e-ISSN 2356-3818       print ISSN 1979-8997

Cross-Border Mergers and Acquisitions in China: A Test of the Free Cash Flow Hypothesis

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Cross-Border Mergers and Acquisitions in China: A Test of the Free Cash Flow Hypothesis

Yane Chandera, Lukas Setia Atmaja

Abstract


This research investigates whether Chinese cross-border investments have positive impact on
shareholders wealth and whether the amount of bidders’ free cash flow influences the shareholder
returns resulted from the acquisitions. The sample is based on 77 top Chinese cross-border investments
during the years 2005-2009 with each deal value of minimum US$100 million. The assessments
of acquisition abnormal returns are based on the event study methodology (Brown & Warner, 1985).
Cross-sectional regression analysis is used to determine the bidding firms factors which significantly
affect the returns. Factors are examined using OLS with White’s heteroscedasticity-corrected standard
errors, since the assumption of homoscedasticity is likely to be violated. The study proves Chinese
cross- border acquisitions result in positive abnormal returns which is consistent with synergy
hypothesis. The amount of bidders’ free cash flow is also found to be marginally but positively associated
with shareholders return which is consistent with Myers and Majluf’s pecking order hypothesis
but unsupportive of Jensen’s free cash flow hypothesis.

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