A Study On Bidding Firms’ Changes In Financial Condition And Acquisition Decisions

Historical M&A prediction models stress on identifying traits of target firms ratherthan studying traits of potential buyers. This paper looks at M&A decisions andannouncement returns from the angle of bidding firms by identifying key financialmeasures which can be utilized to predict bidding activities. The result shows that themanagement considers Leverage Deficit as well as management compensation whenmaking M&A decisions. More specifically, firms which became more under-levered andmore generous in giving high compensation to executives in the past few years are morelikely to engage in cash or partial cash bidding activities. Announcement returns of cashor partial cash offer bidding firms shows a significantly positive relationship withhistorical leverage deficit measures, conforming to the results from historical researches.This paper provides evidence suggesting a possible formulation of a bidder predictionmodel using the key variables identified. Further study and back-testing procedures maybe carried out to follow up on the formulation of a more accurate prediction model.