Evidence on Takeover Characteristics and Motives in the Acquisitions of NASDAQ Targets Following the Stock Market Crash of 1987

Abstract

Prior to the Black Monday (October 19, 1987), the twenty-day moving average of the NASDAQ composite index had reached a peak level of 442 on October 13, 1987. It then declined rapidly around the Black Monday by over forty percent and did not reach the pre-crash level again till June 8, 1989. This study examines the motives (synergy, agency and/or hubris) in successful takeovers initiated during the "after-crash" period (October 14, 1987 - June 7, 1989). For comparison, it also examine the motives in takeovers during the ten year period "before" the crash of 1987. The sample size for the after-crash and before-crash periods is 76 and 188 respectively. The study finds a significant increase in same industry takeovers, stock-financed takeovers, size of acquirers, and market-to-book ratio of assets of acquirers in the after-crash period relative to the before-crash period. Average gains to the combinations and to the acquirers, however, are significantly lower in the after-crash period than in the before-crash period (target gains are not different). For both the before-crash and after-crash periods, the correlations between the gains to targets, acquirers and combinations suggest synergy as the motive when the combination gains are positive and agency as the motive when the combination gains are negative. The correlations fail to suggest hubris as the primary motive for both the periods irrespective of whether the combination gains are positive or negative. Findings from the cross-sectional relationship between the gains to acquirers/targets and the uncertainty about the gains from takeovers also fail to suggest hubris as the primary motive in takeovers during both the periods. Thus, the findings of this study suggest that gains to the combinations and to the acquirers decrease in takeovers initiated during the after-crash period due to an increase in takeovers motivated by self-serving behavior of acquiring firm managers. The findings fail to suggest that this decrease arises from an increase in takeovers motivated by managerial hubris (i.e., overconfidence) about their ability to estimate and/or extract takeover gains.