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# Testing the Multiple Regression

When looking at the results from the multiple regression, we want to determine which, if any, factors that have a significant impact on abnormal returns. In line with our setup in Section 4, Sample and Data, we have separate hypotheses for the firm-specific and deal-specific variables:

Hypothesis 3: The firm-specific explanatory variables have no significant effect on the abnormal returns resulting from a merger announcement.

Hypothesis 4: The deal-specific explanatory variables have no significant effect on the abnormal returns resulting from a merger announcement.

Since we are interested in finding variables with a significant impact on abnormal returns, we aim to reject both hypotheses. Furthermore, we are interested in whether there are any differences in which factors that have a significant impact in the different geographic regions. Additionally, given that one or more variables occur in several regions, we want to examine if the variables affect abnormal returns in the same direction and if they differ in magnitude. We therefore aim to reject the following hypothesis:

Hypothesis 5: There is no difference in factors across geographical locations in terms of significance and sign of the regression coefficients.

Based on previous literature, we have made initial predictions on the direction of impact on each of our independent variables. In the discussion in Section 7, we want to investigate and discuss whether our results are in line with the predictions made before the analysis. Table 5.2 below shows our theories.

Effect Effect

Liquidity + M&A experience +

ROE-trend + Enterprise value -

ROA-trend + Related/Unrelated -

Sales ratio + Payment1 -

Sales trend + Prior ownership +

Equity ratio + Domestic/Cross-border -

Tobin’s Q + M&A wave -

Cost efficiency + GDP +

Growth in Assets - Interest rate -

Table 5.02: Initial expectations of the effect of the independent variable on abnormal returns Source: Compiled by authors

Figure 5.01: Illustration of initial expectations for the regression (separating negative (red) and positive (green) variables)

As seen from Table 5.2 as well as Figure 5.1, we believe that eleven of our selected variables will have a positive effect, while that the remaining seven will have a negative impact on abnormal returns. Based on the importance of profitability measures emphasized by Karlsson et al. (2001) we have included several variables that indicate how profitable a company is. We believe that higher profitability, liquidity and solidity ratios should result in higher abnormal returns. As a result, we believe that Liquidity, ROE- and ROA-Trend, Sales Ratio, Equity Ratio, Tobin’s Q, Cost Efficiency and Sales Trend should all have a positive effect.

Furthermore, as previously mentioned, based on the complexity of combining two different entities, we believe that greater M&A Experience should generate higher returns.

In addition to the aforementioned firm-specific variables, we expect one deal-specific and one control variable to have a positive impact. Prior Ownership in the target firm should give the acquirer more insight and opportunity to assess whether a potential merger could be profitable. Furthermore, an initial stake could also smoothen the integration process of the acquired firm. The control variable expected to have a positive effect is GDP. A higher GDP indicates a higher economic performance in the region as a whole, which could affect the stock returns of the acquirer positively.

Besides the variables mentioned, we believe the remaining seven variables to have a negative impact. Two of these variables are firm-specific, three are deal-specific, and the remaining two are control variables. In line with the findings by Fu (2011) and Cooper et al. (2011), we believe that Growth in Assets has a negative impact on abnormal returns. Their findings are consistent with other papers examining the same effect. The overall consensus is that asset growth is strongly linked to lower expected future returns (Berk, Green, &

Naik, 1999) (Gomes, Kogan, & Zhang, 2003) (Carlson, Fisher, & Giammarino, 2004) (Anderson & Garcia-Feijoo, 2006) (Fama & French, 2006). The other firm-specific variable that we believe will have a negative impact is Enterprise Value. Previous research suggests that small firms earn higher returns in M&A deals than larger firms, implying a negative relation between firm size and abnormal returns (Moeller et al., 2004) (Gorton et al., 2009) (Rieck, 2002).

We believe that three of our four deal-specific variables will have a negative effect in our analysis. The first is the variable that indicates whether a merger is between Related/Unrelated firms. Aligned with studies by Wilcox et al. (2001), Georgen & Renneboog (2004) and Seth (1990) we expect to find a negative coefficient, indicating that unrelated M&A results in lower abnormal returns than related ones. The next deal-specific variable presumed to be negative is Payment1, which represents deals where shares were the primary source of payment. Previous studies examining the effect source on payment has on abnormal returns find that

deals paid in cash have statistically significant greater abnormal returns compared to those paid with shares (Asquith et al., 1987) (Huang & Walkling, 1989) (Georgen & Renneboog, 2004) (Yook, 2003) (Andrade et al., 2001). We expect to find a similar connection in our study. The last deal-specific variable is Domestic/Cross-border. As a result of the cross-cultural differences between companies in different countries, we believe that the unification of two firms from different geographic regions will generate lower abnormal returns than those within the same country. Thus, we expect the coefficient on the Domestic/Cross-border variable to be negative.

Finally, we expect two of the control variables to negatively impact abnormal returns, namely M&A Wave Position and Interest Rate. If a merger is positioned in an M&A wave, there are a high number of deals happening at the same time. This makes it harder for firms to achieve their goals given higher competition, and higher premiums on target firms. Regarding Interest Rate, we believe that this can negatively affect abnormal returns through higher cost of capital. An increased cost of capital would make mergers financed with debt more expensive, which could have a negative impact on how the market reacts to the announcement.

Outline

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