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Title: Financial derivatives hedging and target CEOs' retention in mergers and acquisitions
Author: Chen, Zhong
Awarding Body: University of Reading
Current Institution: University of Reading
Date of Award: 2016
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This thesis examines the impact of financial derivatives hedging on firms’ performance and investment behaviour by means of a particular type of firm operation: mergers and acquisitions (M&As). In addition, it examines the conditions under which target Chief Executive Officers (CEOs) are retained, their retention quality, and also whether they enhance the acquirer performance following their retention. The thesis studies the relationship between target CEO’s quality and their retention in M&As. I use target CEO’s previous firm performance and past M&A deal experience to proxy for target CEO’s value. The results indicate that target CEOs with better previous firm operating and stock performance over their tenure as target CEOs have a higher likelihood of being retained. Besides, the likelihood of target CEOs being retained is also found to be positively correlated with the M&A transaction experience over their tenure as target CEOs. Furthermore, I find no evidence that the retentions of successful CEOs are associated with higher retained positions and longer tenures. However, I do find that successful CEOs are more likely to leave the combined firm after their retention even though the changes to their position during their retention do not significantly differ with those retained unsuccessful CEOs. In addition, the retentions of target CEOs have no impact on the completion time of M&A deals but can significantly reduce the advisory fees paid by the targets. In the long run, I do not find a significant impact of target CEOs’ retention, whatever their qualities, on the long-term performance of the combined firms. Overall, the results suggest that acquirers fail to realise the long-term benefit of retaining successful target CEOs due to the existing of agency problems, although the value of successful target CEOs is acknowledged at the time of acquisitions. I go on to examine the impact of financial derivatives hedging on firm performance in cross-border M&As. I observe that acquirers with financial hedging programmes have higher acquirer announcement returns than those without such programmes. Besides, the hedging benefit extends beyond the deal announcement and is capitalised in the long-term performance of the acquirer. Additionally, I find that deals carried out by acquirers with financial hedging programmes are associated with a higher deal completion rate, a longer completion time, and less implied volatility for acquirer’s stock. The results lend support to the optimal hedging theory that financial hedging improves firm performance. The thesis continues by exploring the impact of financial derivatives hedging on firm investment behaviour in domestic M&As. The results show that financial derivatives users are more likely to attempt acquisitions. In addition, I also find that acquirers with financial hedging programmes are more likely to choose cash as the method of payment and to finance their deals through external borrowing. In particular, the more types of financial derivative that acquirers use, the more likely they are to pay a higher percentage of cash and to use external borrowing to finance their deals. Overall, the results show that the reduced borrowing cost and fewer financial constraints induced by financial hedging have a significant impact on firms’ investment behaviour.
Supervisor: Not available Sponsor: Not available
Qualification Name: Thesis (Ph.D.) Qualification Level: Doctoral
EThOS ID:  DOI: Not available