Financial decisions and market performance: An analysis of China's domestic mergers and acquisitions

We examine the financial decision and market valuation in mergers and acquisitions using a unique dataset of Chinese firms in the period of 2003–2010. Our results show that bidders’ financial decisions are related to factors specific to the bidders, targets and deals, ownership structure and financial conditions. State–controlled bidding firms are less likely to use cash proceeds from stock issuance to finance mergers and acquisitions, suggesting that they are more concerned with the threat of resulting corporate control change, while executives prefer cash from debt issuance to avoid dilution of voting power. Bidders with huge cash reserves are less likely to opt for any form of stock financing, which is consistent with the view that cash–rich bidders prefer internally generated funds to finance mergers and acquisitions. With regards to market performance, both cash and stock financed deals create value for bidding firms in the short–term, while stock deals perform better than cash deals in the long–term. Our further analyses show that market reactions differ in ways which suggest a difference in the market’s assessment over financing decision when the deals are paid in cash, with deals involving seasoned equity offerings outperforming those paid by internal funds and debt. Our results highlight that market reactions to M&A deals financed by different sources in China differ from those in well-developed economies due to its distinctive institutional setup.