2010-28
Post-stock Performance of Bailout Acquisitions inJapan: A One Decade Experience
Tadanori Yosano
Yoshinori ShimadaPost-stock Performance of Bailout Acquisitions in Japan:
A One Decade Experience

Tadanori Yosano

Graduate School of Business Administration of Kobe University, 2-1, Rokko-dai cho,Nada-ku, Kobe, 657-8501, Japan

Yoshinori Shimada

Graduate School of Business Administration of Kobe University, 2-1, Rokko-dai cho,Nada-ku, Kobe, 657-8501, Japan1

Post-stock Performance of Bailout Acquisitions in Japan:
A One Decade Experience

Abstract:

In this paper, we found a strong positive post-rescue performance for acquiring firms.
Furthermore, we observed even more dramatic recovery effects when we focused on
accounting accrual components, such as the credit sale increases or reduction of PPE
depreciation value.
We found that investors have been dubious with the solvency of the troubled firms atleast one year before the announcement date of their acquisition. As a result, they soldthe troubled firms’ stocks heavily leading to sluggish sales that hover at a considerably
low level during a one year period. However, once they are rescued by an acquiring firm,
the target firm’s business recovers dramatically.
Focusing on accounting accrual components (changes in ratio of receivables to total
assets for one year preceding the rescue), we found a 35.92% average difference forthree-year CARs between the highest and lowest ranked firms (reversed out into theacquiring firm’s stock appreciation). We also found a 35.29% average difference forthree year CARs between high vs. low firm ratio changes of depreciation costs against
total assets for the year preceding the announcement.
Finally, we found the reversal effect on troubled firms who underwent a large stock
sell-off, and found that a greater stock sell-off is strongly correlated to a more drastic
reversal for the acquiring firm’s stock appreciation after buyout.
[JEL Classification] G34, M41[Key Words] Accounting accruals, Rescued M&A, Accruals reversals

2

1.

Introduction(1) Purpose
In the ten years before 2005, the Japanese economy was in the most severe andprolonged recession since World War II, and experienced a lot of bailout acquisitions
during this period. If we focus on bailout acquisitions where both acquirer and target
firms are listed, there are 97 cases from 1996 to 2004.
This paper focuses exclusively on rescue acquisitions from 1996 to 2004. We
investigated the financial attributes of troubled firms that resulted in successful
recoveries. First, we analyzed the representative components of accounting accruals
used frequently by the troubled firm to boost their earning numbers in order to go
unnoticed by investors who are trying to predict future economic trouble.

Accounting

accruals, which are at the company's discretion to some extent, help to determine theearning’s bottom line, and will help us to predict future economic trouble with detailed
knowledge about the accounting accruals.

Second, we analyzed the financial attributes

that can explain the company’s dire economic situation and poor fiscal health. The
financial metrics of the former include inventory accumulation and/or gross income loss
combined with decreasing sales and/or net incomes. The financial metrics of the latter3

involve over-leverage and a lack of liquidity.
We hypothesize that there is a positive inverse effect between acquiring firms after
the rescue of troubled firms, because we believe that investors have taken into accountthe possibility of bankruptcy and sold heavily stocks of insolvent firms in advance. We
also hypothesize that the more depreciation of a troubled firm’s stock prices, the more
dramatic the post-rescue reversals for the acquiring firms.
In general, bailouts are caused by many reasons and defined in different ways,
which makes it difficult to identify bailout cases precisely. Therefore, we used specificcriteria in order to obtain our data sample. We defined rescue acquisitions according to
the following four types of discounted acquisitions:(a) A company filed bankruptcy or experienced negative earnings over consecutive
quarters that built up to an overall negative capital.
(b) Large shareholders sold their shares to outside business interests at reduced prices.
(c) Private placement of a large amount of new shares at a discounted price in externalbusiness interests.
(d) Discounted tender offer bids.

(2) Composition

4

The composition of this paper is as follows: Section 2 provides an overview ofprevious research and develops our hypotheses. Section 3 is a general outline of ourdata sample and data characteristics. Section 4 delineates our methodologies for
identifying the cumulative abnormal returns (CARs) of the acquiring and target firms.
Section 5 presents the results of our investigation with consideration to our hypotheses,
and the subsequent cross-sectional stock returns using univariate tests. Section 6 review
our main conclusions and future research goals.

2.

Developments of Our Hypotheses

There are two distinct types management behaviors when using discretionary
accounting accruals. Beaver (2003) introduced them as following: First, is an"opportunistic" discretion behavior which results in an adverse selection or moral
hazard for the management. The second typology is in regards to management"signaling" and naturally involves management motivation in the discretion of
accounting accruals revealing parts of private information to investors.
Dechow et al. (1996) found that firms who faced the risk of bankruptcy especially5manipulated the reported earning numbers by using accounting accruals from theprevious two fiscal years. This was uncovered after SEC allegations, and enforcement
actions were taken by SEC in the U.S.
Scott (2006) also introduced in his accounting theory text book that thecomponents of accounting accruals play a great role in the manipulation schemes offirm managers. He identified the four components to be at the considerable discretion of
the manager

controlling the reported earnings number. First is the accounts

receivables, second is the PPE depreciation, third are the inventories, and the fourth
includes accounting payables.
Previous research focuses on the components of accounting accruals as follows:
Callen et al. (2004) provided empirical findings that internet companies, which haveexperienced a string of past and future losses, are greatly motivated to overestimate
revenues and accounting receivables. Marquardt and Wiedman (2004) also provided
empirical findings showing that firms, who issue equity, appear to prefer managing
account earnings upward by accelerating revenue recognition. They also found thatmanaging earnings by accelerating recognition of revenues and account receivables ispreferred by the managers compared to the earning management which defers therecognition of expenses.

6

The literature review paper of Healy and Wahlen (1998) also introduces the PPE
depreciation and increase of inventories as the greatest portion of accounting accruals
components. For example, Petty and Williams (1994), whose sample is comprised ofpreceding management buyout offer cases, provides evidence that PPE depreciation is
the most easily manipulated component of accounting accruals.
Finally, the fundamentals textbook by Friedlob and Schleifer (2002) also
introduces the account receivables and inventories as the most controllable components.
For example, a company may increase sale revenues by lowering their credit
requirement standards and granting credit to less creditworthy customers. The firm’s
inventory can grow and expensed by delaying the transfer of inventory costs from theaccount to the cost of goods sold.

Therefore, we can hypothesize that detailed knowledge about accounting accruals
can help to predict future economic troubles causing a positive inverse effect between
the subsequent stock performance of acquiring firms and the magnitude of accounting
accruals in saved troubled firms. Highly sophisticated investors have noticed theopportunistic behavior of accounting accruals within troubled firm managements, andhave incorporated the risk of bankruptcy in the troubled firm’s stock price. Therefore,

7once the troubled firm is rescued by an acquiring firm, the bankruptcy risk lapse will
already be reflected within the acquiring subsequent stock price as a counteracting
effect. Henceforth, we can propose the following hypothesis:

H1: There will be a positive inverse effect between the subsequent stock
performance of acquiring firms and the magnitude of accounting accruals forsaved firms. The greater the magnitude of accounting accruals and/or accounting
accruals components of the troubled firm, the greater the subsequent stock
performance of the acquiring firms.

Shumway (2001) found that investors actually notice a firm's bankruptcy risk (inthis context, accounting accruals are one of the indicators for bankruptcy risk), and thefirm’s preceding negative stock performance has a significant power to predict a firm’s
risk of bankruptcy. Therefore, we can propose the following hypothesis:

H2: There will be a positive inverse effect between the subsequent stock
performance of acquiring firms and the magnitude of selling-off of the flailingfirm’s stocks immediately preceding the acquisition. The greater the magnitude

8

of the close-out stock sale for the troubled firm, the better the subsequent stock
performance of the acquiring firm.

We also analyze the financial attributes that can help explain the company’s direeconomic situation and poor fiscal health. The financial metrics of the former include a
consecutive decrease in sales and/or the EBIT number. The financial metrics of thelatter involve over-leveraging and a lack of liquidity.
If the troubled firm is only saved because of its poor fiscal health rather thanineffective business practices, then the business will recover dramatically after thebail-out rescue that naturally settles financial issues externally. Henceforth, we canhypothesize the following:

H3: The greater the magnitude of the rescued firm’s health condition
represented through poor liquidity and/or high leverage, the greater thesubsequent stock performance of the acquiring firms, if the rescued firms sales
and/or EBIT numbers are still going well.

Lastly, we developed a hypothesis with consideration to the synergy effect in9

M&As. Megginson et al.(2000) provided empirical evidence, using a sample ofnon-diversified firms from 1977-1996, that firms in the U.S. have succeeded in merger
activities. Non-diversification M&A one year CARs were on average 2.30%, however,
diversified M&A one year CARs was on average -10.20%. Therefore, we hypothesizethat companies in dire economic situations can only recover when they are bailed out by
a company within the same industry or has similar business interests. We reasoned that
if the acquiring company is in the same line of business, it is capable of making andeasier, better judgment about the business potential and merits of a troubled company
through their investments. We continue to hypothesize that a fiscally troubled company
is more likely to recover after a bailout, because its business operations were efficientand not likely the source of bankruptcy. Hence, we can propose the following:

H4: If a rescued firms sector is in the same line of business, the subsequent
stock performance of the acquiring firm is generally higher compared to thediversified rescue of M&A.

3.

Data and Sample

10(1) Data and sample

We identified troubled firms according to the following four types: filed
bankruptcy (4 firms), large shareholders resale stocks at reduced prices (4 firms),
private issuance of a large amount of stock at a discounted price (7 firms), anddiscounted tender offer bids (82 firms), respectively. Our sample period is from January
1996 to December 2004, and consists of 46 firms listed in mature markets (Section 1
and 2 of Tokyo Stock Exchange), and 51 firms listed in emerging markets, such as the
Nagoya stock exchange, Fukuoka stock exchange, Sapporo stock exchange, JASDAQ,
MOTHERS in the Tokyo stock exchange, and HERCULES in the Osaka Stock
Exchange. All firms included in our sample satisfied the following criteria:(a) Both acquiring firms and troubled firms are listed in the stock exchange inorder to exclude small cases.
(b) Neither the acquiring firms and troubled firms are financial institutions.
(c) Type of bailout and/or negative premium is identifiable in the Nikkei Telecom
21 of the Nikkei Newspaper digital Ltd.
(d) The stock price and financial data of both acquiring and troubled firms areavailable from the Nikkei NEEDS-Financial QUEST by Nikkei Media

11

Marketing, Inc.
(e) Post-bailout monthly returns are made available to the acquiring firms for atleast thirty-six months in order to analyze long-term performance.
(f) Finally, if firms announced a bailout and/or negative premium involving
several independent firms on the same day, they are regarded as one transaction
when we analyzed the long-term performance of the acquiring firms.

(2) Sample characteristics

Table 1 shows the sample characteristics for four types of companies at risk
according to year (1996-2004), mature markets, emerging markets, non-diversified, anddiversified categories, respectively.

We also show the bankruptcy firm characteristics

separately. At-risk companies experience, in general, included low profitability, fiscal
hardship, and deflated stock prices. The mean values of ROA, debt to equity ratio, cash
ratio, and current ratio of mature markets (emerging markets) are 1.9892% (0.9510%),7.4049 (3.6555), 9.1631% (10.6630%), and 129.75% (190.48%), respectively. On theother hand, these numbers of all listed firms are 4.8430%, 5.3639, 13.0425%, and200.51%, respectively. The mean values ofthe previous three-year CARs for troubled

12firms is -15.9242% (-19.9819%).
We also specifically show sample characteristics of the bankruptcy four firms,
separately in the next to the most right column of Panel A in Table 1. Figures forbankruptcy firms were much more severe than for troubled firms. Mean values of ROA,
debt to equity ratio, cash ratio, and current ratio are -1.8143%, 5.6628, 4.4907%, and48.65%, respectively. Mean value of previous three-year CAR for bankruptcy firms wastremendously low level of -107.0965%.

4.

Methodology

In order to measure the long-term stock performance of acquiring firms, we
identified a standard for comparison: the reference portfolio. The difference between theacquiring firm’s stock performance and the reference portfolio is considered anabnormal return. The reference portfolio is based on risk factors shared with our stock
samples. The two major risk factors utilized in this study are the book-to-market ratio
and firm size. The procedures employed in the construction of the reference portfolio
are as follows:First, we identified all stocks listed during the same month that each13

bailout occurred. We divided these stocks into five groups according to firm
size to define the cut-off points of each quintile.
Within each quintile, we further sorted the stocks into five groups using thebook-to-market ratios as the limits. The individual stocks were ultimately sorted into
one of twenty-five cells arranged in a five by five table.

In order to compare the long-term stock performance of acquiring firms to theirreference portfolios, we first identified the appropriate cell for each acquiring firm withrespect to size and the book-to-market ratio. Once the proper cell is identified, we
calculated the average raw return of the stocks in that cell (excluding the sample firm).
The abnormal return for each acquiring firm was then calculated by taking thedifference of the acquiring firm’s stock return from the average raw return of stocks in
its corresponding cell (reference portfolio).
Barber and Lyon (1997) and Kothari and Warner (1997) indicated that cumulative
abnormal returns (CAR) may cause misspecification when compared against the market
performance. This problem implies that the null hypothesis where the abnormal return
equals zero is rejected more frequently than just by chance alone. In Japan, previous
research also indicates that abnormal returns (AR), with the TOPIX as a benchmark,often has a similar bias. Therefore, we calculated AR against the reference portfolio

14

return marker.

5.

Results

In Table 2, we report one, two, and three-year acquiring firm CARs against thereference portfolio for the rescue M&A cases. We were able to find a statistically
positive effect from the M&A rescue, which is consistent with our prediction of apositive recovery effect. We found excess returns of 6.98%, 14.14%, and 26.38% (10%,1%, and 1% significant levels) in one, two, and three-year periods, respectively, foracquiring firms. Consistent with our predictions, this implies that investors have taken
into account the possibility of bankruptcy, and sold the troubled firm’s stocks heavily inadvance. Therefore, stock prices which had depreciated with the troubled firm’s
hardships experience a recovery period after the acquiring firm’s financial rescue.

(1) Accounting accruals

We analyzed four distinct accounting accruals components as well as the total
accruals: (a) the increase in the ratio of receivables against total assets, (b)

the

15

decreased ratio of depreciation costs against the total assets, (c) the increase in theinventories against total assets ratio, and (d) the decreased ratio of accounting payables
against total assets, which are generally believed that to be predictive of future
economic distress. The total accruals are calculated following Dechow et al. (1995) and
Sloan (1996):
Total Accruals = (ΔCA - ΔCash) - (ΔCL - ΔSTD - ΔTP) - Dep
where

ΔCA
ΔCash
ΔCL
ΔSTD
ΔTP
Dep

= change in current assets= change in cash / cash equivalents= change in current liabilities= change in debt included in current liabilities= change in income taxes payable= depreciation expense

Table 3 shows the magnitude of the accounting accruals components compared to thetotal accruals according to the preceding fiscal year prior to the rescue M&A. The
depreciation has the greatest magnitude, at 235.94%, compared to the total accruals, andthe account receivables have the second largest magnitude at 149.83%. Meanwhile,
inventories have a slight magnitude, with an average of -5.28%. This implies that
rescued firms try to boost their earning numbers especially through the accounting
components of the depreciation and accounts receivable, which is introduced in detail inFriedlob and Schleifer’s (2002) fundamentals textbook.
The post-acquisition results for the acquiring firm performance according to the16accruals components and total accruals are shown in Panel A in Table 4. Panel A in
Table 4 shows the difference between the high accruals components group (Highaccruals) and the low accruals components group (Low accruals), in addition to thedifference between the high total accruals group (High accruals) and the low total
accruals group (Low accruals). All of our samples are divided into three groups inaccordance to their accounting accruals components and total accruals.
We found a significant difference amongst CARs between the low and high ranked
firms with accruals components, especially for the depreciation and the accountreceivable characteristics, in line with the magnitude of the accruals components to thetotal accruals shown in Table 3. We also found that the one, two, and three-year CARs,
17.66%, 20.96%, and 42.71%, of firms in the greatest increase in the accounting
receivables group for the year preceding the rescue are higher than the CARs, -4.20%,
2.08%, and 6.79%, of firms in lowest increase in the accounting receivables group,
respectively (1%, 10%, and 10% significant level, one-tailed z-statistics). We cannot
find any significant differences in CARs for inventories and account payables, except
for one year acquiring firms who have a 16.98% difference between high and low
accrual groups. Meanwhile, with regards to the total accruals, we only find a significant
difference in two year CARs, although we find the opposite differential sign (not17significant) for three year CARs.
In Figure 1, we show the acquirer’s three year post-rescue performance for thethree following groups: 1) the troubled firms whose preceding year's increase in accountreceivables are greatest, 2) the troubled firms whose preceding year's increase inaccount receivables are a medium amount, and 3) the troubled firms whose preceding
year's increase in account receivables are least of all.
In Figure 2, we show the acquirer’s three year post-rescue performance for thethree following groups: 1) the troubled firms whose preceding year's decrease ofdepreciation are greatest, 2) the troubled firms whose preceding year's decrease ofdepreciation are a medium amount, and 3) the troubled firms whose preceding year's
decrease of depreciation are least of all.
In Figure 3, we show target firms with a previous-rescue of high, middle, and low
ranked performance of ratio increases for receivables against total assets one year prior
to the rescue, respectively. In Figure 4, we also show target firms with a previous-rescueof high, middle, and low ranked performance ratios of decreasing depreciation costs
against total assets for one year preceding the rescue, respectively.

(2) Reversal effect of the acquiring firms post close-out stock sale of rescued firms

18Panel B in Table 4 show the reversal effect of the acquiring firms after theclose-out stock sale of rescued firms in detail. The more stock prices of troubled firmsthat had depreciated, the more dramatic the post-rescue reversals for the acquiring firms
are. We divide acquiring firms into three groups in accordance with the preceding target
one to three-year CARs.
The one, two, and three-year acquiring firms that rescued firms whose stock aremost aggressively sold off in the previous year have higher CARs, 13.78%, 28.13%, and45.57%, compared to acquiring firms that rescued firms whose stock were least sold in
the previous year resulting in lower CARs, -4.60%, 0.65%, and 10.91%, respectively(5% significant levels of z-statistics, one-tailed).
In Figure 5, we show the acquirer’s three year post-rescue performance for thethree following groups: 1) the troubled firms whose stocks are most aggressively soldoff, 2) the troubled firms who has a medium amount of stocks sold, and 3) the troubled
firms whose stocks were sold least of all.

(3) Fiscally Troubled19

We hypothesize that a fiscally troubled company is more likely to recover after abailout, because we assume that its business practices worked well and were not thesource of bankruptcy. We constructed nine partition cells with breakpoints based on thetertile points of all listed firms.

The upper section of Panel B in Table 5 is based on athree-year average sales growth, or EBIT growth, and the current ratio of rescued firms.
The bottom section of Panel B in Table 5 is based on a three-year average sales growth,or EBIT growth and the debt-to-equity ratio of rescued firms. Panel A in Table 5 shows
the average values of sales growth, EBIT growth, the current ratio, and thedebt-to-equity ratio, for the bottom, middle, and upper tertiles.
Panel B in Table 5 shows the results of the two-way ANOVA analysis. We find astatistically significant difference for the nine sales growth and debt-to-equity ratio
partition cells over one, two, and three year acquiring firm CARs. In regards toacquiring firm two year CARs, the performance at 42.461% for the highest sales growthand highest debt to equity ratio is greater than the performance at 7.060% for the lowest
sales growth and lowest debt to equity ratio. We also find a statistically significant
difference for the nine EBIT growth and debt-to-equity ratio partition cells over two andthree-year acquiring firm CARs. In regards to acquiring firm two year CARs, theperformance at 46.849% for the highest EBIT growth and highest debt to equity ratio is20

greater than the performance at -10.096% for the lowest EBIT growth and lowest debt
to equity ratio.
However, we could not find any significant signs for the current ratio, except for
two year CARs for acquiring firms. The performance rating, 43.062%, for the highest
EBIT growth and current ratio is significantly greater than the performance rating,-14.451%, for firms with the lowest EBIT growth and current ratio.

Especially in

M&A rescue cases, the heavy debt places a great burden on rescued firms, but once thisfiscal barrier is removed business should recover dramatically.

(4) The profitability of vertical integration

We hypothesize that companies in troublesome situations can recover remarkably
when bailed out by a company in the same industry or with similar business interests.
Table 6 provides the post-rescue CARs of all acquiring firms who rescued, respectively
targets in both the same industry and diversified industries. However, we cannot findany significant differences between vertically integrated bailouts and diversified or
horizontally integrated bailouts. Our results imply that acquiring firms observe theirtargets thoroughly, and are able to obtain in-depth information about them even when21

they acquired businesses in less familiar industries.

6.

Concluding remarks

In our paper, we found a strong positive post-rescue performance for acquiringfirms. Furthermore, we observed even more dramatic recovery effects when we focusedon accounting accruals components, such as the credit sale increases or reduction of
PPE depreciation value. We found that investors have been dubious with the solvency of
the troubled firms at least one year before the announcement date of their acquisition.
As a result, they sold the troubled firms’ stocks heavily leading to sluggish sales thathover at a considerably low level during a one year period. However, once they arerescued by an acquiring firm, the target firm’s business recovers dramatically. Focusing
on accruals components (changes in ratio of receivables to total assets for one year
preceding the rescue), we found a 35.92% average difference for three-year CARs
between the highest and lowest ranked firms (reversed out into the acquiring firm’s
stock appreciation). We also found a 35.29% average difference for three year CARs
between high vs. low firm ratio changes of depreciation costs against total assets for theyear preceding the announcement. Finally, we found the reversal effect on troubled

22

firms who underwent a large stock sell-off, and found that a greater stock sell-off isstrongly correlated to a more drastic reversal for the acquiring firm’s stock appreciation
after buyout.
The implications of our findings are distinct and straight forward. Investors areable to gain from the reversal effect, even if they do not analyze the accruals arbitrarily
generated by the target firms. However, if they carefully interpret accounting accruals
and construct trading strategies based on the magnitude of discretionary accruals
numbers published by the firm’s management, investors can enjoy long-term gains
rather than the reversal effect.
Observing manager’s discretional motivation and understanding the baseaccounting figures utilized in bottom-line earnings is still an extremely interesting
research topic for the present and future.
[2010.4.12 978]23

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24

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25

Table 1 Descriptive Statistics
Panel A: Sample firms(mean)(median)4

emerging
market51

maturemarket46

nondiversification
diversification
37
60

218,468
114,931

297,446
206,701

250,933
38,078697,807
186,313392,350
133,907

7,302
3,444

21,995
5,938

5,397
3,130

7,949
4,577

57,261
13,836-1.543%2.909%-18.329%0.309%-1.194%6.201%-54.811%5.601%-6.890%4.028%-1.658%2.093%-7.900%0.560%

13.350%3.821%-0.999%-2.167%-23.562%1.494%

3.981%
2.317%

2.408%
2.472%

5.734%
5.000%

2.809%
2.972%

3.284%
3.969%

2.537%
2.517%

2.225%
2.540%

2.240%
2.270%

0.484%
1.039%

2.473%
1.902%

2.89242.72403.29942.83663.84023.6441

14.2786
2.94733.01422.19195.91505.91502.46742.47625.70243.69406.3843
2.17264.22482.6166

Acquirer Book-toM arket Ratio

0.59770.59770.75600.63601.27510.91551.13220.8855

Target Book-toM arket Ratio

0.40670.40670.93541.08301.4553
1.2731

Acquirer
Cash Ratio

4.0307%4.0307%

10.3366%
6.5986%

TargetCash Ratio

2.0711%2.0711%

Acquirer
Current Ratio

bankruptcy

Total

4

97

506,32973,581

233,527
65,288462,853
98,77019,382
6,520

38,704
5,653

261
40

31,3345,700-5.130%2.297%-5.711%1.202%-6.268%3.944%

12.874%13.068%-6.056%2.845%-5.507%0.578%

5.244%
2.085%-5.199%0.956%

2.545%
1.508%-34.171%-47.247%-0.409%1.354%

3.437%
3.001%

4.433%
3.747%

3.227%
2.804%

3.514%
2.479%

4.075%
3.942%

4.633%
4.541%

3.861%
3.533%

0.072%
0.544%

0.249%
1.707%

0.951%
1.092%

1.989%
2.213%

1.656%
1.294%

1.312%
2.266%-1.814%-0.816%1.443%
1.807%

8.43053.62404.50824.32217.80406.59716.73782.65273.22974.44787.90162.97913.33063.47204.47254.60035.0742
3.11754.09942.12326.3523
4.09176.7232
3.29734.78294.42213.65552.47077.40494.10674.76612.48185.84513.20585.662810.26425.43352.91690.72240.6414

1.21400.76401.5574
1.09780.89950.93770.9156
0.95771.12530.8063

1.07490.8422

1.04990.8466

1.13320.82490.8406
0.58311.10140.83771.01840.81061.14500.994812.38251.7775-5.1858
1.7134

7.19681.6942

1.36951.38320.70991.48533.69281.07381.51681.29492.4992
1.167815.737860.4472

2.1245
1.24749.3947%8.1577%9.3600%7.3793%10.4345%
8.1139%10.9899%
10.1300%

8.7477%7.3248%10.2542%7.7157%5.6814%
5.8379%11.4354%
10.1300%

7.5263%6.6129%9.0232%
7.7157%9.9259%6.8059%11.6034%
10.2363%9.5816%7.3248%10.1527%8.1732%

6.3810%5.2118%

11.2729%
10.9274%

9.1851%
8.6772%13.6548%5.9053%10.8912%8.5609%9.5933%5.8078%6.2496%5.8281%

10.6630%
7.9799%9.1631%
6.9534%11.0761%6.6490%9.2583%7.6586%4.4907%4.2550%9.9517%7.3373%83.58%
83.58%

151.70%119.99%166.48%124.53%157.20%123.49%147.26%135.70%128.26%140.64%136.03%102.44%115.75%106.07%122.13%133.19%150.63%123.48%131.84%117.74%138.83%128.92%143.50%107.15%74.71%
79.28%

141.72%
119.30%TargetCurrent Ratio

59.16%
59.16%

197.73%116.86%132.20%103.43%183.00%135.13%134.17%126.98%315.47%164.00%103.39%94.71%

148.88%105.52%95.34%
92.65%

190.48%109.95%129.75%106.11%199.05%126.98%138.64%103.07%48.65%
36.24%

161.68%107.04%

Premium-4.7472%-4.7472%-17.7600% -30.1727% -14.9827% -24.3782% -18.3901%-15.2142% -27.5150% -12.3903% -13.9636% -14.0909%-9.8304%-8.3205%-15.4329% -25.7278%-8.8383% -28.2181%-21.0157% -15.5537%-18.1042% -10.2966%-17.1709%-13.4108%-19.1683%-13.1893%-7.0426%-5.2852%-18.3985%-13.3721%

1996

1997

1998

1999

2000

2001

2002

2003

2004

1

6

12

18

15

11

17

13

Acquirer Size(¥mln)

574,302574,30261,196
13,933

1,382,041
139,958

572,909
116,569

554,107
133,907257,331
98,770110,956
32,524

Target Size(¥mln)

233,615233,615

5,171
3,605

38,411
11,70281,0109,486

15,0689,934

17,997
4,577

Acquirer
ROE

1.589%
1.589%

10.088%8.359%

1.504%
3.552%

3.447%
2.254%-11.086%
1.001%

TargetROE

2.853%
2.853%-15.042%-2.065%2.750%
2.373%

0.378%
1.309%

Acquirer
ROA

3.548%
3.548%

7.655%
6.846%

4.167%
3.327%

TargetROA

2.802%
2.802%-2.700%-0.489%Acquirer Debt
to Equity Ratio

2.86092.8609Target Debt
to Equity Ratio

N

Panel A in Table 1 shows the sample characteristics for four types of companies at risk according to year (1996-2004), mature markets, emerging markets, non-diversified, and diversified categories,
respectively.

26

Table 1 (Continued)
Panel B: Descriptive Statistics: All listed firms(mean)(median)
1996

1997

1998

1999

2000

2001

2002

2003

2004

Total

N

3,640

3,765

3,897

3,999

4,120

4,245

4,322

4,321

4,259

4,063

Size (¥mln)

178,261
27,022

174,750
16,646

180,408
11,272

198,00312,823

198,371
11,262

169,602
10,160142,295
8,631

126,894
9,153

153,632
13,870168,157
12,736

ROE-0.0201%
4.8611%1.2129%4.8062%4.5988%3.8918%0.4424%3.0437%5.1142%4.1013%35.5062%4.0271%-1.4783%2.9652%5.2629%4.0984%5.9721%5.9367%6.4820%4.2090%ROA

4.5716%3.8959%5.1055%4.2003%4.6064%3.6892%

4.0660%3.2642%

5.0981%
3.9727%4.9566%
4.1961%

3.8317%3.1181%5.0395%
3.9481%6.2176%4.6526%4.8430%3.9189%Debt toEquity ratio

4.51852.71494.50202.6801

6.94322.6432

6.09652.6295

6.39342.5551

5.46212.60544.77692.50935.17062.48634.51772.42125.36392.5723Book-to-M arket
Ratio-1.68140.52140.31360.75800.57561.07510.81050.96151.22991.08991.34631.1602

1.4604
1.28691.44901.16701.02380.87660.8204
0.9516

Cash Ratio

11.5595%
9.4365%

11.1788%8.9831%

11.2373%
9.0583%12.3085%9.8833%13.2907%10.5903%13.1753%
10.1285%

13.9389%
10.6307%14.1970%
11.1490%

14.9654%
11.4692%

13.0425%
10.1875%

Current Ratio

158.39%126.14%159.95%124.59%168.11%124.63%175.10%128.51%

278.40%132.38%192.02%131.11%217.62%134.24%223.99%136.89%217.80%142.39%200.51%130.75%27

Table 2 Acquiring firm CARs against the reference portfolio for M&A rescue cases
One year CARs

(N = 97)
6.982% *Two year CARs

14.138% ***Three year CARs

26.378% ***Table 2 reports one, two, and three-year acquiring firm CARs against the reference portfolio
for the rescue M&A cases. We were able to find a statistically positive effect from the M&A
rescue, which is consistent with our prediction of a positive recovery effect.

Table 3 Magnitude of accounting accruals components compared to total accruals
Increase of Accounitng Receivables / Assets (one year preceding the rescue)
Decrease of Depreciations / Assets (one year preceding the rescue)
Increase of Inventories / Assets (one year preceding the rescue)
Decrease of Accounting Payables / Assets (one year preceding the rescue)

235.94%149.83%-5.28%
105.14%

Table 3 shows the magnitude of the accounting accruals components compared to the total accruals
according to the preceding fiscal year prior to the rescue M&A.

28

Table 4 The post-acquisition acquiring firm performance results in terms of total accruals, accruals components, and the rescued firm's stock sale magnitude
Panel AHigh accruals

Middle accruals

Low Accruals

Differencet -valuep -value

Increase of Total Accruals / Assets(one year preceding the rescue)

0.047-0.032-0.113

0.160

7.201

0.000

One year CARs
Two year CARs
Three year CARs

8.31%
27.35%
5.25%

7.76%
23.85%
21.12%

5.25%
3.45%
19.73%

3.06%
23.90%-14.48%

0.331
1.143
0.563

High accruals

Middle accruals

Low accruals

Difference

Increase of Accounting Receivables / Assets(one year preceding the rescue)

0.053-0.003-0.044

One year CARs
Two year CARs
Three year CARs

17.66%
20.96%
42.71%

7.21%
18.85%
28.44%High accruals

Decrease of Depreciations / Assets(one year preceding the rescue)
One year CARs
Two year CARs
Three year CARs‡z -value p -value
‡

6.245

0.000

0.629
0.129
0.712

0.272
1.489
-0.528

0.393
0.068
0.701

t -valuep -valuez-value p -value

0.097

5.438

0.000

‡

***

6.595

0.000

‡

***

-4.20%
2.08%
6.79%

21.86%
18.88%
35.92%

2.271
1.259
2.039

0.014
0.107
0.023

**

2.547
1.440
1.471

0.005
0.075
0.071

***
*
*

Middle accruals

Low accruals

Differencet -valuep -value

0.054

0.024

0.008

-0.121-14.274

0.000

24.57%
50.46%
63.25%-4.69%-7.51%-2.86%

7.03%
13.82%
27.96%

17.54%
36.64%
35.29%

1.409
2.697
1.521

0.088
0.006
0.074

High accruals

Middle accruals

Low accruals

Differencet -valuep -value

Increase of Inventories / Assets(one year preceding the rescue)

0.027-0.002-0.031

0.057

9.171

0.000

One year CARs
Two year CARs
Three year CARs

7.03%
13.85%
23.73%

10.06%
26.78%
39.09%

3.99%
3.40%
18.64%

3.04%
10.45%
5.09%

0.307
0.768
0.291

High accruals

Middle accruals

Low accruals

Difference

Decrease of Accounting Payables / Assets(one year preceding the rescue)-0.033-0.002

0.045

One year CARs
Two year CARs
Three year CARs

7.62%
15.54%-9.37%

23.74%
38.14%-9.02%-9.37%
55.22%
3.61%

‡

‡

***

**

*

z-value p -value*** -5.815

0.000

*
***
*

0.097
0.006
0.106

1.300
2.533
1.246

‡

***
*
***

z-value p -value
***

‡

6.949

0.000

0.380
0.223
0.386

0.538
0.775
0.846

0.295
0.219
0.199

t -valuep -valuez-value p -value-0.078-6.1940.000

16.98%-39.68%-12.98%2.203-2.189-1.408

0.016
0.984
0.918

‡

***

*** -7.088

0.000

**

0.100
0.135
0.152

2.325
-2.146-1.109

‡

***

***

Table 4 shows the difference between the high accrual components group (High accruals) and the low accrual components group (Low accruals), in addition to the difference
between the high total accruals group (High accruals) and the low total accruals group (Low accruals). All of our samples are divided into three groups in accordance to theiraccounting accruals components and total accruals. Statistical significance is tested by using both t-test and Mann-Whitney's rank-sum test. ***, **, * denote that the difference inmean values is significant at the 1%, 5% and 10% level, respectively. ₈ denotes that p-value is two-tailed.

*29

Table 4 (Continued)
Panel B

Target's Previous CAR (1yr)
One year CARs
Two year CARs
Three year CARs

Most aggressively
sold off-42.64%13.78%
28.13%
45.57%

Target's Previous CAR (2yrs)
One year CARs
Two year CARs
Three year CARs

Most aggressively
sold off-52.68%18.21%
28.58%
41.88%

Target's Previous CAR (3yrs)
One year CARs
Two year CARs
Three year CARs

Most aggressively
sold off-62.67%18.56%
30.02%
42.60%

MiddleLeast sold

Differencet -valuep -value
‡

6.92%
4.17%
1.48%
5.09%

50.36%-4.60%
0.65%
10.91%-93.01%18.38%
27.49%
34.66%-10.1314
2.197
1.995
2.303

0.000
0.016
0.026
0.013

MiddleLeast sold

Differencet -valuep -value-0.73%
0.18%
5.33%
17.14%

54.11%-8.55%-4.40%
4.44%-106.79%
26.76%
32.99%
37.45%-9.632
2.897
2.437
2.419

0.000
0.003
0.009
0.009

MiddleLeast sold

Differencet -valuep -value-5.56%-2.88%
7.13%
23.55%

50.99%-2.11%-5.62%-0.97%-1.13720.67%
35.64%
43.57%-9.501
2.308
2.761
2.921

0.000
0.013
0.004
0.002

‡

‡

z-value p -value*** -6.455** 1.943** 1.930** 1.956

‡

0.000
0.026
0.027
0.025

***
**
**
**

z-value p -value*** -6.511*** 2.741*** 2.423*** 1.732

‡

0.000
0.003
0.008
0.042

***
***
***
**

z-value p -value*** -6.457** 2.258*** 2.601*** 2.139

‡

0.000
0.012
0.005
0.016

***
**
***
**

Panel B in Table 4 show the reversal effect of the acquiring firms after the close-out stock sale of rescued firms in detail. All of our samples are divided into threegroups in accordance to their preceding CARs. Statistical significance is tested by using both t-test and Mann-Whitney's rank-sum test. ***, **, * denote that the difference in meanvalues is significant at the 1%, 5% and 10% level, respectively. ₈ denotes that p-value is two-tailed.

30

Table 5 Two-way ANOVA analysis of the rescued firm's business practices and fiscal healthPanel A
Rank1

Rank2

Rank3

Total

Sales Growth0.21410.0008-0.11440.0208EBIT

0.1751

0.0991

0.04130.1203Current Ratio

3.57891.35810.7496

1.6168Debt to Equity Ratio-0.1385

1.4677

9.07344.4253

Panel A in Table 5 shows the average values of sales growth, EBIT, the current ratio, andthe debt-to-equity ratio, for the bottom, middle, and upper tertiles.

31

Table 5 (Continued)
Panel BOne year
CARs

F -valuep -value

Sales Growth

Two Years
CARs

F -valuep -value

Sales GrowthThree Years F -valueCARsp -value

Sales Growth

One year
CARs

F -valuep -value

Sales Growth

Two Years
CARs

F -valuep -value

Sales GrowthThree Years F -valueCARsp -value

Sales Growth(0.1848)

Rank1

Current ratio
Rank2
Rank3

Total

1.59

One year
CARs

F -valuep -value

0.94(0.4462)

Rank1

Current ratio
Rank2
Rank3

Total

Rank1

19.799%11.474%12.317%19.680%

Rank1

11.934%17.118%21.800%17.420%

Rank2-3.861%19.773%-8.920%-9.985%Rank2-5.943%-13.322%17.103%2.744%

Rank3

7.922%-16.091%2.932%

6.359%

Rank3

0.923%

16.469%3.770%

5.241%

Total

0.819%

5.842%

10.654%6.982%

Total

0.819%

5.842%

10.654%6.982%(0.2982)

Rank1

Current ratio
Rank2
Rank3

Total

(0.0129)

Rank1

Current ratio
Rank2
Rank3

Total

Rank1

32.081%

11.580%5.230%

29.356%Rank1

39.015%45.759%21.965%

1.24

Rank2

6.520%

48.104%-20.010%-9.358%Rank3

23.494%-22.579%

20.931%

16.955%Total

0.158%

10.565%23.381%14.138%(0.2302)

Rank1

Current ratio
Rank2
Rank3

Total

Rank1

42.307%11.924%4.541%

41.031%

Rank2

12.196%79.049%-14.341%5.727%

Rank3

41.141%21.888%48.395%26.403%Total

11.022%29.897%32.508%26.378%(0.0108)

Rank1

Debt to Equity ratio
Rank2
Rank3

Total

Rank1

17.030%12.620%24.135%19.680%Rank2-8.404%-23.229%-3.313%-9.985%

Rank3

13.197%-1.196%5.316%

6.359%

Total

7.204%-1.274%12.421%

6.982%(0.0008)

Rank1

Debt to Equity ratio
Rank2
Rank3

Total

Rank1

35.933%0.750%

29.356%Rank2-9.815%-36.030%

6.505%-9.358%Rank3

7.060%

4.897%

41.103%16.955%

Total

8.590%-6.555%31.319%14.138%(0.0515)

Rank1

Debt to Equity ratio
Rank2
Rank3

Total

Rank1

37.678%29.347%41.031%

Rank2

7.670%-19.510%19.152%5.727%

Rank3

12.664%8.641%

61.055%26.403%Total

17.069%9.700%

43.039%26.378%

1.43

3.48

5.17

2.45

**

***

*

42.461%48.109%EBIT

Two Years
CARs

F -valuep -value

EBIT

Three Years F -valueCARsp -valueEBIT

One year
CARs

F -valuep -valueEBIT

Two Years
CARs

F -valuep -value

EBIT

Three Years F -valueCARsp -value

EBIT

3.36

**

43.062%Rank2-10.008%-24.286%25.118%2.497%

Rank3-14.451%

15.200%16.584%9.863%

Total

0.158%

10.565%23.381%14.138%(0.1702)

Rank1

Current ratio
Rank2
Rank3

Total

Rank1

53.520%35.414%50.757%1.64

0.621%

Rank2-6.210%7.261%

26.990%12.147%Rank3

1.835%

50.250%26.803%25.394%Total

11.022%29.897%32.508%26.378%(0.4209)

Rank1

Debt to Equity ratio
Rank2
Rank3

Total

Rank1

14.044%14.558%20.396%17.420%

Rank2-3.317%-3.867%

12.532%2.744%

Rank3

12.201%-1.470%7.962%

5.241%

Total

7.204%-1.274%12.421%

6.982%(0.0030)

Rank1

Debt to Equity ratio
Rank2
Rank3

Total

Rank1

40.321%30.496%21.965%

0.98

4.33

***

46.849%Rank2-3.006%-5.599%13.158%2.497%

Rank3-10.096%-11.843%

36.546%9.863%

Total

8.590%-6.555%31.319%14.138%(0.0681)

Rank1

Debt to Equity ratio
Rank2
Rank3

Total

Rank1

47.816%26.676%50.757%

2.26*

57.274%Rank2

3.079%-2.556%30.866%12.147%Rank3

2.061%

16.004%43.127%25.394%Total

17.069%9.700%

43.039%26.378%Panel B in Table 5 shows the results of the two-way ANOVA analysis. We constructed nine partition cells with breakpoints based on the tertile points
in all listed firms: the upper section of Panel B in Table 5 is based on a three-year average sales growth, or EBIT growth and the current ratio of
rescued firms. The bottom section of Panel B in Table 5 is based on a three-year average sales growth, or EBIT growth and the debt-to-equity ratio of
rescued firms.***, **, * denote that the difference in mean values is significant at the 1%, 5% and 10% level, respectively.

32

Table 6 Acquirer's one to three year post-rescue performance: non-diversified versus diversified
Nondiversification(N = 30)

Diversification

Difference t -value p -value

z -value p -value(N = 67)CAR12

6.548%

7.249%

0.701%

0.091

0.928

0.004

0.997

CAR24

10.670%16.276%5.606%

0.512

0.610

0.546

0.585

CAR36

26.460%26.328%-0.132%-0.0100.992-0.1820.856

Table 6 provides the post-rescue CARs of all acquiring firms who rescued, respectively ,targets inboth the same industry and diversified industries.

33

Figure 1 Acquirer's three year post-rescue performance (ranked according to the rescued firm's
account receivables increase in preceding years)

50%
40%
30%
20%
10%
0%
-10%
-20%
0

2

4

6

8 10 12 14 16 18 20 22 24 26 28 30 32 34 36

Preceding year's increase in account receivables are greatest
Preceding year's increase in account receivables are a medium amountPreceding year's increase in account receivables are least
Figure 1 shows the acquirer’s three year post-rescue performance for the three following groups: 1) the troubled
firms whose preceding year's increase in account receivables are greatest, 2) the troubled firms whose preceding
year's increase in account receivables are a medium amount, and 3) the troubled firms whose preceding year's
increase in account receivables are least of all.

Figure 2 Acquirer's three year post-rescue performance (ranked according to the rescued firm's
preceding year's depreciation decrease)

80%
70%
60%
50%
40%
30%
20%
10%
0%
-10%
-20%
0

2

4

6

8 10 12 14 16 18 20 22 24 26 28 30 32 34 36

Preceding year's decrease of depreciation are greatest
Preceding year's decrease of depreciation are a medium amountPreceding year's decrease of depreciation are least
Figure 2 shows the acquirer’s three year post-rescue performance for the three following groups: 1) the troubled
firms whose preceding year's decrease of depreciation are greatest, 2) the troubled firms whose preceding year's
decrease of depreciation are a medium amount, and 3) the troubled firms whose preceding year's decrease ofdepreciation are least of all.

34

Figure 3 Rescued firm's preceding three year performance (ranked according to the rescued firm's
preceding year's increase in account receivables)

20%
10%
0%
-10%
-20%
-30%
-40%
-50%
0

2

4

6

8 10 12 14 16 18 20 22 24 26 28 30 32 34 36

High ranked performance of ratio increases for accounting receivables against
total assets one year prior to the rescue
Middle ranked performance of ratio increases for accounting receivables
against total assets one year prior to the rescue
Low ranked performance of ratio increases for accounting receivables against
total assets one year prior to the rescue
Figure 3 shows target firms with a previous-rescue of high, middle, and low ranked performance of ratio
increases for receivables against total assets one year prior to the rescue, respectively.

Figure 4 Rescued firm's preceding three year performance (ranked according to the rescued firm's
preceding year's depreciation decrease)

20%
10%
0%
-10%
-20%
-30%
-40%
-50%
-60%
-70%
0

2

4

6

8 10 12 14 16 18 20 22 24 26 28 30 32 34 36

High ranked performance of ratio decreases for depreciations against total
assets one year prior to the rescue
Middle ranked performance of ratio decreases for depreciations against total
assets one year prior to the rescue
Low ranked performance of ratio decreases for depreciations against total
assets one year prior to the rescue
Figure 4 shows target firms with a previous-rescue of high, middle, and low ranked performance ratios ofdecreasing depreciation costs against total assets for one year preceding the rescue, respectively.

35

Figure 5 Acquirer's three year post-rescue performance (ranked according to the rescued firm's stock
return magnitude in the previous 3-years)

50%
40%
30%
20%
10%
0%
-10%
-20%
0

2

4

6

8 10 12 14 16 18 20 22 24 26 28 30 32 34 36
Stocks were most aggressively sold off
A medium amount of stocks sold
Stocks were sold least

Figure 5 shows the acquirer’s three year post-rescue performance for the three following groups: 1) the troubled
firms whose stocks were most aggressively sold off, 2) the troubled firms who has a medium amount of stocks
sold, and 3) the troubled firms whose stocks were sold least of all.

36