External sources of finance and value creation of Chinese mergers and acquisitions: does ownership type matter?

• DOI: https://doi.org/10.1108/IJAIM-10-2020-0159
• Published date: 01 July 2021
• Date: 01 July 2021
• Pages: 452-471
• Subject Matter: Accounting & finance,Accounting/accountancy,Accounting methods/systems
• Author: Xiaogang Bi,Agyenim Boateng

External sources of finance and

value creation of Chinese mergers

and acquisitions: does ownership

type matter?

Xiaogang Bi

Nottingham University Business School China, The University of Nottingham

Ningbo China, Ningbo, P. R. China, and

Agyenim Boateng

Department of Finance and Accounting, De Montfort University, Leicester, UK

Abstract

Purpose –This paper aims to investigatethe effects of external sources of finance and ownership type on

the value creationof Chinese acquiring firms.

Design/methodology/approach –The data set consists of domestic-listed mainland Chinese firms

engaged in domestic mergers and acquisitions during the period 2004–2012. Standard event study

methodology and cross-sectionalregression analysis are used to examine the relationship between external

finance,ownership type and value creation of the acquiring firms.

Findings –This paper finds thatwhereas bank financing is positively related to the firm value of privately-

owned enterprises(POEs), bank financing has a negative but insignificant influenceon the firm value of state-

owned enterprises (SOEs). Moreover, equity financing has a negative and significant effect on the value

creationof SOE acquirers, however, this appears not to be the case of POEs.

Research limitations/implications –The results suggest that the capitalmarkets in China take into

consideration the discriminatory and cheap access to bank loans available to SOEs as negative signals to

stock markets, which cause capital markets to punish SOEs through price depreciation. Conversely, capital

marketsreward POEs in respect of Chinese banks’discrimination againstPOEs in bank financing.

Practical implications –The results suggest that the capital markets in China take into account the

discriminatoryand cheap access to bank loans available to SOEs as negative signals to stock markets,which

cause capital markets to punishSOEs through price depreciation. Conversely, capital markets rewardPOEs

in respect of Chinesebanks’discrimination against POEs in bank financing.

Originality/value –The results of this study show that external sources of finance and ownership

type influence acquiring firm valuein an environment where the corporate governance systemis weak and

the banking sector is dominated by state banks. Further reforms in the financial sector, particularly, in the

corporategovernance system appear warranted.

Keywords External financing, Ownership type, Firm value, Mergers and acquisitions

Paper type Research paper

1. Introduction

How are acquisitions are financed has implications for firm value (Faccio et al.,2005;

Schlingemann, 2004;Hartford,1999;Golubov et al.,2016).Prior studies (Liu et al.,2009;Hou

et al., 2015) have reported a negativeassociation between the external sources of finance and

The authors would like to thank the Editor and three referees for their comments and suggestions.

IJAIM

29,3

452

Received7 October 2020

Revised26 January 2021

20March 2021

27April 2021

Accepted27 April 2021

InternationalJournal of

Accounting& Information

Management

Vol.29 No. 3, 2021

pp. 452-471

© Emerald Publishing Limited

1834-7649

DOI 10.1108/IJAIM-10-2020-0159

The current issue and full text archive of this journal is available on Emerald Insight at:

https://www.emerald.com/insight/1834-7649.htm

stock returns. However, raising external finance, particularly bank financing [1], in an

emerging country suchas China may be linked to the ownership type of the firm (Allen et al.,

2005;Cull et al., 2009). Studiessuch as Firth et al. (2009),Zhou et al. (2015) indicate that state-

owned enterprises (SOEs) in emerging countries have easier access to bank financing to

fund their activities compared to private-owned enterprises (POEs). Despite the banking

sector reforms in China, POEs are still discriminated against in terms of the allocation of

bank credit (Allen et al., 2005;Culland Xu, 2003). Lin and Bo (2012),Poncet et al. (2010) echo

similar views and found that firms with state ownershipin emerging countries tend to face

fewer financial constraints whenconducting acquisitions compared to POEs. Yet, we know

relatively little attention has been given to how ownership type (SOE versus POE) and the

source of external finance impact on the acquirer returns in the emerging country context.

This study fills the above research gap by examining the effects of external financing used

by SOEs and POEs on value creation.

The choice of Chinese acquisitionsis motivated by the following reasons, namely, first, it

has been documentedthat SOEs have preferential access to banks loans administeredby the

big five state-owned banks whose loans portfolios constitute over 70% of the bank credit to

the industrial sector(Cull and Xu, 2003;Boateng et al., 2015;Ayyagari et al., 2015). Moreover,

after three decades of enterprise reforms,SOEs remain an important feature of the Chinese

economy. SOEs have a stakein most Chinese listed firms (Chen et al., 2009). China, therefore,

provides an ideal setting to explorethe impact of external sources of finance and ownership

type on the firm value. We do so by using the standard event study methodology to

investigate the wealtheffects of 481 Chinese acquiring firms over the period 2004–2012.

Our results document a negative but insignificant relationship between acquirer returns

and external sources of finance. However, when we classify the sources of external finance

into equity and bank financing, we find that whereas equity financing has a negative and

significant effect on the value creation of SOE acquirers, this appears not to be the case of

POEs. In contrast, bank financing has a positive effect on the firm value of acquirers and

creates value for POEs compared to SOEs. The results suggest that whereas the capital

markets may take into consideration the Chinesebanks’discrimination against POEs in the

formal financing and reward them, capital markets in China appear to punish (reduce

returns) SOEs due to preferentialaccess to bank financing through non-marketfactors.

Our study makes two primary contributionsto the literature. First, this paper contributes

to firm ownership –mergers and acquisitions(M&A) performance discourse by drawing on

insightsof agency theory in an emergingcountry context where capitalmarket imperfections

such as information asymmetry, weak institutions and poor corporate governance systems

are prevalent. We believe that analyzing how ownership and sources of financing

acquisitions impact on performance is important and timely in that M&As are particularly,

sensitiveto the efficiency of the financial marketsand the market for corporate control(Peng,

2008). Acquisition transactions greatly rely on an institutional framework that ensures

transparency, a good corporate governance system, efficient allocation of funds in the

financial markets and contract enforcement (Chen et al.,2017;Giroud and Mueller, 2011). In

this regard, our study constitutes one of the first attempts to extend prior studies such as

Martynova and Renneboog (2009) and Schlingemann (2004), which focused on sourc es of

financing and acquirers’gains without taking into consideration the distinctive nature of

firmownershipinemergingcountries(La Porta et al.,1999,2002).

Second, we show that the ownershiptype of the firm and the choice of external sources of

finance have implicationsfor acquisition performance. More specifically, our analysisshows

that the impact of the use of external sources of finance on the value creation of M&As is

conditioned by the nature of firm ownership. A significantnegative price revision following

Finance and

value creation

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