Capital Characteristics, Payment Method And Value Effect

With the development of the economy and capital market, Mergers andAcquisitions will be an eternal topic in corporate finance and economics and it hasbecome one of the most active economic behaviors in the world. Many companies’development history tells us that M&A is an main way of rapid expansion for acompany and also an important allocation method of social resources for a society,which plays an increasingly important role in promoting innovation level,improvement of business productivity or competitiveness and promoting economicdevelopment in the future for a M&A company. However, due to that many questionsremain unanswered in theory at present, we can not guide M&A practice correctlywith the M&A theory, and also with the low success rate of M&A, many failed M&Acases are not rare in our economic life. There are two main reasons why we have somany failed M&A cases: First, M&A size and complexity beyond control capabilitiesfor the enterprise, so the risk during M&A is not under control. The risk from M&Ahave many sources and aspects. However, all risks and all their sources finanly arefinancial risk. That is to say, financial risk is the root of all the risks and the lastconcentrated expression form of risk in its transfering. Second, whether the M&Acreates value remains the mystery to be solved. How to guide the M&A behavior ofcompanies, take the advantage of opportunity, design their own financial planaccording to their own financial situation, complete the M&A payment with mostreasonable method, minimize effects of the financial risk resulting from Mergers andAcquisitions and maximize value effects of Mergers and Acquisitions are all urgentproblems for us to to be solved.In view of real Mergers and Acquisitions issues and the actual situation in ourcountry and based on the existing literatures review and comment, we research therelation between capital characteristics, Payment method and value effects of Mergersand Acquisitions with Probit, Tobit models and the mean of mathematical modeling.We have following main conclusions:Firstly, we study the relationship between capital structure and the method ofpayment. In the context of china’s capital market and characteristic of its developmentstage, the findings show that leverage deficit has a significant impact on the methodof payment. That’s to say, the higher the leverage deficit, the smaller the possibility ofmergers and acquisitions with the cash payment. The role of leverage deficit on method of payment has a significant difference between market downturn and risingperiod, which is defined as “deficit timing effects” in this paper. Meanwhile, becausechina’s capital market characteristic of its development stage has a significant impacton the method of payment, the probability with stock payment increases greatlyduring market rising period, which is called “payment timing effect”. Based on theabove research and theendogenous problen with payment method, this paper alsostudies whether there is an interactive relationship between capital structure andpayment method with our limited and valuable corporate merger sample only. Thefindings indicate that there is a significant interaction between capital structure andpayment method; stock-payment is much more preferred by acquirers during capitalmarket upsurge. We also find that, though the interactive relation does exist, it is notfully consistent with the target leverage theory, which means that the leverage isoptimized in cash-payment cases, and deteriorated in stock-payment cases; andmotivate on leverage optimization is weaker in stock-payment cases.Secondly, the paper also studies the impact of shareholder control on paymentmethod from the perspective of different internal control sources, especially from theperspective of management and shareholder control. The findings show that thegreater proportion of executive stock ownership, the higher the proportion of usingthe cash to pay in M&A. we also find that with the greater equity ratio of the largestshareholder control rights, the bidder is more likely to use stock to pay when thelargest shareholder has an intermediate level of shareholding ratio, which shows thatreal investors have a significant dilution motive in the context of the share reform. Weargue that debt capacity is an comprehensive reflection of debt affordability and findthat the enterprises with greater debt capacity will pay higher proportion of cash inM&A transactions due to greater borrowing capacity, which is consistent withimplications of the impact of capital structure on payment method.Finally, we study the influencial factors of M&A value creation with the cashpayment methods in M&A transaction. We hypothesize that the ability to pay hugeamounts of cash in M&A has a close relation with debt capacity, an comprehensivecapital characteristic. Based on this idea and from the perspective of debt capacity, thepaper studies its effect on the sensitivity of payment to internal fund and value effect.The conclusion of this study indicates that when Mergers and Acquisitions are subjectto debt financing constraint, debt capacity has a significantly positive impact on thesensitivity of payment to internal fund in M&A activities. However, when Mergers and Acquisitions are not subject to debt financing constraint, debt capacity has no anyimpact on the sensitivity of payment. We also find that changes in the sensitivity ofpayment transmit important information to the capital market and the capital marketeffectively identify the information and make pricing. Specifically, when Mergers andAcquisitions are subject to debt financing constraint, debt capacity has a significantlypositive impact on value effect in M&A activities. However, when Mergers andAcquisitions are not subject to debt financing constraint, debt capacity has no anysignificantly impact on the value effect.According to the conclusions of this paper, in the last chapter, we give therelevant policy implications.