The fundamental valuation process uses financial and operational information to assess future earnings and risk to arrive at a conclusion on the pricing of a risky investment project. We show that the market participants use this fundamental valuation process to assess the premium paid by acquirers to target firms following disciplinary takeovers. Using changes in Value Line forecasts before and after mergers announcements as a proxy for the investors' information about the fundamental values of the target firm, we show that this valuation plays a significant role in the investors' assessment of the target shareholders premium following the takeover announcements, after incorporating the bidders takeover motive as an integral part of the valuation process. Analysis of the target firm operating performance provides corroborative evidence of an inefficient target management The second part of the dissertation identifies and estimates the potential tax benefits as sources of gains in Mergers. First, we isolate the tax benefits from interest deductions associated with an increase in the debt of the combined firm after the merger. The results seem to suggest that these tax benefits are mainly associated with mergers that use either cash or both cash and stock as means of transaction. Mergers that use strictly stock as means of exchange are not followed with any significant leverage increase either immediately or in the next five years. The increase in debt could be either because of an increase in the combined firms' debt capacity following a merger or optimally utilizing any under utilized pre merger debt. Second, the revaluation of the target firms' asset at the acquisition price (stepped up basis) allows the acquirer with the option of increased depreciation deductions. Third, the net value of the tax benefits for the combined firm from net operating loss carryforwards and investment tax credits associated with tax free mergers. We estimate these potential tax benefits. Additionally, we also control for synergy, an increase in the post-merger operating performance (similar to Healy et. al.(1991)). Finally we show that these benefits are able to explain the wealth gains associated with mergers around the announcement dates, after controlling for increases in post-merger operating performance / acase@tulane.edu
| Identifer | oai:union.ndltd.org:TULANE/oai:http://digitallibrary.tulane.edu/:tulane_27148 |
| Date | January 1994 |
| Contributors | Ghosh, Aloke (Author), Lee, Chi-Wen Jevons (Thesis advisor) |
| Publisher | Tulane University |
| Source Sets | Tulane University |
| Language | English |
| Detected Language | English |
| Rights | Access requires a license to the Dissertations and Theses (ProQuest) database., Copyright is in accordance with U.S. Copyright law |
Page generated in 0.0132 seconds