External Sources of Finance and Value Creation of Chinese Mergers & Acquisitions: Does Ownership Type Matter?

Purpose: This paper investigates the effects of external sources of finance and ownership type on value creation of Chinese acquiring firms.

Design/Methodology Our dataset consists of domestic-listed mainland Chinese firms engaged in domestic M&A during the period 2004-2012. Standard event study methodology and a cross-sectional regression analysis are employed to examine the relationship between external finance, ownership type and value creation of the acquiring firms.

Findings

We find that whereas bank financing is positively related to the firm value of privately-owned enterprises (POEs), bank financing has a negative but insignificant influence on the firm value of state-owned enterprises (SOEs). Moreover, equity financing has a negative and significant effect on the value creation of SOE acquirers, however this appears not to be the case of POEs.

Practical Implications The results suggest that the capital markets in China take into consideration the discriminatory and cheap access to bank loans available to SOEs as negative signals to stock markets which cause capital markets to punish SOEs through price depreciation. Conversely, capital markets reward POEs in respect of Chinese banks’ discrimination against POEs in bank financing.

Limitations The study is limited to the relationship between the external sources of finance and stock price performance and ignores informal financing which is becoming a common source of external finance in emerging countries.

Originality The results of this study show that external source of finance and ownership type influence acquiring firm value in an environment where corporate governance system is weak and banking sector is dominated by state banks. Further reforms in the financial sector, particularly, in the corporate governance system appear warranted.