PhD Oral Exam - Nabil El Meslmani, Business Administration
When studying for a doctoral degree (PhD), candidates submit a thesis that provides a critical review of the current state of knowledge of the thesis subject as well as the student’s own contributions to the subject. The distinguishing criterion of doctoral graduate research is a significant and original contribution to knowledge.
Once accepted, the candidate presents the thesis orally. This oral exam is open to the public.
This thesis consists of three essays. In the first essay, we examine the behavior of the implied volatility of both target and acquirer firms around merger and acquisition announcements and find that option implied volatility is related to the bidder firm’s announcement cumulative abnormal return (CAR-Bidder), the choice of the method of payment as well as the probability that the deal will be concluded successfully. Specifically, we show that target implied volatility not only drops at the announcement day but moves towards the acquirer implied volatility post acquisition announcement for stock or mixed deals. Moreover, we find that the method of payment is related to the post announcement target implied volatility, and we document that target implied volatilities are lower in cash deals. The probability of deal success is significantly negatively affected by the spread between the actual target’s implied volatility two days after the announcement and its theoretical value. The greater the difference between the target’s implied volatility and its theoretical value, the lower the probability of successful deal completion.
Next, we rely on the average of the implied volatility as a proxy for expected risk and the volatility of the implied volatility as a proxy for uncertainty about expected risk. We show that the CAR-Bidder decreases with an increase in both the expected risk and the uncertainty about expected risk of the bidder firm for stock or mixed deals. We also illustrate that the probability of a cash offer is decreasing in the expected risk and the uncertainty about expected risk of both bidder and target firms. We also find that the probability of deal success is decreasing in bidder’s expected risk. Our measures related to risk and uncertainty about risk contain information additional to common proxies for asymmetric information used in the literature such as the standard deviation of analysts’ forecasts and idiosyncratic volatility.
The second essay examines whether the puzzling negative relationship between idiosyncratic volatility and next month performance is affected by the intensity of merger and acquisition (M&A) activity in the market. Our results show that the idiosyncratic volatility puzzle is stronger in periods of high M&A activity than in periods of low M&A activity. Further analysis shows that the negative relationship between idiosyncratic volatility and next month performance is the strongest in the high M&A activity sub-period spanning from 1982-1989. In contrast, M&A activity does not explain the negative relationship between the common factor in idiosyncratic volatility (CIV) and next month performance. M&A activity can in part explain the idiosyncratic volatility puzzle, but it does not subsume the negative relationship between CIV exposure and firm returns.
The third essay investigates how investor sentiment affects mergers and acquisitions. Our results show that periods of higher market sentiment are associated with a lower likelihood of observing a Cash-Only offer. We also find that for stock and mixed offers, periods of higher market sentiment are associated with lower bidder announcement returns, higher target bargaining power, and lower synergy. Our finding are consistent with Barker and Wu’s (2012) argument that associate periods of higher market sentiment with greater overpricing. These results are consistent with the argument that higher overpricing results in bidder firms opting for stock or mixed deals. However, this will also lead bidder investors to react more negatively to these non-cash offer announcements, target investors to bargain more if they are to be paid in stock (fully or partially), and the market to anticipate lower total synergy as the deal may be driven by the stock overpricing rather than the maximization of synergy. Next, we find that target firm runups are, on average, higher in periods of higher market sentiment. This relationship is not observed in the premium which is unrelated to investor sentiment. The differing results of the runup and the premium is interesting as we expected to find a relationship between runup and premium similar to the markup pricing hypothesis of Schwert (1996). It appears that in periods of higher investor sentiment there is a higher runup potentially associated with the overreaction of optimistic investors. However, bidder firms’ management realize that this excessive runup is not an increase in the stand-alone value of the target firm and they price the deal accordingly.