Barber and Lyon (1997) and Lyon et al. (1999). However,
none of the new developed methodologies is free from criticism. Twenty years on, what has
become clear is that application of different methodologies result in different findings and
that the testing process becomes a one over choice of econometric model to use rather than
being simply a direct test of the study at hand (Black et al. 2011).
In a review of five studies on stock performance a year after a successful M&A, Jensen and
Ruback (1983) 1 show that in four of the studies, bidders obtain negative abnormal returns. In
a comprehensive review by Agrawal and Jaffe (2000) 2 of twenty-two studies confirm that

1
The studies reviewed include Dodd and Ruback (1977); Mandelker (1974); Langetieg (1978); Asquith (1983); Malatesta
(1983). The study by Mandelker (1974) is the only one that reported positive abnormal returns. (See Jensen and Ruback
(1983: p. 21) for a table of the studies.
2
For a complete list of the studies see Table 1 from Agrawal and Jaffe (2000: p. 10)

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indeed bidder firm shareholders lose value in the long-term after a successful M&A. In recent
review, Tuch and O’Sullivan (2007) conclude, “the overwhelming consensus is that
shareholders in bidding companies suffer significant wealth losses when long-run returns are
considered” (p. 148). More recent studies use sophisticated statistical software packages such
as R and Stata applying bootstrapped skewness adjusted t-tests to avoid bias in the
measurement of abnormal returns, but still obtain similar results. For example, Sudarsanam
and Mahate (2006) using a sample of 519 successful UK takeovers completed between 1983
and 1995, find that three benchmark models record negative and significant but different
abnormal returns. According to Loughran and Ritter (2000), the differences are expected due
to the differences in powers of detecting abnormal returns performance wielded by different
methodologies. Similar results are shared by Bouwman et al. (2009) and, Dutta and Jog
(2009).
The few existing studies on long-term M&A wealth effects in China seem to be in consensus
that managers make M&A decisions that increase shareholder value. Zhou et al. (2012) using
a sample of 811 successful M&A deals between 1994 and 2008 and applying 24 months
BHAR methodology, find that bidder firms earn positive and significant abnormal returns of
23.36% at 1% significance level. They also find that SOEs (24.59%) outperform private
owned firms (16.91%) in terms of long-term market performance over the 24 months event
window. The results indicate that political connections of SOEs to the state through the
appointment of managers and directors, as well as being the regulator, enable them to obtain
lucrative deals at no premium. Boateng and Bi (2010) using a sample of 1,267 announced
deals between 1998 and 2008, find that bidders obtain positive and significant abnormal
returns of 5.15%. Similarly, Chi et al. (2011) find that bidder firms obtain positive and
significant returns of 5.30%. Chi et al. (2011) conclude that the positive abnormal returns
may be the result of low M&A competition (there is usually one bidder for a target) and that
political connections play a pivotal role in value creation. Alexandridis et al. (2010) also
share this conclusion.
However, in a study similar to the present study, Black et al. (2011) using a sample of 415
domestic M&A announced by Chinese listed firms between 2000 and 2009 find that bidders
lose a significant -7.98% over twenty-four months following the announcement. They use
bootstrapped skewness adjusted t-tests to avoid bias in the measurement of abnormal returns.
Given the overwhelming international evidence that bidders lose value in the long-term and
that in an efficient market returns to bidders over long windows should be normal and Black
et al.’s (2011) findings for China, it is hypothesised, in its null form, that:
H1.2: Bidder abnormal returns following M&A announcement are negative and significant.

2.4 Corporate governance and M&A performance

2.4.1 Agency theory
The 21st century firm represents a complex organisation that involves managing complex
interlocking relationships with its stakeholders (Swanstrom, 2006). One relationship that is of
paramount importance for a listed firm is that between shareholders and management. This
relationship is dominated by an inherent conflict of interest characterised by a potential
misalignment of interests where managers may pursue self-interests instead of shareholder
value maximisation (Jensen & Meckling, 1976). However, in China the highly concentrated
ownership structure of listed firms poses another agency problem. In such firms, the agency
problem between managers and owners is replaced by the agency problem between majority

6
and minority owners which may lead to expropriation of minority owners (Villalonga &
Amit, 2006). A firm can use a good corporate governance structure to ameliorate total agency
costs of a firm through monitoring and bonding mechanisms embedded in a good governance
structure. A number of studies have tested corporate governance mechanisms within the
M&A context and the ones considered in this study are discussed below.

2.4.2 Ownership structure

Shareholders can offer incentives such as managerial ownership to align management
interests with those of the shareholders. Evidence from literature suggest that increasing
inside ownership results in improved firm performance up to a certain level of ownership,
beyond which it worsens firm performance. The non-monotonic relation between the size of
inside ownership and firm performance is a puzzle that has motivated a large literature, but
no resolution (Agrawal and Knoeber, 2012). Also, the existence of blockholders and
institutional investors is regarded as an effective managerial monitoring mechanism.
However, similar to inside ownership, concentrated shareholding can also provide an
incentive for power to extract private benefits at the expense of minority shareholders.
Previous research highlights the importance of the ownership structure in determining bidder
abnormal returns around M&A announcement (Shim and Okamuro, 2011). Specifically,
Megginson and Netter (2001) note that state ownership has an impact on firm performance
especially in emerging countries. The association between state ownership and investment
decisions is generally not sufficiently explored and particularly in China. There are studies
that criticise state ownership of firms because of political intervention and the need to help
achieve government objectives instead of profitability (Sun and Tong, 2003; Wei et al.,
2005). However, Chen et al. (2009) findings support Stiglitz (1999) results that market-
oriented state shareholders may be the most suitable controlling owners of firms in countries
with weak institutional environments. Similarly, Sun et al. (2002) argue that state ownership
has positive impacts such as positive signalling, effective monitoring of management and
providing business connections. The study by Pukthuanthong-Le and Visaltanachoti (2009)
on Chinese firms finds a positive relationship between concentrated ownership and bidder
abnormal returns. Additionally, Chi et al. (2011) suggest that state ownership is not
necessarily associated with negative bidder abnormal returns. Zhou et al. (2012) in an
examination of the role of state ownership in mergers and acquisitions by analysing the short-
term and long-term performance of Chinese state-owned enterprise (SOE) bidders relative to
privately owned enterprise (POE) peers from 1994 to 2008 find that SOEs outperform POEs
in terms of long-run stock performance. The results suggest that the gains from government
intervention outweigh the inefficiency of state ownership in China’s M&A.
However, given that state ownership has been associated with neglecting profitability
objectives in favour of social objectives, it is hypothesised stated in its null form, that:
H2.1: There is a significant and negative relationship between state ownership and bidder
abnormal returns.
Another group of dominant owners in China is the legal person, whose shares are owned by
legal entities or another company or institution with a legal entity status. This is the second
largest ownership type in Chinese listed firms. Legal person shareholders have a relatively
large part of cash flow rights, which gives them more incentive and interest in monitoring and
controlling managers (Tan, 2002). In general, legal person have a close relationship with
management and have access to corporate inside information (Xu and Wang, 1999). This

7
helps reduce information asymmetry and ensure better monitoring of management. This
group of shareholders tend to be economically motivated. Legal-person ownership is a unique
type of ownership in China and is of particular interest in that it combines the merits of both
institutional investor shareholding in the developed countries and state shareholding
characterised in China.
In a study of 1,069 US acquisitions between 1998 and 2003, Ahn et al. (2010) find a positive
relationship between institutional ownership and bidder announcement returns. However,
other studies find a negative relationship. Cosh et al. (2006) find that institutional
shareholders have a negative effect on bidder announcement returns in a study of UK
takeovers between 1985 and 1996. In China, most studies find a positive relationship between
legal person shareholding and firm performance (Xu and Wang, 1999; Sun et al., 2002).
However, Chi et al. (2011) in M&A context study on Chinese listed firms report a negative
relationship between bidder announcement and legal person ownership.
Given the evidence from Xu and Wang (1999) and Sun et al. (2002) in the Chinese context, it
seems reasonable, in spite of the mixed results on the relationships between legal person
ownership and firm performance to hypothesise, stated in its null form, that:
H2.2: There is a significant and positive relationship between legal person ownership and
bidder abnormal returns.
Managerial ownership is considered one of the most important bonding mechanisms that
reward agents for achieving principals’ goals. Managerial ownership incentives such as
equity ownership and stock options play an important role in mitigating agency costs
associated with M&A (Hagendorff et al., 2007). Evidence from prior studies highlight that
share ownership by managers may be an important mechanism for aligning the interests of
management with those of shareholders (Brewer III et al., 2010). There are studies that
provide evidence that managerial ownership has a positive effect on bidder announcement
returns (e.g. Bauguess and Stegemoller, 2008; Datta et al., 2001; Cosh et al., 2006; Ben-
Amar and Andre, 2006). This reflects greater incentives for managers to maximise value as
their stakes rise. However, Jong et al. (2007) and Ahn et al. (2010) find a negative and
insignificant relationship between CEO ownership and bidder announcement returns. A small
number of studies have researched the impact of managerial ownership on firm performance
in China. Gao and Kling (2008) find that if management ownership of shares in a firm may
act as an effective governance mechanism for mitigating tunnelling activities Chen (2001)
and Li et al. (2005) report a positive relationship between managerial shareholdings and firm
performance. This is consistent with Jensen and Meckling (1976). The limiting factor on the
Chinese studies on managerial ownership is the small magnitude of managerial ownership
and the close relationship between management and the state, which is the controlling
shareholder in most of the listed firms (Yang et al., 2011). Given evidence from Gao and
Kling (2008), Chen (2001) and Li et al. (2005) it is hypothesised, stated in its null form, that:
H2.3: There is a significant and positive relationship between executive ownership and
bidder abnormal returns.

2.4.3 Board structure

The board of directors, appointed by shareholders, has a fiduciary responsibility to represent
shareholders by monitoring management (agency theory) and providing resources (resource
dependency theory) (Swanstrom, 2006). They hire and can fire management, design the

8
executive compensation contract, and approve major firm decisions. However, recent
corporate failure cases such as Enron and WorldCom indicate that boards have failed in their
responsibilities. These events have stirred calls for board structure reform especially relating
to independence and CEO influence. In the US, this resulted in the enactment of the Sarbanes
and Oxley Act (2002) calling for more independent directors on boards while in the UK, this
resulted in the review of the Code of Practice every two years. The influence of board
structure and composition on specific decisions such as acquisitions is an important field of
study that has attracted much attention.
Board size is considered one of the possible factors affecting board-monitoring quality
(Lipton and Lorsch, 1992; Jensen, 1993). According to the resource dependency hypothesis,
larger boards may increase the pool of knowledge available, while the agency theory posits
that larger boards give rise to conflict and coordination problems among members (Belkhir,
2009; Cheng, 2008; Coles et al., 2008). Empirical evidence mainly from the US, UK and
other developed markets are mixed and inconclusive (see e.g. Swanstrom, 2006; Bauguess
and Stegemoller, 2008; Ahn et al., 2010; Levi et al., 2008; Kroll et al., 2008; Masulis et al.,
2007; Cosh et al., 2006). Previous findings suggest that there is a relationship between board
size and bidder returns but the contradictory evidence suggests that the direction and extent of
the relationship is uncertain. Evidence on China is not conclusive either. Using general
corporate governance and firm performance empirical research in China, Liang and Li (1999)
and Li and Noughton (2007), find that board size has no effect on firm performance. This
may be explained by the fact that when it became a requirement that one thirds of board
members must be independent, firms simply added more directors to the already existing
numbers. Another explanation is that most of the Chinese listed firms are large-sized former
SOEs involved in energy, resources and other key industries (Liao et al., 2009). These large-
sized listed firms need more advice and expertise, compared with small firms (Liao et al.,
2009) and as a result larger boards which according to Yermack (1996) have no relationship
with performance. The complex nature of Chinese firms calls for more directors on their
boards. Therefore, it is hypothesised, stated in its null form, that:
H3.1: There is a significant and positive relationship between board size and bidder
abnormal returns.
Agency theorists prefer a board dominated by independent non-executive directors. They
argue that boards dominated by non-independent directors have less incentive to monitor
management (Mallin, 2010). Prior research highlights that the presence of independent
directors on the board of directors plays an important role in monitoring managers’ decision-
making process (Fama and Jensen, 1983). In support, Byrd and Hickman (1992) find that
tender offer bidders are best served when outsider representation is close to 60% of the board.
Additionally, Kroll et al. (2008) and Masulis et al. (2007) find similar results. Kroll et al.
(2008) conclude that independent directors do not only monitor managerial decisions but also
provide advisory services in specific events such as M&A. However, Cosh et al. (2006) and
Levi et al. (2010) find a negative relationship between the ratio of independent directors on
bidder’s board and shareholder abnormal returns casting doubts on the independence of the
independent directors. There are no direct studies on China. Existing evidence from corporate
governance and firm performance is mixed (Yang et al., 2011). Fan et al (2007) find that
independent directors play an important role in monitoring CEOs while Qui and Yao (2009)
find that they do not positively affect performance because they are not independent
themselves.
Given the evidence from Qui and Yao (2009) in the Chinese context, it seems reasonable in

9
spite of the mixed results on the relationship between independent directors and bidder
returns to hypothesise, stated in its null form, that:
H3.2: There is a significant and positive relationship between board independence and
bidder abnormal returns.
Demsetz (1983) criticizes the concentration of power held by a CEO who also serves as
chairperson of the board as it may compromise board independence and increase the agency
problem. Studies on CEO duality and bidder announcement returns find a negative
relationship. Cosh et al. (2006) in a study of UK firms find a negative relationship between
CEO duality and abnormal acquisitions returns around announcement date. Ahn et al. (2010)
and Masulis et al. (2007) study US firms and also find a negative relationship in support of
the agency theory. However, stewardship theory favours role duality. Donaldson and Davis
(1991) argue that role duality enhances effectiveness and produces superior returns to
shareholders. Again, Vafeas and Theodorou (1988) and Bozec (2005) support the idea of the
two posts being held by one person because it reduces executive remuneration and improves
managerial accountability. Levi et al. (2008) in a study of US firms find a positive
relationship between CEO duality and bidder announcement returns in support of the
stewardship and resource dependency theories. Given the mixed evidence from developed
economies and the high state ownership of listed firms in China, it is hypothesised, stated in
its null form, that:
H3.3: There is a significant and positive relationship between CEO role duality and bidder
abnormal returns.

2.5 Control variables

Our study controls for a number of bidder specific and deal specific characteristics which are
expected to influence the bidder returns. The present study draws from prior research and the
limits of Chinese financial reporting, to address the potential for omitted variable bias.

2.5.1 Bidder characteristics:

This study controls for firm specific characteristics including Tobin’s q, leverage,
administration, related transactions and firm size, all of which are measured at the end of the
year prior to the announcement date.
Tobin’s q: Lang et al. (1991) document that shareholder abnormal returns are related to the
Tobin’s q ratio of the bidders firms. They assert that abnormal returns are higher for bidder
firms with high Tobin’s q, which is supported by previous studies (Moeller et al., 2004; Jong
et al., 2007). However, a few of the available studies report a negative relationship between
Tobin’s q ratio and bidder announcement returns (Masulis et al., 2007; Levi et al., 2008). We
therefore expect Tobin’s q to have a negative effect on bidder abnormal returns.
Leverage: Masulis et al. (2007) document that leverage is an important governance
mechanism. They note that higher debt levels help reduce future free cash flows and therefore
limit managerial discretion. Higher debt also means that managers lose control to creditors
and risk losing their jobs their firms fall into distress. Masulis et al. (2007) report positive and
significant effect on abnormal returns. Other studies record either insignificant positive or
negative effect on bidder returns (Jong et al., 2007; Wang and Xie, 2009). Leverage is
expected to have a positive effect on bidder abnormal returns.

10
Geographical focus: Chi et al. (2011) argue that when M&A take place between firms from
the same local government administration the returns are lower than cross local government
ones. This is consistent with findings by Cheung et al. (2010) who find that M&A deals that
involve bidder and the target falling under one administrative province have negative effects
on bidder abnormal returns. We therefore expect the administration variable to have a
negative effect on bidder abnormal returns.
Related party: Related party transactions involve the transfer of assets or liabilities between a
listed firm and the legal entities or individuals who control it (Cheung et al., 2010: pp. 675).
Cheung et al. (2010) note that generally related party transactions do not create value for
shareholders. We therefore expect a negative effect on bidder abnormal returns.
Firm size: Firm size may affect both M&A activity and the propensity to engage in M&A
(Goranova et al., 2010). Moeller et al. (2004) find that managers of large bidders are prone to
hubris and end up overestimating potential synergies. They document that small bidders show
positive returns, while large bidders show slightly negative returns. We expect firm size to
have a negative effect on bidder abnormal returns.
Bidder industry: M&A tend to cluster in industries as firms often imitate actions of their
rivals. According to Pangarkar (2000) this is because of bandwagon theory which argues that
firms will tend to imitate their close rivals regardless of whether such imitation is value
enhancing or not (pp. 38). Cooke (1991) noted that a dominant firm within a particular
industry might lead to a bandwagon effect on the M&A by other firms in that industry. Firms
in the same industry may have to merger or acquire other firms in order to remain
competitiveness. Moatti (2009) confirms that the choice of M&A is highly influenced by
competitor moves. Therefore, bidding firms industry type will be included as a control
variable.

2.5.2 Deal characteristics:

The study also controls for deal characteristics including method of payment, listing status of
the target firm, value of the transaction, diversifying or focusing acquisition and previous
M&A experience.
Target listing status: Andrade et al. (2001), in a review of acquisitions announced between
1973 and 1998, find that bidders for public targets experience negative returns. Fuller et al.
(2002) find negative returns for bidders of public firms and positive returns for private firms.
The explanation given is that bidder firms for private target capture a liquidity discount
(Masulis et al., 2007). We therefore expect acquisition of public targets to have negative
effects on bidder abnormal returns and private targets to have positive effects on returns.
Method of payment: Evidence from prior research suggest that M&A deals paid in cash signal
greater commitment to an acquisition target firm than other forms of M&A finance
(Hagendorff and Keasey, 2010). The use of equity to finance M&A deals sends a signal to the
market that bidder firms are overvalued (Andrade et al., 2001). Additionally, this might
indicate information differences between managers of the bidding firm and external investors
(Myers and Majluf, 1984). Empirical evidence is mixed, with some studies reporting positive
cash (stock) effects while other reporting negative cash (stock) effects on abnormal returns
(Swanstrom, 2006; Bauguess and Stegemoller, 2008). We therefore expect cash to have
positive effects and stock to have negative effects on bidder abnormal returns.
Deal value: Deal value gives an indication of the size or value of the target firm. Houston and

11
Ryngaert (1994) note that smaller deals may be easier to integrate into the context of the
bidder firm and thus generate positive abnormal returns. However, large deals are undertaken
solely in pursuance of managerialism behaviour associated with large firms such as greater
power, higher salary, more reputation and social recognition. Uddin and Boateng (2009) in a
study of UK cross boarder M&A find that deal size does not have a positive effect on the
bidder firm wealth gains. We therefore expect deal size to be positively related to bidder
abnormal returns.
Acquisition experience: Pangarkar (2000) asserts that once a firm engages in an acquisition, it
develops a competency in the process of making that type of acquisition, which increases
chances of engaging in another similar acquisition. This might explain why firms engage in
multiple and repeat acquisitions. Recently, Kroll et al. (2008) assert that directors with prior
acquisition experience help in making value-creating acquisitions. In light of the learning
effect, we expect firms with prior acquisition experience to perform better.
Post-share reform: Since the M&A in our sample cover a period which saw substantial
regulatory changes, especially for the soft laws relating to share tradability, we include a
variable to reflect M&A relevant changes pre- and post-share reform. Cosh et al. (2008) find
that post-Cadbury M&A deals have a positive impact on takeover performance both in the
short and long term. In China, Hou et al. (2012) find that the non-tradable share reform has a
significant impact on the improvement of incentive compensation in Chinese listed firms. In
light of the above, we expect M&A deals announced after 2005 to positively influence
shareholders wealth.
Year of announcement: It is now known from prior research that the reaction of the markets
to M&A announcement depends on the period of time the announcement take place (Jong et
al., 200). In studies carried out in 2005, Harford (2005) and Moeller et al. (2004) noticed that
shareholders realised higher abnormal returns at the start of merger waves and towards the
end realise wealth destruction. Jong et al. (2007) in a study of 865 Dutch acquisitions over
the period 1993-2004 noted that when the global economic crisis set in early 2000s,
shareholders experienced losses in wealth. Therefore it is expected that abnormal returns in
each year to be different due to underlying economic fundamentals in that particular year.

3 Data and methodology

3.1 Sample selection
Our study focuses on domestic M&A deals between January 2001 and December 2010 by
Chinese listed firms. The initial data set is obtained from the China Stock Market and
Accounting Research (CSMAR) database. It comprises 30,763 deals. The following criteria
are then used to screen the sample:
1. The bidder is a Chinese firm with Class 'A' shares traded on the Shanghai or Shenzhen
Stock Exchange, while the target firm can be a listed public firm or a private firm
(Cosh et al., 2006).
2. The status of the deal must be successful with the deal value disclosed. To avoid the
results generated by very small transactions (Fuller et al., 2002), the amount paid for
the target should be at least 1 million Chinese Yuan.
3. M&A involving firms in the financial industry are excluded, because they are subjected
to special accounting and regulatory requirements.

12
 4. For firms with multiple announcements, only the first announcement is considered. If
the firm makes an announcement of the acquisitions of two firms on the same date, it is
treated as a single acquisition.
5. The share price data for the bidder must be available for at least a year prior to and two
years following the announcement of the M&A, since these stock prices are required to
compute the bidder’s abnormal returns.
6. Only deals announced on a trading day are included. Announcements made on a non-
trading days are excluded as they may introduce noise on the share price as investors
take positions before the next trading day.
To ensure that the movement in the share price is due to the M&A announcement and not to
other confounding events, we controlled for confounding events by removing announcements
with such events as share splits, dividend and earnings announcements, and executive
changes within the event window from the sample. Our final sample comprises 1,921 M&A
transactions.

3.2 Sample characteristics

Table 1 presents an overview of the final sample of M&A deals. Panel A shows the
distribution of M&A deals by the year of announcement. The general trend that has
characterised the Chinese M&A market over the last decade: increase in both the number of
deals and the value of the transactions over time as indicated by rising average deal values.
The number of M&A deals increased from 41 in 2001 to 254 in 2010 with a peak in 2007.
The average value of M&A deals increased from CNY68 million in 2001 to CNY398 million
in 2010. The increase in both number and value of transactions shows the confidence of the
local market players in the Chinese M&A market.
Panel B presents the distribution of M&A deals by bidder industry. Manufacturing sector
dominates M&A deals over the sample period accounting for 55.75% of the deals. The sector
of unclassified firms comes second accounting for 7.08%. In terms of value, transport sector
accounts for the largest deals (CNY830 million per deal on average) and information
technology is second recording an average of CNY651 million per deal. Manufacturing
industry records a relatively small average deal value of CNY189 million per deal. They
might be three possible explanations why manufacturing industry firms dominate the M&A
market in China. Firstly, this may be explained by the bandwagon theory (Lieberman and
Asaba, 2006; Pangarkar, 2000), which posits that firms in manufacturing are imitating their
close rivals as their managers are driven by the urge to increase the size of their firms to earn
high pay and build high political profiles. Secondly, the phenomenon might be explained by
the deliberate policy by the state to consolidate the highly defragmented manufacturing
industry to increase international competitiveness. Thirdly, the dominance of the
manufacturing industry might indicate a wave. The industry shock that manufacturing firms
react to is, the need for industry consolidation (Andrade et al., 2001).
Table 2 presents the distribution of M&A deals by method of payment, type of restructuring
and type of business. Panel A presents the distribution of M&A deals by method of payment.
Cash payment dominates both the number of deals (90.06%) and the total value of
transactions (58.84%). However, on average very large deals tend to be paid by stock or
mixed payment methods. The average size of deals paid with equity was CNY1630 million
and paid by a combination of methods was CNY1180 million. The average size of deals paid

13
in cash are relatively small at CNY180 million. This is consistent with Boateng and Bi (2010)
who note that bidder firms in China prefer to finance M&A by cash because they have large
cash holdings and Chinese firms still prefer to deal with business transactions in cash.
Panel B presents the distribution of M&A deals by type of restructuring. The afore-discussed
trend is repeated in the type of restructuring. Asset acquisition accounts for 90.58% of the
announced M&A deals. Asset acquisition is very popular in China mainly as a result of the
political legacy that many of the private firms do not have shares and therefore the best
possible acquisition option is by bidding assets whose value are easier to determine and
verify. Asset stripping comes second with 3.33% closely followed by debt restructuring with
3.12%. Mergers (0.36%), asset swap (0.31%) and share repurchase (0.05%) are not very
common in China. In contrast, mergers and share purchase account for the largest deals in
terms of deal values with an average of CNY3990 million and CNY1990 million,
respectively.
Panel C presents the distribution of M&A deals by type of business. 96.77% of the
announced M&A deals are negotiated. This is consistent with findings from Tuan et al.
(2007) where the bidding firm takes over the target firm by negotiating with the major
shareholders. Negotiated equity transfer accounts for 63.35% of the deals while 33.42% are
negotiated asset transfer. There are 60 debt restructuring cases accounting for 3.12% and only
2 tender offer announcements accounting for 0.10%. However in terms of deal value, tender
offers are conducted in the largest scale recording an average deal value of CNY886 million,
which is followed by asset transfer with CNY419 million.

3.3 Methods
The paper applies a two stage procedure. First, we use event study methodology to determine
the abnormal returns earned by the bidding firm’s shareholders. Second, we use a series of
cross-sectional regressions between abnormal returns and corporate governance variables to
explain the variation in returns earned by bidding firms. In the regressions we also control for
the firm specific and deal specific variables.

3.3.1 Bidder abnormal returns around announcement

Short term event study methodology, as suggested by Fama et al. (1969), further developed
by Brown and Warner (1985) and employed by Uddin and Boateng (2009), is used to
measure stock performance around the M&A announcement date. Event studies focus on
examining the abnormal returns attributable to the event by subtracting normal return from
the actual return of a stock. Normal return is the return that is expected if the event had not
taken place.
There are several methods of estimating normal returns identified in literature but the most
widely used method is the market model (see Kumar and Panneerselvam, 2009; Masulis et
al., 2007; Chi et al., 2011). The daily abnormal return (AR) for each firm is calculated using
the following:
(1)
Where, is the abnormal return on stock on day , is the daily actual or realised stock
return on firm on day and is the equally-weighted market return on day of the
Shanghai or Shenzhen Stock Exchange depending upon where the bidding firm is listed. This

14
is because there is no single composite index for both exchanges. The coefficients and
are ordinary least squares (OLS) estimates of the intercept and the slope. We estimate the
model parameters using 200 daily return observations starting from 220 to 21 days before
M&A announcement date. This is consistent with recommendations made by Bartholdy et
al., (2007) that the standard estimation period is between 200 and 250 daily returns (p.228).
We construct cumulative abnormal returns (CAR) as the sum of the abnormal returns over the
event window around the announcement date. Although prior studies use different event
windows, the event window must be long enough to cover for the uncertainty over the exact
time of publication and public dispersion of information before the event date and delayed
response by the market after the event date. Additionally, the event window should not be
short enough to miss some run-up returns and long enough to incorporate confounding
events.
For the purposes of this study, CAR is computed over a five-day event window starting from
two days before the announcement date to two days after announcement date. This period is
considered sufficient to cover for the delayed response of the weak form market of China
after the event date and short enough to prevent confounding events before the event date.
After an analysis of CAR over different event windows (see Table 3: Panel A), the five day
window reports the highest t-statistic value.
Test statistic is used to determine whether the abnormal returns are statistically different from
zero. The statistical significance of CAR is determined following Brown and Warner (1985)
and employed by Hagendorff and Keasey (2010). Standardised abnormal returns are used to
prevent AR with large variances dominating the test. The t-statistic is calculated using the
following formula:
̅̅̅̅
(2)
√

where, ̅̅̅̅ is the sample mean and is the cross sectional sample standard deviation.

3.3.2 Bidder abnormal returns post-M&A

There is evidence to indicate that long-term performance measurement is sensitive to both the
methodology and the benchmark. It is also worth noting, “... the estimation of abnormal
returns over long event windows is a matter of some intense debate” (Sudarsanam and
Mahate 2006: pp. S15). Sudarsanam and Mahate (2006) note that although different
benchmark models have been developed such as stock market, size and book to market ratio
and Fama-French three and four factor models, none of them is free of the bad model
problems. We follow the standard buy-and-hold abnormal return (BHAR) methodology
(Barber and Lyon, 1997) to examine the long-term performance of bidding firms. We
accordingly calculate the expected returns for the bidding firms by using the stock market
returns as benchmark.
To calculate BHAR, firstly, the returns of the firms and benchmark returns (market returns)
are compounded individually. Secondly, the difference between the returns of the bidding
firms and the returns of the equally weighted market returns is calculated to derive the
BHAR. BHAR is calculated for a 24-month post-acquisition period, starting with one month
after the announcement date using the following formula:
∏ ∏ (3)

15
where, is equally weighted stock market return, is the month return for firm and
T is the investment horizon in months.
Average BHAR for the entire sample is calculated to find out the overall performance of the
sample firms over the 24-month period. The average or mean BHAR is the arithmetic
average of abnormal returns in the sample of size N. Mean BHAR is calculated using the
following formula:
̅̅̅̅̅̅̅̅̅̅̅̅̅ ∑ (4)

A ̅̅̅̅̅̅̅̅̅̅̅̅̅ for a specific time period is interpreted as a gain in shareholder value (value
creating) if it is positive and as a loss of shareholder value if it is negative (value destroying).
Sudarsanam and Mahate (2006) highlight that BHAR3 are positively skewed and this problem
may increase as the holding period length increases and may weaken the effect on statistical
tests. To minimize the skewness problem, we draw inferences based on block bootstrapped
skewness-adjusted t-statistic as recommended by Lyon et al. (1999).

3.3.3 Multivariate analysis

To explore the influence of factors on the shareholders abnormal return around
announcement date, we adopt cross-sectional ordinary least squares (OLS) regression
analysis with clusters. The sample of 1,921 announcements is made up of 1,059 firms. In
other words, there were some instances where a particular firm was involved in more than
one acquisition over the ten-year time horizon of this study. The returns within each firm may
not be independent, and could lead to residuals that are not independent within firms. To
address this potential problem, we use standard errors adjusted for heteroscedasticity and
M&A transactions are clustered based on the bidder using the unique stock code provided in
CSMAR database (suggested by White (1980) and used by Masulis et al. (2007)). While
these clusters of acquisition observations may be correlated within firms, they would be
independent between firms. These variance estimates are robust to any type of correlation
within the observations of each firm. Stata 12.1 is used to run the cross-sectional regression
model and is specified as:
(5)
̅̅̅̅̅̅̅̅̅̅̅̅̅ (6)

3.3.4 Variables specifications

The dependent variable is defined as cumulated abnormal returns around the
announcement period over a five-day event window using market model parameters
estimated over 200-day estimation period. ̅̅̅̅̅̅̅̅̅̅̅ is defined as the mean buy-and-hold
abnormal returns over the twenty-four month period calculated using the market index as the
benchmark.
Corporate governance variables selected for this study and identified in previous empirical

3
Subsequently, BHAR refers to the mean BHAR for the sample.

16
studies include state ownership, legal person ownership, executive ownership, board size,
board independence and CEO duality. State ownership is measured as the proportion of
shares owned by the state and its agencies to the total number of outstanding shares in a
bidding firm a year before M&A announcement. Legal person ownership is measured as the
proportion of shares owned by legal person to the total outstanding shares in a bidding firm a
year before M&A announcement. Executive ownership is the bidder executives’ percentage
ownership of the bidding firm a year before M&A announcement. Board size is measured as
the total number of directors serving on a bidding firm’s board a year before M&A
announcement. Board independence is a dummy variable equal to 1 if over 33% of the bidder
board members are independent a year before the M&A announcement or 0 otherwise. CEO
duality is a dummy variable equal to 1 if the bidder’s CEO also serves as the Chairperson of
the board a year before the M&A announcement or 0 otherwise.
Control variables include firm specific characteristic variables such as Tobin’s q, leverage,
administration, related party transactions, firm size and industry of the bidding firm. Tobin’s
q is measured as a ratio of a bidder’s market value of assets over its book value of assets,
where the market value of assets is computed as the book value of assets minus the book
value of common equity plus the market value of common equity. Leverage is measured as
book value of long-term debt and short-term debt divided by market value of total assets.
Administration is a dummy variable equal to 1 if both the bidder and target firms fall under
the same local authority administration or 0 otherwise. Firm size is defined as the log
transformation of the bidder’s log market value of equity. The present study controls for the
industry type to control for differences in industries. A dummy variable is included in the
model for each of the twelve industry classification used by the CSRC.
We also control for deal specific characteristics such as listing status of the target firm, ,
method of payment, the deal value and repeat bidders. Public target is a dummy variable
equal to 1 if the target is listed on the stock exchange or 0 otherwise. Two methods of
payment indicators are created for all cash-financed and all stock-financed deals. All cash
equals to 1 when the M&A transaction is fully financed with cash or 0 otherwise. All stock
equals to 1 when the M&A transaction is financed fully with stock or 0 otherwise. The deal
value is measured as the log transformation of Chinese Yuan value of the M&A deal.
Acquisition experience is a dummy variable equal to 1 if the bidder is engages in more than
one deal or 0 otherwise. To control for any shift in market reaction to M&A announcement
since the share reforms, we included a dummy variable equal to 1 if the deal was announced
after 2005 or 0 otherwise. To capture the effects of the ownership status of the target firm, the
listing status of target variables are interacted with the method of payment variables to create
the mutually exclusive and exhaustive deal categories. To avoid the problems of
multicollinearity, the dummy construction rule is applied and therefore only public target x
all cash, private target x all stock and private target x all stock variables will be used in
hypothesis testing. To control for any trends in M&A performance over the sample period,
we included a variable for the year in which M&A was announced, starting at 1 with 2001
and adding 1 for every subsequent year.

4 Empirical results and discussion

4.1 Descriptive statistics
Table 5 presents the summary statistics of the corporate governance, bidder specific and deal
specific characteristics variables. The results show some of the salient features of the Chinese

17
board structure and composition. On average, the total number of directors in a board range
from 5 to 19, the figures recommended by the Chinese Company Law guidelines. An average
board size is 9.22 with a median of 9. This reflects full compliance by the Chinese listed
firms with the regulation and is consistent with prior studies (Huyghebaert and Wang, 2010).
The results also show the continued downward trend in CEO duality with 13.1% of the firms
whose CEOs still hold the dual positions. Currently the CSRC requires that the number of
independent directors sitting on a board should be at least 0.33 of the total number of
directors. On average, the results from the sample show that 80.1% of the sample firms are
complying with the regulations. By comparison, companies have a board more than half of
the board to comprise of independent directors in mature markets.
The average state ownership is 28.7% and legal person is 18.9% of the total outstanding
shares. The state remains the controlling shareholder, controlling about 30% and more of the
outstanding shares in about 40.3% of the firms where they own shares. This is a quite
significant reduction from 84% and 46.6% as reported by Liu and Sun (2005), and Chi et al.
(2011) at the end of 2001 and 2005 respectively. The reduction may be attributable to the
share structure reform introduced in 2005. Despite the improvement, the ownership structure
of Chinese firms is still highly concentrated. Insider ownership is very small. Executive
ownership is almost negligible at 0.9%. However, it is worth noting that some firms have
executive shareholding at as high as 63.8%.
The sample shows that the average Tobin’s q ratio is 2.3 which imply that the bidder firms
are overvalued. The average leverage for our sample is 0.14, which is lower than 0.497
reported by Li et al. (2011) of and 0.24 reported by in Pukthuanthong-Le & Visaltanachoti
(2009). 73.5% of the target firm and the bidder firm fall under the same local authority
administration and 60.5% are related transactions. On average, the firm size measured by the
total assets is CNY5 130 million with asset values ranging from between CNY120 million
and CNY 108,000 million with a median of CNY 2,250 million. The sizes of the firms vary
considerably as evidenced by the high standard deviation of CNY 11,000 million.
The results show that Chinese listed firms acquire 93.8% private firms in the M&A
transactions and 6.2% public targets. The results are consistent with prior evidence from
China (Chi et al., 2011). The popularity of private targets is mainly due to their smaller size
and easy victims of political bullying by state-controlled firms. About 90.1% of the M&A are
conducted on the basis of cash finances transactions. This is consistent with previous studies
from China that record cash as the main method of payment employed by bidding firms. Chi
et al. (2011) record 87% cash transactions, and Tao and Fei (2010) record 80% cash
transactions. Bidding firms prefer paying by cash than by stock because of its simplicity and
because it allows bidding firms to avoid the complex process of issuing stock in line with the
requirements of the CSRC (Chi et al., 2011). Stock-financed M&A deals constitute 4.4% and
other payment methods 5.5% of the method of payments.
Table 5 further shows that on average, the value of the transaction is CNY 142 million with
the values ranging between CNY 1.0 million (which is the selection criteria minimum cut-off
value) and CNY 32,800 million and a median of CNY 38.9 million. These statistics imply
that there are some very large deals. The values also vary considerably given a very high
standard deviation of CNY 1,460 million. The results show that 73.0% of the M&A
transactions in the sample are by repeat bidders. The results also show that 67% of the M&A
deals were announced after the share reform in 2005.

18
4.2 Wealth effects around announcement date
Panel A of Table 3 shows that the bidder firms’ cumulative abnormal returns during the
various event windows. In the sample of 1,921 M&A announcements, bidder firms obtain
positive and statistically significant CAR of 0.57% at 1% level over the 5-day event window.
The results are consistent with previous studies on China’s M&A deals (Chi et al., 2011;
Song et al., 2008; Li et al., 2011; Zhang and Wang, 2006). This result indicates that bidder
firms make M&A decisions that create value for the shareholders.
Figure 1 shows the movement of abnormal returns for the 21-day event window. The average
abnormal returns (AAR) around the announcement date show a significant spike on the
announcement day. From day -2 to the announcement date, the share prices record positive
and significant returns. However, a downward trend is observed from day +1 and continues
through to day +2. The picture becomes clearer when the event window is widened to 21
days. We consider three contributing reasons. First, this may explain the hubris hypothesis
that bidding firms over-estimated the evaluation of take-over opportunities (Berkovitch and
Narayanan, 1993). Second, this may indicate that there was no information leakage before the
announcement date. If there were information leakage, share prices would have fluctuated
well before the announcement date. Third, the results suggest that China’s stock market is
efficient as the information relating to the M&A announcement is immediately reflected in
the share prices.
The positive results hold regardless of firm size, target status, bidder industry, method of
payment and even for post-share reform deals (see Table 4). Previous studies find that the
size of the bidder has a significant impact on the performance of bidding firms. Contrary to
our expectation that large firms make value-destroying M&A decisions, both large and small
firms record positive shareholder gains (p<0.01). The results for sub-samples by firm size are
consistent with the result for the full sample. Our overall results are evidence to the effect that
the M&A strategies for both categories create value for shareholders.
The CAR for bidder firms of unlisted (private) targets is positive (p<0.01), so is CAR for
bidders of listed (public) targets. Although the CAR for bidders of public targets is greater
than CAR for bidders of private targets, the difference is not significant. Despite being in
contrast to previous studies that private firm bidders earn higher returns than bidders for
public targets do, our results are consistent with the possibility that the market does not have
full information relating to private firms and accordingly results in lower evaluations due to
liquidity discount.
Further, we compare bidder returns by the industry of the bidding firm. The results for the
individual industries are consistent with the results of the full sample. Bidders earn positive
returns across industries. Bidders of the manufacturing sector earn a relatively low but
statistically significant return of 0.4% (p<0.10) despite its dominance in terms of deal
numbers. Bidders of the agriculture industry obtain the highest abnormal returns of 1.9%
(p<0.05) with the unclassified industry bidders earning the least abnormal returns of only
0.2%. Information technology also recorded a significant positive return of 1.4% (p<0.05).
Our results show that different methods of paying for M&A deals result in different reactions
from the market. Bidder shareholders earn positive returns regardless of the payment method
in M&A deals. Stock-financed M&A yield significant returns of 7.0% (p<0.01) while asset
deals earn significant returns of 2.1% (p<0.05) and cash deals record non-significant returns
of 0.2%. Our results are in contrast with the findings of Travlos (1987) that cash-financed
M&As yield higher returns than stock-financed M&As and Andrade et al. (2001) that stock

19
financed M&As yield negative returns while cash-financed M&As yield positive returns. The
explanation put forward for the difference is that the use of stock signals overvaluation of the
bidder. Our results, however, indicate that the M&A market in China welcomes stock
transactions. Cash payments subject the bidder to adverse selection, which, in turn, results in
overpayment to the target (Boateng and Bi, 2010).
Furthermore, we analysed the bidder returns by whether the deal was announced pre-or post-
share reform. In both subsamples, shareholders earn positive returns. However, deals
announced after the share reform posted a significant return of 0.8% (p<0.01) while pre-
reform deals recorded a negligible and insignificant return. Finally, we compare bidder
returns by type of transactions, whether the M&A deal involves related party transactions
with their controlling parents. The results are consistent with the full sample. Bidders earn
abnormal returns across all transactions, related or not.

4.3 Corporate governance and bidder returns around announcement date

Table 6 presents the cross sectional regression results of the relationship between cumulative
abnormal return for 5-day around the announcement date and various corporate governance
measures and bidder and deal characteristics. Overall, the regression models are significant at
the 1% level, and the explanatory power of the models is quite similar with adjusted R 2
ranging from 6.3% to 5.8%. Although the R2 values reported in Table 6 may be considered
low, they are in line with literature where the number of observations is above 1,500. This
lends support to the conclusion drawn by DeYoung et al. (2009) in their study of bank
mergers who conclude that the low R2 indicate that little is known about what impacts viable
valuation gains from mergers.
The results show that two corporate governance variables are statistically significant across
regression models. State ownership is negatively associated with abnormal returns at the 10%
level. This finding is as expected although not consistent with Chi et al. (2011) who report a
positive state ownership effect on abnormal returns indicating that the state appears to be pre-
occupied with social welfare goals at the detriment of economic goals. We conjecture that the
difference between the two studies is due to share tradability during the sample period. Chi et
al. (2011) look at M&A between 1998 and 2003 well before the share structural reform
during which state-owned shares were not tradable. The current study looks at a period when
state ownership was significantly reduced and most shares have now become tradable relative
to the period before the share structural reform4.
The proportion of executive ownership was found to be positive and significant at the 5%
level across regression models. The positive coefficient indicates that bidding firms in which
executives own shares make M&A decisions that increase shareholder wealth. This result is
consistent with the findings of Sudarsanam and Huang (2007), and Cosh et al. (2006) for
mature markets and Gao and Kling (2008) and Li et al. (2005) for China as well as this
study’s expectation. The finding lends support to the agency alignment hypothesis which
suggests that shareholdings owned by managers help in aligning their interests with those of
the shareholders (Jensen and Meckling, 1976).
Legal person ownership records a positive but insignificant coefficient across the regression
models. This finding partially supports our hypothesis but is inconsistent with Chi et al.

4
Share reforms started in 2005 and ended in 2008 (Li et al., 2011)

20
(2011). This indicates that legal person ownership is concerned with value maximisation.
Further, in partial support of the stated hypotheses of this study, board size, CEO duality,
board independence record positive but insignificant coefficients. The results indicate that
large boards because of varied skills they bring to the board and complex nature of the
Chinese firms make M&A decisions that increase shareholder wealth. This finding supports
the resource dependency theory. Firms with separate individuals holding CEO and
Chairperson roles make value-creating M&A decisions. The positive relationship between
board independence and M&A performance in the short run supports the widely held
expectation that the presence of independent directors on the board helps in the monitoring of
management and therefore ensures that they make investment decision that maximise
shareholder value. The relationship is not significant because the appointment of independent
directors is de facto a window dressing exercise to comply with the guidelines.
Out of the five firm specific characteristics, coefficients on Tobin’s q and firms that fall under
the same administrative region are statistically significant. Tobin’s q records a negative effect
on bidder returns at the 5% significance level. This finding is consistent with Masulis et al.
(2007), indicating that firms with low growth options are not expected to make value
enhancing M&A than firms with high q ratios. Bidder firms that fall under the same local
government or province with the target firms record a negative effect on bidder returns at the
10% significance level. This result is consistent with findings from Chi et al. (2011) who
report the same effect. Leverage has a positive but not statistically significant effect on bidder
returns suggesting that management of bidding firms with a high debt level are compelled to
operate effectively and efficiently to service their debt obligations. The finding is consistent
with findings by Masulis et al. (2007) for a US sample and Pukthuanthong-Le and
Visaltanachoti (2009) for a Chinese sample. Related party transactions have no effect on
abnormal returns, although are negatively associated. This is consistent with the univariate
results. The results also show that size of the bidding firm has a negative and not significant
effect on bidder returns, which is in line with the findings of Masulis et al. (2007). This may
indicate that firm size has no power in preventing management making value destroying
M&A decisions.
Turning to the deal characteristics, we find that deals paid for in cash have a significant,
negative effect on bidder returns (p<0.05). By contrast, deals financed by equity have a
significant, positive effect (p<0.01). The result lends support to the signalling hypothesis that
different payment methods send different signals to the market. Positive stock payment effect
is consistent with findings of Faccio et al. (2006) but negative cash payment effect is
inconsistent with findings of Chi et al. (2011) who report a positive effect. Further, we
partition the method of payment based on the listing status of the target firm to capture the
interaction effects of target listing status and the bidder’s payment-method choice. The results
(regression models 2 and 3) show that the coefficient on the interaction between cash and
public and private targets is negative and significant (p<0.05). However, the coefficient on
the interaction between stock and private targets is positive and significant (p<0.01). This
indicates that bidders that use stock as a method of payment to acquire private targets create
value for its shareholders, but the reverse holds for cash-financed acquisitions regardless of
the listing status of the acquired firm.
We analysed the effect of share reform on the abnormal returns of bidding firms. A number
of firms have implemented the reforms (Yang et al., 2011). However, the results show that
there is no evidence that the reforms have had the intended impact on abnormal returns. This
in contrast to Cai et al. (2007) and Hou et al. (2011) who find that non-tradable share reform
resulted in statistically significant, positive, abnormal returns for listed firms. Our explanation
21
of the non-influence of the share reform on abnormal returns may be due to the fact that the
reforms may not be appropriate for all the firms.
Consistent with a general observation from US studies, bidder firms bidding listed targets
achieve negative but not significant returns. These results are consistent with the findings of
Fuller et al. (2002), Moeller et al. (2004) and Faccio et al. (2006). We did not find any
significant results for the value of the transaction and acquisition experience variables.

4.4 Two-year post-M&A wealth effects

Panel B of Table 3 shows bidder firms’ average abnormal returns. On average, bidder firms
earn negative returns of -7.2% (p<0.01) twenty-four months following the M&A
announcement. The results are consistent with prior studies from mature and developed
markets but inconsistent with previous studies on China5.
An analysis of the abnormal returns by the size of the bidding firm shows that large firms
record a significant negative return of 16.3% (p<0.01) while small firms record a positive and
insignificant return (see Table 4). This is consistent with prior research findings (see Moeller
et al., 2004). Bidding firms that acquire listed or non-listed target earn negative abnormal
returns (23.9%; p<0.01 and 9.3%: p<0.10, respectively) with those bidding for public targets
losing more. An analysis of long-term abnormal returns by industry shows that eight out of
the twelve bidder industry classes earn negative abnormal returns. The utility, transport,
services and, news and media industries record positive abnormal returns. This suggests that
better performing industries in the short-term continue with their good run in the long-term.
The negative returns are also consistent for cash (p<0.01), bearing liability and mixed
methods of deal financing. Assets and stock financed deals maintain positive returns
following M&A. These losses are also consistent for M&A deals announced pre- and post-
share reform. Both pre-share reform deals and post-share reform deals recorded negative
returns with pre-share reform shareholders losing a significant 13.9% (p<0.05). An analysis
by related party transactions show that bidding firm shareholders lose value regardless of
related or not with related party transactions shareholders losing a significant 7.9% (p<0.10).
Overall, the long-term results indicate that bidder firms’ shareholders lose wealth regardless
of the listing status of the acquired firms, when the deal was announced or, related party
transaction or not. Equity financed deals outperform cash financed deals in the long-term,
which is consistent with Boateng and Bi (2010) findings. This indicates that in the presence
of information asymmetry, cash offers lead to poor post-acquisition performance for bidder
firms. Finally, better performing industries continue their good run into the long-term.

4.5 Corporate governance and long-term stock performance

Table 7 presents the regression results of the relationship between buy-and-hold abnormal
returns for 24 months following M&A announcement and various corporate governance
measures, firm specific characteristics and deal characteristics.
In terms of corporate governance measures, it appears that long-term abnormal returns are
positively influenced by executive share ownership. This indicates that a higher executive
5
Prior studies that report positive and significant returns: Boateng and Bi (2010); Chi et al., (2011); Zhou et
al., (2012).

22
share ownership results in better M&A decisions in support of the alignment of interest
hypothesis of the agency theory. We did not find significant results for the other corporate
governance variables. Legal person ownership (negative), board size (positive) and board
independence (positive) retain their short term sign directions. State ownership now has a
positive effect on abnormal returns but lost its significance in all regression models. The long
term results indicate very limited evidence of a relationship between corporate governance
variables and bidding firm shareholders’ wealth.
Of the bidder specific and deal specific characteristics variables, the coefficients of, firm size,
deal value and acquisition experience are significantly related to abnormal returns the 10%
level or less. The coefficient of firm size is significantly negative at 1% level. The negative
effect of firm size indicates large firms lose value in the long run while small firms gain
value. The positive effect of repeat bidder indicates that the more experienced the bidder is,
the better the long-term stock performance. This is consistent with Kroll et al.’s (2008)
findings that directors with prior acquisition experience help in making value-creating
acquisitions. This lends support to the strategic momentum theory that firms tend to follow
strategies that they have implemented and worked in the past (Pangarkar, 2000). All the other
deal and bidder characteristics are insignificant.

4.6 Robustness tests

To ensure the reliability of our results, we conduct robustness checks for the multivariate
analysis. For robustness tests, we calculated bidder abnormal returns in the short-term using
the market adjusted returns model where abnormal returns are calculated as the difference
between actual stock returns and the market index returns. The results (not tabulated but
available from the author upon request) are consistent with market model results.
To isolate the specific impact of the occurrence of M&A deal announcement, we narrowed
event window from the five-day event window to the three-day (-1, +1) event window
(Masulis et al., 2007). To prevent missing some run-up returns especially in the case of
insider trading or information leakage before press release, we widened the event window to
eleven-day (-5, +5) and twenty-one- day (-10, +10) event windows. The results (see Table 3:
Panel A) are similar to the (-2, +2) event window. We also calculated BHAR for 12 months
and 36 months after M&A announcement in robustness tests. The results (see Table 3: Panel
B) remain consistent with BHAR for 24 months.
Prior evidence shows that size of the bidder firm plays a significant role in the M&A
performance. To measure the effect of firm size, two dummy variables were created. Large
(small) size takes the value of 1 for those firms with size that is in the upper (lower) quartile
of the distribution of firm size defined in terms of total assets of the bidding firm (Campa and
Hernando, 2006). In the short run, small firms have negative and insignificant effects on
abnormal returns, while large firms report a positive but insignificant effect on abnormal
returns (see model 5 of Table 6). In the long run, small firms have a positive but not
significant effect on bidder abnormal returns for 24 months following M&A (see model 5
Table 7). By contrast, large firms have a negative and significant effect on returns at the 1%
level. The signs and significance levels of other variables remain unchanged. These results
confirm the widely held view that large firms lose value after M&A announcement (Moeller
et al., 2004).
Recent studies explore the relationship between corporate governance and firm performance
by “construct[ing] an index comprised of multiple dimensions of a firm’s governance

23
structure” (Bhagat et al., 2008: p. 1832). Following DeFond et al. (2005), we combine the
corporate governance variables into a single dichotomous variable (Governance index) using
the median values of these variables6. The regression analysis reported in Model 4 of Table 6
shows that the corporate governance index has a positive and significant at the 1% level in
the short term. This confirms that corporate governance plays an important role in ensuring
congruence of interests between management and shareholders and that improvements in
corporate governance environment enhances shareholder value. In the long term, we find no
relationship between governance and abnormal returns (see Model 4 of Table 7). Core et al.
(2006) note that no relationship is expected in the long term between corporate governance
and abnormal returns in M&As if the market is efficient (pp. 656). Furthermore, the signs
and significance of other variables remain unchanged in comparison with the primary model.
Finally, we conducted diagnostic tests on the regression results. High levels of correlations
between independent variables can inflate standard errors resulting in less-efficient parameter
estimates. To assess this possibility, we conducted two tests of multicollinearity. First, we
checked correlations among independent variables using the correlation matrix. The
correction between variables ranges between 0.01 and 0.64, none exceeding the 0.80
threshold. Second, we conducted a variance-inflation-factor (VIF) test. The values range
between 1.04 and 3.51 and none of them is above the VIF threshold of 10. The two tests thus
provide evidence that multicollinearity is not a problem.

5 Conclusion
We study the shareholder wealth effects of China’s domestic mergers and acquisitions in the
period of 2001-2010. Specifically we examine how corporate governance influences both
short-term and long-term bidder abnormal returns. We demonstrate that market responses
differ in ways which suggest a difference in how the market’s assessment of share price from
the perspectives of short run and long run. The results demonstrate that bidder firms
experience wealth gains in the short term but lose value in the long term. The short term
results are in contrast to US and UK findings which may be the result of the unique Chinese
regulatory or capital market environment and the sample characteristics. The long term
results are not consistent with Chinese studies which may be due to our use of different
methodologies and benchmarks. The positive short term abnormal returns may arise from
stock market boom being experienced in China currently, and that shareholders are more
willing to believe the promises of synergy and future wealth gains. However, in the long
term, the market recognises that the M&A have not lived up to expectations and thus bidding
firms’ share prices fall in consistency with the managerial discretion hypothesis.
We explore possible explanations for the shareholder wealth effects with particular reference
to internal corporate governance mechanisms while controlling for deal specific and firm

6
In line with DeFond et al (2005) we construct our summary governance measure by summing the six
dichotomous measures for each sample observation and then creating a dichotomous variable based on the
median of the summed values. Thus, our summary measure is constructed from an equally weighted
aggregation of the six governance characteristics and essentially captures the number of governance
characteristics in which each firm is classified as having strong governance. The median value for the
summed values is 2 and therefore values with values of 2 were classified as having strong corporate
governance while those with values below 2 were classified as having weak corporate governance. The
results show that 56.64% of the sample firms have weak corporate governance and 43.36% as having weak
corporate governance (results are not reported but can be made available upon request from the authors).

24
specific characteristics. Our analyses on the factors driving the price differences show that
executive ownership (positive) and state ownership (negative) exert opposite effects on the
announcement period returns. Director independence, however, records a positive but
insignificant effect on abnormal returns. Most notably, when we replace director
independence with board independence measured by the composite corporate governance
index, we find that board independence exerts a positive effect on shareholder wealth. This is
in line with findings of Masulis et al. (2007) that bidders with good corporate governance
experience higher returns around the announcement date while those with poor corporate
governance experience lower returns. The returns further differ by method of payment with
the positive effect identified for stock financing but the negative effect for cash financing.
Furthermore, the results suggest that the share reform started in 2005 has not yet had the
intended impact on abnormal returns.
Our long-term regression analysis shows very limited evidence to support that corporate
governance mechanisms limit the incentives of firm managers to engage in value-destroying
acquisitions. The only corporate governance variable that retains its sign direction and
significance is executive ownership.
Centrally, the evidence leads us to conclude that executive ownership and genuine board
independence are important determinants of wealth effects in the case of China’s M&A. In
addition to the economic factors, Chinese M&A may be driven by other non-economic
factors. For example, the state perceives M&A activity as a key driver of the reform process
and using it to rescue failing SEOs by combining them with healthy firms. The current 12th
Five-Year Plan (2011-2015) deliberately encourages the upgrading and modernisation of
industry through M&A restructuring.
Our findings are practically relevant in that they suggest executive share ownership within a
firm reduces divergent interests between agents and principals. Given the current low level of
executive ownership, the Chinese authorities may need to formulate policies that encourage
executive ownership. Our results also confirm the widely held view that state ownership
destroys shareholder value. This suggests that the state needs to accelerate the split share
reform and leave the market to determine the price. Importantly, our evidence focuses the
attention of the state, managers and investors on how to improve corporate governance
mechanism and managerial monitoring to align managers' interests with those of the
shareholders. To achieve board independence as defined by the statutory guidelines firms
simply add extra members. This call for serious re-think on how to shape the role those
independent directors should play.
While this paper shows that corporate governance structure plays an important role in
shareholders abnormal returns, there are several points that limit its scope. First, measures of
stock performance are sensitive to the methodology and choice of variables. Indeed, our
review of the literature highlights that existing studies produce varying and sometimes
contradictory outcomes. Second, our study examines a sample from a particular country over
a particular period and therefore its generalizability may be limited given the unique China’s
market environment. Third, studies on this subject suffer from low explanatory power of the
independent variables as they are so many variables that influence decision making and this
study is no exception. We therefore recommend further research employing different
approaches and more variables to shed new light on these issues. Future research could use
other stock performance measures such as operating performance and calendar time
approach. The attitude with respect to whether the deals are hostile or friendly is also an
interesting topic worth investigation. Given the scarcity of literature on emerging markets, we

25
recommend similar studies on other emerging markets for comparative purposes. Finally, we
recommend studies that consider both qualitative and quantitative methodologies when
examining corporate attitude towards M&A and its interaction with corporate governance.

26
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 Figure 1: Development of AAR and CAAR
The Figure shows the development of the AAR and CAAR over the 21-day (-10, +10) event window for a sample of
1,921 M&A announced by Chinese listed firms between 2001 and 2010.
.01
.008
.006
.004
.002

-10 -8 -6 -4 -2 0 2 4 6 8 10
Event window

AAR CAAR

33
 Table 1: Distribution of M&A deals by year and bidder industry

Panel A: Distribution of M&A deals by year of announcement

Mean deal value
Year (CNY millions) Number of deals Number of deals (% )
2001 68 41 2.13
2002 105 105 5.47
2003 119 139 7.24
2004 87 184 9.58
2005 268 165 8.59
2006 309 163 8.49
2007 338 328 17.07
2008 331 285 14.84
2009 322 257 13.38
2010 398 254 13.22
All 276 1,921 100.00

Panel B: Distribution of M&A deals by bidder firm industry

Mean deal value
Bidder industry (CNY millions) Number of deals Number of deals (%)
Agriculture 70 46 2.39
Mining 502 59 3.07
Manufacturing 189 1,071 55.75
Utility 459 104 5.41
Construction 489 39 2.03
Transportation 830 86 4.48
Information technology 651 102 5.31
Retail and wholesale 309 110 5.73
Real estate 308 97 5.05
Service 141 64 3.33
News and media 55 7 0.36
Miscellaneous 120 136 7.08
All 276 1,921 100

34
Table 2: Distribution of M&A deals by payment method, business and restructuring

Panel A: Distribution of M&A deals by method of payment

Average deal
value (CNY Number of deals
Payment method Number of deals millions) %
Assets 31 105 1.6
Cash 1730 180 90.1
Stock 84 1,630 4.4
Bearing Liability 11 118 0.6
Mixed 65 1,180 3.4
All 1921 276 100.0

Panel B: Distribution of M&A deals by type of restructuring

Average deal
value (CNY Number of deals
Type of restructuring Number of deals millions) %
Asset acquisition 1740 272 90.6
Asset stripping 64 163 3.3
Equity transfer 43 226 2.2
Debt restructuring 60 109 3.1
Asset swap 6 141 0.3
Merger 7 3990 0.4
Share repurchase 1 1640 0.1
All 1921 276 100.0

Panel C: Distribution of M&A deals by type of business

Average deal
value (CNY Number of deals
Type of business Number of deals millions) %
Negotiated Asset Transfer 642 419 33.4
Negotiated Equity Transfer 1217 208 63.4
Tender Offer 2 886 0.1
Debt Restructuring 60 109 3.1
All 1921 276 100.0

35
 Table 3: Bidder abnormal returns

The sample consists of 1,921 successful M&A announcements made by Chinese listed firms between 2001 and 2010. The
cumulative abnormal returns are calculated using market model regressions that are averaged over each event window
while buy-and-hold abnormal returns are calculated using market index returns as reference portfolio over each event
window.

Panel A: Short-term abnormal returns

Market returns model

Cumulative abnormal returns (CAR)
Statistics (-1,+1) (-2,+2) (-5,+5) (-10,+10)
Mean 0.0044 0.0057 0.0067 0.0096
Minimum -0.2182 -0.3161 -0.6228 -0.7362
25% percentile -0.0236 -0.0308 -0.0430 -0.0592
Median -0.0006 -0.0017 -0.0001 0.0029
75% percentile 0.0272 0.0359 0.0485 0.0707
Maximum 0.3216 0.3946 0.5565 1.4783
Std. dev. 0.0554 0.0694 0.0962 0.1339
T-statistic 3.46 3.58 3.06 3.14
P-value 0.001 0.000 0.002 0.002
Count 1921 1921 1921 1921

Note: Cumulative abnormal returns (CAR) are estimated using the market returns model as in Brown and
Warner (1985). Market returns parameters are estimated over the period from day -220 to day -21.

Panel B: Long-term abnormal returns

Buy-and-hold abnormal returns

Size and BTMV
Statistics 12 months 24 months 36 months
Mean -0.0116 -0.0722 -0.1523
Minimum -2.8458 -6.5187 -6.8621
25% percentile -0.2450 -0.3934 -0.7733
Median -0.0575 -0.1144 -0.2444
75% percentile 0.1569 0.1782 0.2279
Maximum 5.9180 35.6203 32.8189
Std. dev. 0.6428 1.4193 1.8213
Variance 0.4132 2.0145 3.3171
Skewness 1.9549 10.7636 5.7204
Kurtosis 18.8643 256.0924 84.7006
T-statistic* -0.80 -2.16 -3.21
P-value 0.423 0.031 0.001
Count 1921 1921 1667

Note: The 2 year post-M&A is from +1 to +24 months after announcement. For definition of the different
benchmark models for estimating BHARS and on construction of the size and book-to-market value
benchmark portfolio, see text. * indicates skewness-adjusted bootstrapped t-statistics. Significance is based
on bootstrapped critical values

36
 Table 4: Distribution of bidder abnormal returns by subsamples

Size and BTMV

Market model BHAR (24
Sample CAR (-2, +2) months) Number Number (%)

Firm size
Small firms 0.0072*** 0.0603 482 25.1
Medium firms 0.0038* -0.0931*** 958 49.9
Large firms 0.0078** -0.1632*** 481 25.0

Target status
Public 0.0058 -0.2390*** 120 6.2
Private 0.0057*** -0.0610* 1,801 93.8

Bidder industry
Agriculture 0.0189** -0.1050 46 2.4
Mining 0.0062 0.0165 59 3.1
Manufacturing 0.0038* -0.0428 1,071 55.8
Utility 0.0071 -0.2164*** 104 5.4
Construction 0.0096 -0.0562 39 2.0
Transportation 0.0082 -0.4512*** 86 4.5
Information technology 0.0142** -0.0366 102 5.3
Retail and wholesale 0.0128 0.2056 110 5.7
Real estate 0.0031 -0.0767 97 5.0
Service 0.0037 -0.2602** 64 3.3
News and media 0.0117 -0.3125* 7 0.4
Miscellaneous 0.0018 -0.1323 136 7.1

Method of payment
Assets 0.0213* 0.8341 31 1.6
Cash 0.0018 -0.0973*** 1,730 90.1
Stock 0.0701*** 0.1074 84 4.4
Bearing Liability 0.0235 -0.0618 11 0.6
Mixed 0.0144 -0.0693 65 3.4

Post share reform

Pre-share reform 0.0002 -0.1386** 634 33.0
Post-share reform 0.0083*** -0.0395 1,287 67.0

Related party transactions

Related party 0.0049** -0.0794* 1,162 60.5
Non-related party 0.0068*** -0.0610 759 39.5

Note: *, ** and *** stand for statistical significance based on two-sided tests at the 10%, 5% and 1% level, respectively.

37
 Table 5: Summary statistics

The sample consists of 1,921 successfully completed M&A transactions over CNY1million made by Chinese listed firms
between 2001 and 2010 obtained from CSMAR database. Independent variables definitions are in the Appendix.

Independent variable Count Mean Median Std. Dev. Minimum Maximum

Governance variables
State shares 1921 0.287 0.282 0.259 0.000 0.863
Legal person shares 1921 0.189 0.075 0.226 0.000 0.903
Executive shares 1921 0.009 0.000 0.051 0.000 0.638
Board size 1921 9.397 9.000 2.142 5.000 19.000
Board independence 1921 0.801 1.000 0.399 0.000 1.000
CEO duality 1921 0.131 0.000 0.338 0.000 1.000

Bidder characteristics
Tobin's q 1921 2.338 1.795 2.286 0.680 48.088
Leverage 1921 0.143 0.114 0.123 0.000 0.788
Geographical focus 1921 0.735 1.000 0.442 0.000 1.000
Related party transaction 1921 0.605 1.000 0.489 0.000 1.000
Firm size (CNY millions) 1921 7390.000 1850.000 40700.000 14.800 994000.000

Deal characteristics
Public target 1921 0.062 0.000 0.242 0.000 1.000
All cash 1921 0.901 1.000 0.299 0.000 1.000
All stock 1921 0.044 0.000 0.205 0.000 1.000
Deal value (CNY millions) 1921 276.000 38.900 1460.000 1.000 32800.000
Acquisition experience 1921 0.730 1.000 0.444 0.000 1.000
Post-share reform 1921 0.670 1.000 0.470 0.000 1.000

38
 Table 6: Regression analysis of short term bidder abnormal returns

The sample consists of 1,921 successful M&A announcements made by 1,059 Chinese listed firms between 2001 and 2010.
The dependent variable is the cumulative abnormal returns over five days around announcement date. Independent variables
definitions are in the Appendix. In parentheses are standard errors adjusted for heteroscedasticity (White, 1980) and bidder
clustering. *, ** and *** stand for statistical significance based on two-sided tests at the 10%, 5% and 1% level,
respectively. We control for year and industry effect by using year and industry dummy variables in the regressions. In the
unreported results, some of the coefficients of year and industry dummies are significant.
(1) (2) (3) (4) (5)
State shares -0.0170* -0.0169* -0.0174*
(0.010) (0.010) (0.009)
Legal person shares -0.0053 -0.0051 -0.0045
(0.010) (0.010) (0.010)
Executive shares 0.0656** 0.0655** 0.0660**
(0.033) (0.033) (0.033)
Board size 0.0003 0.0002
(0.001) (0.001)
Board independence 0.0016 0.0013
(0.006) (0.006)
CEO duality 0.0006 0.0005
(0.005) (0.005)
Governance index 0.0077**
(0.004)
Tobin’s q -0.0020*** -0.0020*** -0.0020*** -0.0021*** -0.0020***
(0.001) (0.001) (0.001) (0.001) (0.001)
Leverage 0.0008 0.0028 0.0024 0.0002 0.0053
(0.015) (0.016) (0.016) (0.016) (0.016)
Geographical focus -0.0078** -0.0076* -0.0076* -0.0077** -0.0077**
(0.004) (0.004) (0.004) (0.004) (0.004)
Related party -0.0041 -0.0026 -0.0025 -0.0036 -0.0028
(0.003) (0.003) (0.003) (0.003) (0.003)
Firm size -0.0012 -0.0004 -0.0005 -0.0006
(0.002) (0.002) (0.002) (0.002)
Small firm -0.0042
(0.004)
Large firm 0.0001
(0.004)
Public target -0.0028 -0.0031
(0.006) (0.006)
All stock 0.0522*** 0.0515***
(0.018) (0.018)
All cash -0.0159** -0.0163**
(0.007) (0.007)
Log deal value 0.0002 0.0003 0.0003 0.0003 0.0001
(0.001) (0.001) (0.001) (0.001) (0.001)
Acquisition experience -0.0019 -0.0010 -0.0010 -0.0021 -0.0012
(0.004) (0.004) (0.004) (0.004) (0.004)
Post-share reform -0.0109* -0.0178** -0.0191** -0.0073 -0.0193**
(0.006) (0.007) (0.009) (0.007) (0.009)
Public target x all cash -0.0199** -0.0199** -0.0205**
(0.010) (0.010) (0.010)
Private target x all cash -0.0179** -0.0178** -0.0186**
(0.008) (0.008) (0.008)
Private target x all stock 0.0505*** 0.0504*** 0.0510***
(0.018) (0.018) (0.018)
Constant 0.0614 0.0494 0.0491 0.0486 0.0439*
(0.042) (0.043) (0.043) (0.042) (0.025)
Observations 1921 1921 1921 1921 1921
R-Squared 0.058 0.063 0.063 0.061 0.063

39
 Table 7: Regression analysis of long-term bidder abnormal returns

The sample consists of 1,921 successful M&A announcements made by 1,059 Chinese listed firms between 2001 and 2010.
The dependent variable is the buy-and-hold abnormal returns over twenty-four months following announcement date.
Independent variables definitions are in the Appendix. In parentheses are standard errors adjusted for heteroscedasticity
(White, 1980) and bidder clustering. *, ** and *** stand for statistical significance based on two-sided tests at the 10%, 5%
and 1% level, respectively. We control for year and industry effect by using year and industry dummy variables in the
regressions. In the unreported results, some of the coefficients of year and industry dummies are significant.

(1) (2) (3) (4) (5)

State shares 0.0439 0.0346 -0.0499

(0.138) (0.140) (0.132)
Legal person shares -0.1595 -0.1499 -0.1747
(0.159) (0.158) (0.163)
Executive shares 0.7801** 0.9267** 0.8997**
(0.388) (0.395) (0.395)
Board size -0.0042 -0.0104
(0.012) (0.012)
Board independence -0.0966 -0.1065
(0.108) (0.108)
CEO duality -0.1272 -0.1323
(0.081) (0.082)
Governance index -0.0493
(0.076)
Tobin’s q 0.0167 0.0181 0.0183 0.0176 0.0196
(0.013) (0.013) (0.013) (0.013) (0.013)
Leverage 0.4941 0.5181 0.5087 0.4976 0.5895
(0.412) (0.413) (0.413) (0.414) (0.428)
Geographical focus 0.0237 0.0125 0.0113 0.0232 0.0156
(0.107) (0.109) (0.108) (0.108) (0.107)
Related party transaction 0.0112 0.0192 0.0101 0.0079 -0.0040
(0.087) (0.087) (0.087) (0.084) (0.085)
Firm size -0.1150*** -0.1222*** -0.1192*** -0.1185***
(0.036) (0.040) (0.040) (0.038)
Small firm 0.0922
(0.082)
Large firm -0.0630
(0.058)
Public target -0.1696* -0.1680*
(0.093) (0.093)
All stock -0.0913 -0.0869
(0.404) (0.400)
All cash -0.2504 -0.2482
(0.359) (0.357)
Log deal value -0.0170 -0.0168 -0.0196 -0.0172 -0.0319
(0.020) (0.020) (0.020) (0.020) (0.021)
Acquisition experience 0.0779 0.0888 0.0872 0.0790 0.0819
(0.093) (0.093) (0.094) (0.092) (0.095)
Post-share reform -0.0214 -0.0412 0.0394 0.0046 -0.0260
(0.077) (0.085) (0.134) (0.087) (0.144)
Public target x all cash -0.4191 -0.4283 -0.4557
(0.358) (0.360) (0.369)
Private target x all cash -0.2374 -0.2400 -0.2696
(0.345) (0.346) (0.355)
Private target x all stock -0.0805 -0.0712 -0.0418
(0.388) (0.389) (0.383)
Constant 2.9708*** 3.1202** 3.1813** 3.0529** 0.9176
(1.144) (1.231) (1.244) (1.209) (0.666)
Observations 1921 1921 1921 1921 1921
R-Squared 0.040 0.042 0.043 0.040 0.039

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 Appendix: Variable definitions

Panel A: Cumulative abnormal returns

CAR (-2, +2) Five day cumulative abnormal return calculated using market model. The
market model parameters are estimated over 200-day estimation period starting
from -220 to -21 before announcement date
BHAR (24 months) Bidder’s buy-and-hold returns minus the benchmark portfolio’s buy-and-hold
returns over 24 months following M&A announcement. The equally weighted
market index returns for the Shanghai or Shenzhen Stock Exchange are used
depending on which the sample firm is listed.
Panel B: Corporate governance characteristics

State shares Percentage of state ownership in the bidder firm a year before M&A
announcement
Legal person shares Percentage of legal person ownership in the bidder firm a year before M&A
announcement
Executive shares Percentage of executive ownership in the bidder firm a year before M&A
announcement.
Board size Total number of directors serving on the board
Board independence Dummy variable equal to 1 if over 33% of bidder directors are independent 0
otherwise.
CEO duality Dummy variable equal to 1 if the bidder CEO is also chairperson a year before
M&A announcement.
Panel C: Bidder characteristics

Tobin’s q Market value of assets over the book value of assets

Leverage Book value of debt divided by the market value of total assets
Geographical focus Dummy variable equal to 1 if bidder and target firms fall under the same local
government administration
Related party transaction Dummy variable equal to 1 if it is a related party transaction and 0 otherwise
Firm size Logarithmic transformation of market value of equity
Panel D: Deal characteristics

Public target Dummy variable equal to 1 if the target is a public firm and 0 otherwise
All cash Dummy variable equal to 1 if the M&A deal is all paid in cash and 0 otherwise
All stock Dummy variable equal to 1 if the M&A deal is all paid for by stock and 0
otherwise
Deal value Logarithmic transformation of the value of the M&A deal in Chinese Yuan.
Acquisition experience Bidder firms that have completed more than one M&A deal during the sample
period.
Post-share reform Dummy variable equal to 1 if the M&A deal was announced after 2005 and 0
otherwise

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