Market reaction to M&A announcements by state-owned enterprises : an empirical analysis of the market’s reaction when state-owned enterprises announce a merger or acquisition.

Abstract

In this thesis, we analyse implications of corporate state ownership. We use the Norwegian corporate state ownership as a basis for this analysis. One of the main problems regarding corporate state ownership is that the state participates in the market that it regulates and legislates. To circumvent this problem, the Norwegian State through the Government acts as an owner with a greater distance to the management of their firms by refraining from holding seats on the board of directors. Along with this refrainment and the Government’s declared policies on ownership involvement, we argue that they act as a passive owner. Based on previous studies on ownership involvement, we hypothesize that the market values the decisions made by managers in state-owned enterprises (SOEs) more negatively than those of private-owned enterprises (POEs). To test this hypothesis, we analyse announcement returns to merger and acquisitions (M&As). The abnormal return surrounding the announcement reflects how the market values these decisions because M&A is one of the largest investment decisions that a firm can make. We find significant evidence that announcement return is lower for SOEs compared to POEs. After finding this difference, we hypothesize that an explanation for this lower announcement return can be related to a greater extent of managerial agency problems in SOEs because of the Government’s policies on ownership involvement. We further hypothesize that this leads to managers of SOEs engaging in acquisitions that are motivated by their self-interest. We find that it is difficult to conclude whether or not there is evidence of managerial agency problems to a further extent in SOEs compared to POEs.