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The use of contingent value rights in M&A : an empirical review

Fosheim, Eivind K.; Langerød, Niklas Olufsen
Master thesis
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http://hdl.handle.net/11250/2487256
Utgivelsesdato
2017
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  • Master Thesis [4657]
Sammendrag
This paper contributes to the literature on payment methods in Mergers and Acquisitions

(M&A). It seeks to establish how the use of Contingent Value Rights (CVRs) in M&A affect

the probability of deal completion following a bid announcement. Further, the paper provides

answers on how the stock market reacts to bidders’ issuing CVRs as part of their deal

consideration package by estimating the bidders’ cumulative abnormal returns (BCAR). It

also presents a general definition of a CVR that acknowledges that there exist two main

categories of the instrument. Namely, event-driven CVRs and performance CVRs.

By utilizing more than 1,800 U.S. transactions, including 41 observed CVRs, we find robust

evidence in favour of that CVRs have a significant positive impact on the probability of deal

completion in M&A. More precisely, we run Probit regressions on matched sub-samples and

estimate that the marginal probability increase on deal completion when using CVRs are

13.9% to 22.1%. BCAR is estimated using a market model. We find consistent evidence across

all our regressions that indicates a negative relationship between BCAR and the use of CVRs.

Moreover, the final matched sample regression shows that the issuance of event-driven CVRs

have a negative, and statistically significant, effect of 5.08 percentage points on BCAR.

To our knowledge, this paper is the first contribution on both how CVRs affect the deal

completion probability, how event-driven CVRs affect BCAR, as well as to be presenting the

first general definition of a CVR.

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