THE RELATIONSHIP BETWEEN OPTIMISM AND MERGER AND ACQUISITION WAVES: EVIDENCE FROM THE BRAZILIAN MARKET

Fonseca, Rodrigo Raposo da; Almeida, Vinicio de Souza e

doi:10.1590/S0034-759020230102x

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ARTICLES • Rev. adm. empres. 63 (01) • 2023 • https://doi.org/10.1590/S0034-759020230102x copy

THE RELATIONSHIP BETWEEN OPTIMISM AND MERGER AND ACQUISITION WAVES: EVIDENCE FROM THE BRAZILIAN MARKET

Authorship SCIMAGO INSTITUTIONS RANKINGS

ABSTRACT

The reason why mergers and acquisitions occur in waves is still a subject rarely explored in the financial literature, especially in a context of markets outside the USA and UK. Therefore, the present study investigates whether the optimism of the agents could led to a wave of M&A, using Brazilian data from 2007 to 2017 of transactions and the Business Confidence Index, wich measures the optimism of the entrepreneurs about the current and future economy scenario. We used Harford (2005)Harford, J. (2005). What drives merger waves? Journal of Financial Economics, 77(3), 529-560. doi: 10.1016/j.jfineco.2004.05.004
https://doi.org/10.1016/j.jfineco.2004.0... ’s definition for a M&A wave. Using a Logit binary response model, the study pointed out that optimism increases the probability of M&A wave. Ibovespa was the variable that had the greater effect on the probabilities of a M&A wave. The results were significant for different lags.

Keywords:
mergers and acquisitions waves; mergers and acquisitions; optimism; agent confidence; logit

Variable	Description	Previous studies
Wave	Dummy – 1 if the transaction occurred during an M&A wave
BCI	Business Confidence Index
BCI - 1	BCI – lag of 1 period
BCI - 2	BCI – lag of 2 periods
BCI - 3	BCI – lag of 3 periods
BCI - 6	BCI – lag of 6 periods
BCI - 12	BCI – lag of 12 periods
Spread	Spread applied on the firms’ credit operations (excluding the subsidized ones)	Harford (2005)Harford, J. (2005). What drives merger waves? Journal of Financial Economics, 77(3), 529-560. doi: 10.1016/j.jfineco.2004.05.004 https://doi.org/10.1016/j.jfineco.2004.0... ; Gugler, Mueller, Weichselbaumer, and Yurtoglu (2012)Gugler, K., Mueller, D. C., Weichselbaumer, M., & Yurtoglu, B. B. (2012). Market optimism and merger waves. Managerial and Decision Economics, 33(3), 159-175. doi: 10.1002/mde.2542 https://doi.org/10.1002/mde.2542...
Consultant	Dummy – 1 if the transaction counted on a financial consultant	Bao and Edmans (2011)Bao, J., Edmans, A. (2011). Do investment banks matter for M&A returns? The Review of Financial Studies, 15(2), 103-120. doi: 10.1257/jep.15.2.103 https://doi.org/10.1257/jep.15.2.103... ; Hermansson and Song (2016)Hermansson, C., Song, H S. (2016). Financial advisory services meetings and their impact on saving behavior: A difference-in-difference analysis. Journal of Retailing and Consumer Services, 30, 131-139. doi: 10.1016/j.jretconser.2016.01.017 https://doi.org/10.1016/j.jretconser.201...
Stock	Dummy – 1 if the transaction was totally or partially financed with stocks	Rhodes-Kropf and Viswanathan (2004)Rhodes-Kropf, M., & Viswanathan, S. (2004). Market valuation and merger waves. The Journal of Finance, 59(6), 2685-2718. doi: 10.1111/j.1540-6261.2004.00713.x https://doi.org/10.1111/j.1540-6261.2004... ; Shleifer and Vishny (2003)Shleifer, A., & Vishny, R. W. (2003). Stock market driven acquisitions. Journal of Financial Economics, 70(3), 295-311. doi: 0.1016/S0304-405X(03)00211-3 https://doi.org/0.1016/S0304-405X(03)002...
Cross-border	Dummy – 1 if cross-border transaction	Chandhuri (2014); Xu (2017)Xu, E. Q. (2017). Cross-border merger waves. Journal of Corporate Finance, 46, 207-231. doi: 10.1016/j.jcorpfin.2017.07.004 https://doi.org/10.1016/j.jcorpfin.2017....
Lo gTA	Logarithm of total assets	Rhodes-Kropf et al. (2005)Rhodes-Kropf, M., Robinson, D. T., & Viswanathan, S. (2005). Valuation waves and merger activity: The empirical evidence. Journal of Financial Economics, 77(3), 561-603. doi: 10.1016/j.jfineco.2004.06.015 https://doi.org/10.1016/j.jfineco.2004.0...
PB	Price-to-book at the end of the previous year	Rhodes-Kropf and Viswanathan (2004)Rhodes-Kropf, M., & Viswanathan, S. (2004). Market valuation and merger waves. The Journal of Finance, 59(6), 2685-2718. doi: 10.1111/j.1540-6261.2004.00713.x https://doi.org/10.1111/j.1540-6261.2004... ; Rhodes-Kropf et al. (2005)Rhodes-Kropf, M., Robinson, D. T., & Viswanathan, S. (2005). Valuation waves and merger activity: The empirical evidence. Journal of Financial Economics, 77(3), 561-603. doi: 10.1016/j.jfineco.2004.06.015 https://doi.org/10.1016/j.jfineco.2004.0... ; Goel and Thankor (2010)Goel, A. M., & Thakor, A. V. (2010). Do envious CEOs cause merger waves? The Review of Financial Studies, 23(2), 487-517. doi: 10.1093/rfs/hhp088 https://doi.org/10.1093/rfs/hhp088... ; Haleblian et al. (2012)Haleblian, J., McNamara, G., Kolev, K., & Dykes, B. J. (2012). Exploring firm characteristics that differentiate leaders from followers in industry merger waves: A competitive dynamics perspective. Strategic Management Journal, 33(9), 1037-1052. doi: 10.1002/smj.1961 https://doi.org/10.1002/smj.1961...
EBITDA	EBITDA in the previous year
Leverage	Leverage in the previous year	Rhodes-Kropf et al. (2005)Rhodes-Kropf, M., Robinson, D. T., & Viswanathan, S. (2005). Valuation waves and merger activity: The empirical evidence. Journal of Financial Economics, 77(3), 561-603. doi: 10.1016/j.jfineco.2004.06.015 https://doi.org/10.1016/j.jfineco.2004.0...
TOBQ	Tobin’s Q in the previous year	Jovanovic and Rousseau (2002)Jovanovic, B., & Rousseau, P. L. (2002). The Q-theory of mergers. American Economic Review, 92(2), 198-204. doi: 10.1257/000282802320189249 https://doi.org/10.1257/0002828023201892...
LogIBOV	Logarithm IBOV	Shleifer and Vishny (2003)Shleifer, A., & Vishny, R. W. (2003). Stock market driven acquisitions. Journal of Financial Economics, 70(3), 295-311. doi: 0.1016/S0304-405X(03)00211-3 https://doi.org/0.1016/S0304-405X(03)002... ; Harford (2005)Harford, J. (2005). What drives merger waves? Journal of Financial Economics, 77(3), 529-560. doi: 10.1016/j.jfineco.2004.05.004 https://doi.org/10.1016/j.jfineco.2004.0... ; Goel and Thankor (2010)Goel, A. M., & Thakor, A. V. (2010). Do envious CEOs cause merger waves? The Review of Financial Studies, 23(2), 487-517. doi: 10.1093/rfs/hhp088 https://doi.org/10.1093/rfs/hhp088... ; Gugler, Mueller, Weichselbaumer, and Yurtoglu (2012)Gugler, K., Mueller, D. C., Weichselbaumer, M., & Yurtoglu, B. B. (2012). Market optimism and merger waves. Managerial and Decision Economics, 33(3), 159-175. doi: 10.1002/mde.2542 https://doi.org/10.1002/mde.2542...
Basic materials	Dummy – 1 if in the basic materials sector
Communications	Dummy – 1 if in the communications sector
Consumer, cyclical	Dummy – 1 if in the consumer sector – cyclical
Consumer, non-cyclical	Dummy – 1 if in the consumer sector – non cyclical
Diversified	Dummy – 1 if in diversified sectors
Energy	Dummy – 1 if in the energy sector
Financial	Dummy – 1 if in the financial sector
Real estate	Dummy – 1 if in the construction sector
Industrial	Dummy – 1 if in the industrial sector
Technology	Dummy – 1 if in the technology sector
Utilities	Dummy – 1 if in the utilities sector

Filter	Number of transactions	Transactions that occurred during M&A waves
All data	3,269	29.89%
Type of payment	2,060	30.00%
Total asset	1,370	29.64%
Price-to-book	1,169	30.37%
EBITDA	1,055	29.57%
Leverage	1,042	29.85%
Tobin’s Q	1,033	29.62%

Variables	Mean	Standard-deviation	Obs
Wave	0.30	0.46	1,033
BCI	100.20	12.92	1,033
BCI - 1	100.54	12.74	1,033
BCI - 2	100.75	12.67	1,033
BCI - 3	100.99	12.77	1,033
BCI - 6	101.11	12.98	1,033
BCI - 12	101.72	12.60	1,033
Spread	0.14	0.02	1,033
Consultant	0.25	0.44	1,033
Stock	0.12	0.32	1,033
Cross-border	0.51	0.50	1,033
Lo gTA	3.72	0.94	1,033
PB	10.64	139.75	1,033
EBITDA	4,029.80	11,343.05	1,033
Leverage	3.90	10.03	1,033
TOBQ	3.16	34.57	1,033
LogIBOV	4.75	0.07	1,033
Basic materials	0.12	0.32	1,033
Communications	0.06	0.24	1,033
Consumer, cyclical	0.08	0.27	1,033
Consumer, non-cyclical	0.27	0.44	1,033
Diversified	0.01	0.11	1,033
Energy	0.06	0.23	1,033
Financial	0.04	0.21	1,033
Real estate	0.12	0.32	1,033
Industrial	0.10	0.31	1,033
Technology	0.06	0.24	1,033
Utilities	0.07	0.26	1,033

Variables	Wave		Of wave		∆	∆%
Variables	Mean	Standard-deviation	Mean	Standard-deviation
BCI	106.21	3.15	97.68	14.54	8.53	8.74%
BCI - 1	106.62	3.34	97.99	14.29	8.63	8.81%
BCI - 2	106.98	3.47	98.13	14.14	8.86	9.03%
BCI - 3	107.39	3.54	98.30	14.21	9.09	9.25%
BCI - 6	108.68	3.49	97.92	14.14	10.76	10.99%
BCI - 12	111.04	2.68	97.80	13.06	13.25	13.55%
Spread	0.15	0.01	0.14	0.02	0.01	6.41%
Consultant	0.26	0.44	0.25	0.43	0.01	2.56%
Stock	0.11	0.44	0.12	0.33	-0.02	-12.89%
Cross-border	0.47	0.50	0.53	0.50	-0.06	-10.52%
LogTA	3.65	0.90	3.75	0.96	-0.10	-2.77%
PB	3.48	11.76	13.65	166.36	-10.17	-74.50%
EBITDA	3,172.46	9,846.06	4,390.67	11,904.93	-1,218.21	-27.75%
Leverage	2.95	6.10	4.31	11.26	-1.36	-31.50%
TOBQ	1.84	1.49	3.72	41.20	-1.88	-50.59%
LogIBOV	4.82	0.03	4.72	0.07	0.09	2.01%
Basic materials	0.11	0.31	0.12	0.33	-0.01	-9.24%
Communications	0.03	0.18	0.08	0.26	-0.04	-56.80%
Consumer, cyclical	0.07	0.25	0.08	0.27	-0.01	-15.44%
Consumer, non-cyclical	0.28	0.45	0.26	0.44	0.02	8.79%
Diversified	0.00	0.06	0.02	0.12	-0.01	-78.40%
Energy	0.08	0.26	0.05	0.22	0.02	47.69%
Financial	0.03	0.16	0.05	0.22	-0.03	-49.98%
Real estate	0.15	0.36	0.10	0.31	0.05	46.93%
Industrial	0.13	0.34	0.09	0.29	0.04	45.39%
Technology	0.04	0.20	0.07	0.26	-0.03	-39.44%
Utilities	0.07	0.25	0.07	0.26	-0.01	-7.61%
Observations	306		727

Wave	I	II	III	IV	V	VI
Intercept	-209.30***	-204.80***	-201.84***	-199.35***	-192.55***	-165.66***
Intercept	(16.50)	(16.28)	(15.84)	(15.51)	(16.05)	(17.43)
BCI	0.12***	0.10***	0.09***	0.07***	0.07***	0.18***
BCI	(0.01)	(0.01)	(0.01)	(0.01)	(0.01)	(0.02)
Spread	35.25***	34.33***	30.93***	28.89***	24.02***	17.96***
Spread	(6.175)	(6.16)	(5.99)	(5.87)	(5.55)	(6.23)
Consultant	0.18	0.09	0.04	0.00	0.03	-0.14
Consultant	(0.27)	(0.27)	(0.27)	(0.27)	(0.26)	(0.26)
Stock	-0.70*	-0.60*	-0.56	-0.60*	-0.78**	-0.74**
Stock	(0.37)	(0.36)	(0.36)	(0.35)	(0.35)	(0.35)
Cross-border	0.21	0.21	0.18	0.16	0.19	0.27
Cross-border	(0.24)	(0.24)	(0.23)	(0.23)	(0.23)	(0.23)
LogAT	-0.04	-0.04	-0.05	-0.06	-0.08	0.05
LogAT	(0.17)	(0.16)	(0.16)	(0.15)	(0.15)	(0.15)
Price-to-book	-0.01	-0.01	-0.01	0.00	0.00	-0.01
Price-to-book	(0.01)	(0.01)	(0.01)	(0.01)	(0.01)	(0.01)
EBITDA	0.00	0.00	0.00	0.00	0.00	0.00
EBITDA	(0.00)	(0.00)	(0.00)	(0.00)	(0.00)	(0.00)
Leverage	-0.02	-0.02	-0.02	-0.02	-0.02	-0.01
Leverage	(0.02)	(0.01)	(0.01)	(0.01)	(0.02)	(0.01)
TOBQ	-0.06	-0.09	-0.10***	-0.10*	-0.09*	-0.07
TOBQ	(0.05)	(0.06)	(0.06)	(0.06)	(0.05)	(0.05)
LogIBOV	40.11***	39.44***	39.24***	39.10***	37.94***	29.82***
LogIBOV	(3.42)	(3.38)	(3.30)	(3.26)	(3.46)	(3.71)
Basic Materials	-0.30	-0.01	0.20	0.29	0.23	0.52
Basic Materials	(0.48)	(0.47)	(0.47)	(0.48)	(0.46)	(0.45)
Communications	-0.53	-0.17	0.10	0.12	-0.13	-0.18
Communications	(0.48)	(0.50)	(0.53)	(0.53)	(0.52)	(0.54)
Consumer, Cyclical	-0.13	0.15	0.32	0.37	0.27	0.60
Consumer, Cyclical	(0.49)	(0.48)	(0.49)	(0.50)	(0.49)	(0.50)
Consumer, Non-cyclical	0.03	0.33	0.49	0.55	0.43	0.69*
Consumer, Non-cyclical	(0.38)	(0.37)	(0.39)	(0.41)	(0.39)	(0.40)
Diversified	-2.76**	-2.41**	-2.13**	-1.99*	-1.97*	-2.28**
Diversified	(1.19)	(1.13)	(1.07)	(1.03)	(1.07)	(1.07)
Energy	0.57	0.96	1.20**	1.24**	1.11*	1.62***
Energy	(0.66)	(0.65)	(0.64)	(0.63)	(0.60)	(0.56)
Financial	-0.71	-0.43	-0.23	-0.14	-0.21	0.15
Financial	(0.69)	(0.66)	(0.67)	(0.66)	(0.62)	(0.61)
Real Estate	0.52	0.78*	0.96**	1.01**	0.84*	1.19**
Real Estate	(0.47)	(0.47)	(0.48)	(0.48)	(0.46)	(0.47)
Industrial	0.34	0.61	0.80	0.87*	0.73	1.12**
Industrial	(0.47)	(0.47)	(0.49)	(0.49)	(0.47)	(0.48)
Technology	0.15	0.45	0.63	0.67	0.53	0.85
Technology	(0.61)	(0.59)	(0.60)	(0.61)	(0.62)	(0.68)
Obs.	1,033	1,033	1,033	1,033	1,033	1,033
Pseudo R2	0.57	0.55	0.54	0.53	0.51	0.53
AIC	588,906	604,691	621,632	636,382	653,474	630,259
BIC	697,591	713,376	730,317	745,067	762,159	738,944
Wald test	280.19***	276.62***	286.71***	297.52***	324.25***	245.41***

	I	II	III	IV	V	VI
Total hit rate (%)	89.74%	88.87%	87.51%	86.83%	85.87%	88.00%
Positive hit rate (%)	84.01%	81.73%	78.46%	77.07%	75.16%	79.17%
Negative hit rate (%)	92.02%	91.80%	91.41%	91.10%	90.63%	91.82%

Variables	I	II	III	IV	V	VI
BCI	0.008***	0.007***	0.006***	0.005***	0.005***	0.008***
BCI	(0.001)	(0.001)	(0.001)	(0.001)	(0.001)	(0.002)
Spread	2.349***	2.311***	2.128***	2.053***	1.696***	0.826**
Spread	(0.013)	(0.602)	(0.568)	(0.544)	(0.482)	(0.402)
Consultant	0.013	0.006	0.003	0.000	0.002	-0.006
Consultant	(0.020)	(0.019)	(0.019)	(0.019)	(0.019)	(0.011)
Stock	-0.038**	-0.034*	-0.033*	-0.035**	-0.043***	-0.027**
Stock	(0.016)	(0.017)	(0.018)	(0.017)	(0.016)	(0.011)
Cross-border	0.014	0.014	0.012	0.011	0.014	0.012
Cross-border	(0.016)	(0.016)	(0.016)	(0.017)	(0.017)	(0.011)
LogAT	-0.003	-0.003	-0.004	-0.005	-0.006	0.002
LogAT	(0.011)	(0.011)	(0.011)	(0.011)	(0.011)	(0.007)
PB	-0.001	0.000	0.000	0.000	0.000	0.000
PB	(0.001)	(0.001)	(0.001)	(0.001)	(0.001)	(0.000)
EBITDA	0.000	0.000	0.000	0.000	0.000	0.000
EBITDA	(0.000)	(0.000)	(0.000)	(0.000)	(0.000)	(0.000)
Leverage	-0.001	-0.001	-0.001	-0.001	-0.001	0.000
Leverage	(0.001)	(0.001)	(0.001)	(0.001)	(0.001)	(0.001)
TOBQ	-0.004	-0.006	-0.007*	-0.007*	-0.007*	-0.003
TOBQ	(0.004)	(0.004)	(0.004)	(0.004)	(0.004)	(0.002)
LogIBOV	2.673***	2.655***	2.699***	2.778***	2.679***	1.371***
LogIBOV	(0.347)	(0.354)	(0.353)	(0.348)	(0.328)	(0.265)

Fundação Getulio Vargas, Escola de Administração de Empresas de S.Paulo Av 9 de Julho, 2029, 01313-902 S. Paulo - SP Brasil, Tel.: (55 11) 3799-7999, Fax: (55 11) 3799-7871 - São Paulo - SP - Brazil
E-mail: rae@fgv.br

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[1] Assocate Editor ad hoc: Evaldo José da Silva