Turki Et Dreeper 2012 The Dividend Policy of The Merged Firm, Method of Payment, and Takeover Premium

The Dividend Policy of the Merged Firm,
Method of Payment, and Takeover Premium
First version: December 25, 2011

This version: April 25, 2012
SEBASTIEN DEREEPER* and AYMEN TURKI*
ABSTRACT
Dividends, particularly of acquiring firms are influenced by several structural adjustments especially after mergers.
Using the dividend clientele hypothesis, we hypothesize that acquirer dividend policy is more likely to change after
the merger if dividend policies of firms involved in a stock-based merger are quite different, while it remains
unaffected in cash deals. Initially, we analyze the relationship between the acquirer dividends after the announcement
and the pre-merger dividend policy of the target. In a second step, a multivariate analysis will be conducted to detect
dynamics of takeover premium with the differences in dividend policy between merged firms. From the observation
of 663 M&As, we find that acquiring firms are more disposed to adjust their dividend policies to those of targets in
case of stock mergers than for mergers in cash. Additional analyses show some evidence that higher acquirer
dividend is associated with higher takeover premium in cash deals, but there’s no significant association between
difference in dividend policies and takeover premium in stock deals. These results highlight the role of the premium
to offset the opportunity cost of target shareholders to receive more dividends in the merged entity when they agree a
cash merger, and justify the triviality of the premium in stock deals by the disposal of the acquirer to adjust its
dividend policy.
Mergers and Acquisitions activities have long been an interesting subject of corporate
finance research. Although, there is still much about M&A process that we do not fully
understand, including the post-merger dividend policy. The extant literature has primarily
focused on firm dividend policy but does not test the same effects on acquiring and non-
acquiring firms. As both groups of firms are different in their managerial and financial
structures, it is pertinent to suspect that their dividend policies will be different. After
all, acquiring firms are more cautious in formulating dividend policies that aligns with
their combined operational and managerial strategy (Nnadi and Akpomi, 2009). The
present study is posit to examine whether the issues of concern by firms engaged in
M&As in formulating their dividend policies are the same as for non-acquiring firms.
Otherwise, an understanding of how acquiring firm can be influenced by the target
dividend policy when implementing its post-merger dividend policy is vital to acquirer
management.
* University of Lille - Northern France, European Center for Corporate Control Studies. We want to thank ECCCS
seminar participants at the Skema Business School for helpful comments. We are also appreciative of research
support from the Lille School of Management Research Center.
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To the extent that the level of post-merger dividends should reflect the level of profits
generated by the combined economic assets, one might think from the idea of managing the
dividend policy according to a target ratio recommended by Lintner (1956) and Fama and
French (1997), that the post-merger dividend policy of the acquirer may also refer to another
target value which is the existing distribution ratio of the absorbed company. Two lines of
thought can be explored in an attempt to theoretically justify such a relationship. The possible
link between change in subsequent dividends of the acquirer and the ex-ante distribution
policy of the target may in fact be indirect, that is to say that the combination of two different
structures would be a factor of post-merger change in dividend policy, or direct when the
level of target distribution prior to the operation plays a mechanical role in the ex-post
adjustment of dividend policy between parties involved. The first hypothesis refers to a
theoretical debate about the existence of strategic considerations propelling post-merger
change in dividend policy, namely the sharing of cash synergy, the discipline of the CEO in
charge of a poorly-driven acquisition, or signaling of subsequent performance of acquisitions.
The second hypothesis involves the management of the clash between two shareholders
populations with different dividend demand. Black and Scholes (1974) argue, according to the
clientele effect, that the dividend policy of the company reflects the shareholders preferences.
Moreover, these authors explain that if the firm can always choose its dividend policy, it will
adjust it depending on the level of dividend yield the most requested until equilibrium is
reached when no firm can affect its value by changing its dividend policy. The purpose of this
paper is to check if the M&As operations can disrupt this equilibrium through causing a
confrontation between two different types of dividend clientele.
The study of dividend policy in the context of M&A can be a subject of considerable debate.
Having defined our object of research, we formulate our main research question as well: is
there a post-merger change in acquirer dividend policy influenced by previous dividend
policy of the target. This question calls concomitant restrictions, namely the disproportion in
ex-ante levels of distribution between merged firms. The explanatory power of target dividend
policy on the possible change in dividends after the merger is not unlikely, especially in stock
deals since the satisfaction of target shareholders and the endurance against dilution risk
caused by a shareholders bloc removal can be factors leading to the success of the merger.
The remaining aspects of this study deal with the bid premium paid and how relative
differences in dividend policy between merged firms affect its value. According to the target
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resistance theory, target shareholders may resist takeover proposals if the premium offered is
not high enough. This resistance may reflect information on future takeover opportunities
(Bradley, Desai and Kim, 1983), job security considerations of target employee shareholders
(Chaplinsky and Niehaus, 1994), or the value of private benefits for target shareholders
(Varaiya, 1987; Bebchuk, 1994). Among these benefits, we consider the future dividend to be
received by target shareholders after a stock-exchange merger. Otherwise, and if the bidder
offers cash to target shareholders which can be deprived of future acquirer dividend, target
management can also force opportunity cost to be favorable by refusing to sell unless they
obtained a higher premium. This implies that the acquirer with higher dividend than target’s
will probably face a tradeoff between paying its acquisition in cash with providing a high
premium, and paying by equity while pledging the same level of dividend to target
shareholders after the merger. Several papers study offer premium directly. Walking (1985)
uses offer premium to predict tender offer success. Eckbo and Langohr (1989) investigate the
effect of method of payment (cash versus stock) on tender offer premiums. Officer (2003) and
Bargeron (2005) test the premium effects of deal protection devices such as termination. To
the best of our knowledge, there are no published scholarly articles that use the difference in
dividend policy between merged firms to investigate the size of announced bid premium. In
this paper, we aim to investigate if the association between bid premium and difference in
dividend policy holds true when considering mergers involving firms with different
distribution strategies.
The rest of this study is organized as follows. Section one outlines a detailed review of the
existing literature to which refers our research. A description of hypotheses, data and
methodology used to achieve the research questions is given in section two. Empirical results
are discussed in section three. Finally, summary and conclusions are presented in section four.
1. Literature review
This section reviews literature regarding dividend clientele that may explain dividend
policies’ shocks surrounding M&A transactions. An overview of studies on the premium
effects is also presented. We also develop our research questions in this section.
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1.1. Dividend clientele in M&As
The dividend policy aims to satisfy shareholders and meet their expectations. These
preferences vary from one shareholder to another. Therefore, the type of investor is a
determinant of distribution policy aspects. Each change in the type of investor usually causes
an adjustment in the dividend policy in order to maintain the same goal, which is shareholders
satisfaction. The change in the clientele or the integration of a new shareholding has its
origins in the financial market shocks that disturb equilibrium between firms and impose
adjustment measures to prevent the depreciation of their values. Among these shocks include
the operations of M&As. When this is done, in whole or in part in securities, it can generate a
confrontation between two different types of shareholders, especially when the degree of
difference in dividend policies between merged firms is important. The encounter of two
different types of shareholding makes the acquirer worried about the departure of target
shareholders and the liquidation of their positions after the merger completion. Thus, and in
order to increase the degree of target shareholder inertia, the acquirer will tend to reconcile
the two policies and increase the degree of similarity between them to keep all shareholders of
the merged entities. In this way, the fundamental purpose of the distribution can make the
adjustment of post-merger dividend policy of the acquirer automatic and spontaneous.
According to the dividend clientele literature, different dividend policies appeal to different
classes of investors (Elton and Gruber, 1970; Black and Scholes, 1974; Kalay, 1982; Scholz,
1992; Allen, Bernardo and Welch, 2000). Some investors prefer to receive the payout from
firms as dividends, while others may prefer to receive the payout as capital gains. In stock
based mergers, shareholders of either company may have an incentive to liquidate their
holdings if the payout policy of the surviving firm no longer fits their preference. Elton and
Gruber (1970) comment that "… a change in dividend policy might cause a change in
clientele and this could be costly". They explain that, "One type of cost would be the
transaction costs incurred by both buyers and sellers as the firm's clientele changes.
Furthermore, there could be at least a short-run unfavorable price movement as the change in
dividend policy is more apparent to those investors who find it less favorable than to those
who find it more favorable."
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Black and Scholes (1974) also recognize the existence of dividend clientele effect. They state
that firms, knowing that there are investors for several levels of dividend yield, would adjust
their dividend policies as necessary, to satisfy each demand. These authors argue that some
types of investors prefer high-dividend yield, while other types prefer low-dividend yields.
The first group includes firms that support higher taxes on capital gains than on dividends,
and instead, the second one concerns investors that endure higher taxation on dividends.
Further, there exists a group of tax-exempt investors that should be indifferent to the dividend
yield of the share they hold.
In addition to clientele effect argued by Black and Scholes (1974), the catering theory of
dividend can also provide a support to the heart in dividend demand between shareholders of
merged firms. The principle behind the theory is that decisions to pay dividends are usually
driven by investors demand. Management therefore “caters” for investors by paying dividends
to shareholders who require it and not paying when investors do not require it. Baker and
Wurgler (2004) argue that investors have uninformed and time varying demand for dividend
paying shares. Management would pay dividend when investors place higher prices on payers
but avoid payments if investors prefer non-payers. In contrast to B&S (1974), their findings
suggest that dividends are highly relevant to share value but in different directions and times.
Miller and Scholes (1978) demonstrate that even if the income tax is higher than the tax on
capital gains, there are instruments in the financial market that allow investors to neutralize
the fiscal disadvantage of dividends. Thereby, there would not be a reason to detect any
clientele effect associated to tax-differential. In addition, the change in dividend clientele may
induce adjustment costs for the firm in the form of missed investment opportunities or costs of
raising funds due to the shortage of free cash-flow. That said, it will be better that firms
follow a consistent dividend policy that will attract a regular dividend clientele and minimize
brokerage costs.
In the context of M&As, Mitchell, Pulvino and Stafford (2004) focus on price pressure around
mergers, and Baker, et al. (2007) find evidence in support of inertial behavior by target
shareholders and that acquirer returns are lower when inertia is lower. We argue that if the
target shareholders’ dividend demand is very different from the acquiring shareholders’, this
may induce to a challenging post-merger dividend policy of the combined firm. If the
dividend clientele hypothesis holds and the dividend policies of the acquirer and the target are

materially different and stock is used in the acquisition, this may cause a change inthe target’s
shareholder base. That is, target shareholders may decide to rebalance their portfolios. They
may decide to sell their position in the target, before the merger is consummated, or in the
survivor firm, after the merger is consummated, if they do not like the dividend policy of the
acquiring firm. In the language of Baker, et al. (2007), a similarity in dividend policies
between the target and the acquirer increases inertia, while a dissimilarity in dividend policies
between the target and the acquirer decreases inertia, other things equal.
On the basis of dividend clientele hypothesis, non-passive target shareholders who do not
prefer the acquirer dividend policy may sell at any point from the announcement date until the
merger consummation, which can have immediate adverse effects on target stock price. On
the other side, acquirer shareholders will have no immediate reason to liquidate their shares
since they don’t necessarily expect a change in post-merger dividend policy. However, an
acquirer’s related announcement effect might be possible if merger arbitragers anticipate and
respond immediately to effects on the target share price. Regarding clienteles preferring the
dividend policy of the acquirer, they will not buy until the likelihood of merger consummation
is high enough and the price drop large enough to compensate them for the risk of merger
failure and the transaction costs of rebalancing.
1.2. Bid Premium and the Difference in Dividend Policy
This study investigates a further main research question centering on the effect of bid
premium to offset the difference in distribution. Reflecting restrictions on the availability of
studies on such relationship, the bulk of the empirical studies on takeover premium
determinants can be explored to identify some plausible arguments for the existence of a
significant link between premium and the difference in dividend policies of merged firms.
Several works have analyzed the motivating factors behind bid premium, and present bid
premium models that use type of combination, toehold, method of payment variables as well
as merged firms characteristics’ variables as meaningful predictors of premium size.
Walking and Edmister (1985) indicate that the premium size is a negative function of the
bargaining power of the bidder. In this sense, the large gap in distribution between merged
firms can weaken the acquirer bargaining strength, and thus lead it to increase the premium in
order to alleviate target resistance.

The existence of synergy makes companies more profitable, and since the cyclicality of
dividends generally follows the pace of earnings (Lintner, 1956), profits taken after the
merger may contribute to increase post-merger dividends. Nevertheless, the value created by
the merger is primarily intended for acquirer shareholders who control the newly acquired
company. That is why the acquirer is willing to pay the target beyond its real value in the
form of higher bid premium. Bradley et al (1988) define synergy gains as the sum of the value
created for acquirer and target shareholders. This definition assumes that dividends received
by shareholders after the merger can contribute in sharing-law implementation specified in the
transaction. Consequently, the dividend policy after the merger completes the role of
traditional elements such as premium to ensure the fair allocation of M&A value created.
Hansen and Lott (1996) hypothesize that since investors are diversified, the goal of the
manager of a firm is not to maximize shareholder value but to maximize the value of the
shareholder’s portfolio. Thus, when a bidder acquires a target by stock, diversified
shareholders will be concerned about how the gains from the acquisition are divided. If the
negative returns of the bidder are offset by the positive gains of the target, premium and
dividend policy following the acquisition can balance gains sharing between shareholders of
merged firms.
Eckbo and Langohr (1989)1 examine the effect of disclosure rules and method of payment on
offer premium. They document that the average premium over the pre-offer price is
significantly higher in all-cash than all-stock exchange offers (73 versus 17%). They explain
this difference by the cash offer-induced upward reevaluation of the target. All the same, they
compute the average premium over the post-expiration price, and they find that it remains
identical across offers with the two payment methods, which explains that the takeover
premium can’t be considered as an instrument to compensate target shareholders for capital-
gains taxation in stock deals. In our context, we will test the compensating effect of the
premium not in terms of liabilities resulting from the means of payment used, but rather in
terms of dividend deprivation, in part or in total, after the merger.
1 Cf. Information disclosure, method of payment, and takeover premiums: Public and private tender offers
in France, Journal of Financial Economics 24, 363-403.

In determining an expected relationship between post-merger variables and acquisition
premiums, Varaiya (1987) and Crawford and Lechner (1996) note that the price offered by a
bidding firm should be a function of both the underlying value of the target firm and all
potential gains a bidder stands to make after the takeover. Therefore, any variable expected to
increase these potential gains from a takeover should increase either the observed premium or
post-merger determinants that can, instead of premium, remunerate target shareholders. In this
sense, the acquirer by stock of a higher-dividend target may settle for paying a high premium
to satisfy target shareholders especially if it predicts that in the long term, it will not be
willing to adjust its dividends to reach the target distribution level. Further, the acquirer by
cash of a lower-dividend target may settle for paying a high premium to compensate target
shareholders’ opportunity cost since the cash-sale will keep them from generating acquirer
dividend in the merged entity.
Facing these different arguments, our job in a second research question is to show that the
expected loss of dividend distribution to be suffered by target shareholders is a part of the
premium paid, which can be really considered as a compensation of the dividend policy shift
after the merger. Our theoretical intuition here postulates the existence of a positive
relationship between the value of the premium and the level of acquirer distribution relatively
to target pre-merger distribution in the case of cash offers.
2. Hypotheses, data and methodology

2.1. Hypotheses
We construct and test two hypotheses in this study. The first hypothesis states that the
acquiring firm is more likely to align its dividend policy after the merger to the previous
dividend policy of the target. Based on the literature reviewed in the previous section, we
believe that post-merger dividend policy of acquiring firms will be significantly related to its
distribution strategy prior to the merger other things equal, as argued by Fama and French
(1997) with regard to acquiring and non-acquiring firms. Furthermore, we assume that
acquiring firm attempts to adjust its dividend policy after the merger to the existing dividend
policy of the target, other things equal. Ceteris paribus, the management of the combined firm
should consider, following a stock-based acquisition, the pre-merger dividend policies of both
acquirer and target. We therefore hypothesize that there is a positive relationship between the

pre-merger dividend policy of the target and the post-merger dividend policy of the combined
firm.
H1: The acquiring firm is willing to adjust its dividend policy after the merger to the
existing dividend policy of the target.
H1a: The stock acquirer is more likely to align its dividend policy following the merger than
the cash acquirer.
Our second hypothesis states that the acquirer is aware of a possible declination of its cash
offer when its dividend policy is more beneficial to target shareholders and accounts for it
when announcing the takeover premium. Consequently, acquiring firm that prefer to pay its
acquisition in cash may offer a higher bid premium to offset the opportunity cost of target
shareholders to receive higher dividend in the merged entity. Ceteris paribus, we presume that
the bid premium paid in cash deal is positively related to acquirer dividend policy before or
after the merger relatively to the pre-merger dividend policy of the target.
H2: There may exist a compensating link between the bid premium and the difference in
dividend policy between merged firms.
H2a: The acquirer with higher dividend will announce a higher bid premium, when it pays its
acquisition in cash, to compensate the opportunity cost of target shareholders.
2.2. Sample
Our sample of acquisitions covers deals announced over the period 1987 to 2005 and is
extracted from the Securities Data Company’s (SDC) US mergers and Acquisitions Database.
As the data required for the study of post-merger dividend policy extends over a period of five
years, we are unable to analyze deals from earlier years. We identify 4 897 completed deals
that meet the following criteria:
1. Both the target and the bidder are listed US firms. Dividend data are available only for
listed firms.
2. Deal value is greater than 1 million dollar.

3. The percentage of shares acquired from the target is more than 50%.
We require moreover that (i) stock prices, earnings per share and dividends per share are
available in the CRSP-Compustat Merged Database (CCM) for both targets and acquirers and
(ii) the bid premium in percentage (computed using the target market price four weeks prior to
the announcement date) and other accounting records are available in the SDC Database. The
sample restrictions result in a final sample of 663 deal observations grouped into two
financing categories. The first category includes 210 acquisitions that are financed solely with
common stock. The second category includes 453 acquisitions financed solely with cash, or
cash plus stock. Table 1 provides the sampling procedure by criteria imposed.
[Insert table 1 about here]
The figure 1 provides the distribution of M&As sample by year. Two determinants are
analyzed: the number of operations and the corresponding aggregate deal value. We sort 663
deals reported as mergers/acquisitions. The SDC sample exhibits a peak in the number of
transactions between 1998 and 2000, which is consistent with the well documented “friendly”
M&A wave of the end of the nineties2. The aggregate deal value displays a similar patterns
except for some years (1988, 2000 and 2003), which corresponds to a fall in the M&A
volume of transaction despite a higher number of deals selected.
[Insert figure 1 about here]
2.3. Methodology
"Although the definition of dividend is conceptually simple, the measurement of this variable
is a challenge". Boudoukh et al (2007) clearly demonstrate the complexity of dividend
measurement. In this study, we construct our measure of dividends using the CCM data items;
Dividend per Share, Earning per Share and Stock Price. Previous researches of dividend
policies invariably select one of two commonly accepted measures of dividend policy
evaluation. These two measurements known as ‘Dividend Yield’ and ‘Payout Ratio’
commonly used as proxies of dividend policy. Both measures are likely to have different
results affected by divergent factors as they are intrinsically unique variables constructed to
measure specific elements. While dividend payout has the traditional focus on relating portion
2
Betton, S., Eckbo, B.E., Thorburn, K.S., 2008. Corporate takeovers.
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of the after-tax profit paid to shareholders, the yield quantifies such dividends on the basis of
its current market value. Most studies have used both variables in part or jointly to describe
dividend policy3. On our side, we will use yield and payout jointly. Furthermore, we refer to
the distribution frequency along the eleven years surrounding the M&A announcement, which
reveals the regularity in the distribution. A fourth indicator (speed of adjustment) is exploited
in order to empirically model the dividend policy change of the acquirer according to Lintner
model (1956).
Indeed, we will hold the partial adjustment model of Lintner, which takes into account the
actual profit and the previous dividend in order to compare the dividend speed of adjustment
between firms involved. The basic assumption here corresponds to the possibility to scrutinize
the post-merger change in acquirer dividend policy, taking into account not only its anterior
speed of adjustment but also the speed of adjustment of the target prior to the merger.
3. Empirical results and discussion

3.1. Descriptive statistics
Table 2 reports descriptive statistics for our sample of acquisitions. Variable definitions are in
Appendix A. Table 2a is dedicated to summary statistics of variables grouped in terms of deal
and firm characteristics. Table 2b displays summary statistics of dividend measures used to
identify dividend policies of merged firms surrounding the merger.
Panel A of table 2a provides summary statistics about deal characteristics. Deal value is
known to be a potential determinant of deal emphasis. Its mean value is about 2354. The
average proportion of stock-payment represents 45.36 %. The Toehold variable is computed
using information from SDC database and known to affect the bid premium (Eckbo, 2009). In
our sample, we note that Toehold acquisition is rare (mean of 0.08) as previously documented
in the literature. The bid premium is on average equal to 46%. Officer (2003) reports an
average premium based on the final offer price deflated by the target’s market value of equity
43 days prior to announcement, of 48.65 % in a sample of 2,511 successful and unsuccessful
3
Chen et al (2005) used payout and yield; Gugler and Yurtoglu (2003) used payout; Johnson et al (2006) applied
yield.
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acquisitions from 1988 and 2000. The Competition seems to be less problematic as we
observe a low average number of bidders (1.10).
Panels B and C provide information on acquiring and target firms. The acquirer leverage is,
on average, 2.29, which is higher than 1.10 reported in Jeon et al. (2010) for All-stock deals.
The average target leverage is smaller than acquirer’s and more important than that reported
by Jeon et al. The firm cash ratio is defined as the total value of cash and marketable
securities scaled by total assets of the company in the last twelve months before the
announcement. The average cash of the target is higher than that of the acquirer.
Panel A of table 2b reports the dividend measures of acquiring firms distinguishing between
records for sample of all acquirers and sub-sample of acquirers paying dividends. In regards
to the average frequency, it is interesting to note the difference between acquirers’ and
targets’ observations over [-5, 0]. This illustrate that acquiring firms are more diligent in
paying dividends and that the target is more likely to be non-payer than the acquirer. The
average dividend yield of acquirers is 1.1%. It is relatively low compared to the average
dividend yield of S&P 500 firms which is about 2.11% and to the Dow Jones’ between 1988
and 2003. When removing zero-dividend firms from the sample, we obtain an average yield
for acquirers close to that of S&P500 firms.
The average acquirer payout of 24.9% is higher than the rate of distribution of targets (15.2%)
before the merger. DeAngelo, DeAngelo and Skinner (2004) examine the distribution rate of
25 industrial firms of CRSP/Compustat that pay the largest amounts of dividends between
1978 and 2000, and found an average payout of 41.99%, well above the average rate of the
sample. However, if we observe at the side of acquirers paying dividend solely, we have a
payout of 38.4%, which is relatively coherent with the ratio revealed by DDS (2004) on
“payers” firms. According to these three criteria, it appears that the acquirers in the sample
have greater dynamism and commitment in their dividend programs compared to a more timid
activity of the targets.
The descriptive statistics of the acquirer dividend policy after the merger show an average
distribution frequency close to the frequency over [-5, 0]. The dividend yield of the acquirer
after the merger is unchanged. The payout also slightly decreases after the merger from 24.9%
to 23.2%. Thereby, if one takes into account the parallel evolution of two among three main
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measures of dividend policy, we may affirm that there is, on average, a light fall in the
acquirer dividends after the merger.
3.2. Associating distribution attitudes of merged firms
Companies that engage in a merger or acquisition must recognize that the poor planning for
future integration may lead to discords in the financial policies of firms involved. The
confrontation between the ex-ante dividend policy of the acquirer and the target’s arouses the
interests of different actors, especially if existing payment strategies reveal a significant
divergence. The study of the crossing of the two policies examined over a range of six years
before the announcement discloses emblematic situations. Table 3 presents contingency tab
that identify all possible scenarios depending on whether the firm involved is paying dividend
or not.
Previously, the classification of the acquirer on a vertical axis, relative to the presence of
dividend in its pre-merger distribution policy, and then that of the target on an horizontal axis,
give rise to the distribution of our transactions between four possible cases of mergers.
Presumably, 64.4% (427 cases) of our operations bring together firms in the same category of
distribution. This result may be reasonable if one takes into account that acquirers generally
follow the track of homogeneity with the target policy to facilitate post-merger integration of
its shareholders. Nevertheless, the existence of numerous cases of merger between firms with
similar dividend policies in the sample will not make a real evidence to explain shocks of
Panels B and C report the changes of acquirer attitude after the merger compared to its
previous distribution policy. More specifically, Panel B presents cases of acquisition where
the target can be "payer" or "non-payer”, which will allow us to examine change over time in
acquirer dividends regardless of dividend policy taken by the target.
In 30.77% of operations, there are “non-paying” acquirers that remain inactive after the
merger. This can be interpreted by the acquirer tendency to maintain the same behavior
without being affected by the new shareholders who have already approved the merger at the
beginning. On the other hand, 62.9% of operations include papying acquirers that remain
active after the merger. In total, approximately 93.67 % of operations say a lack of change in
the attitude of the acquirer after the operation.
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Matrix 1 of Panel C shows that 91.23% of acquirers do not change their policies after
absorbing inactive targets. Furthermore, 6.03% become "payers" after the acquisition of zero-
dividend target while 2.74% of acquirers do not opt for distribution after the operation
although they were "payers". The high percentage of firms that maintained their initiating
dividend policies can be explained by the inactivity of the target that can neither propel the
decline in the standard acquirer distribution given the cost of a negative signal, nor induce
higher activity of inactive acquirer which finds no need to change its behavior even more than
its existing policy does not upset its shareholders or the existing shareholders of target.
Matrix 2 of Panel C concerns the apportionment of acquisitions of paying targets. This gives
about 96.64% of acquirers that do not change their policies after the merger, among them
81.54% of active acquirers who remain "payers" after the operation, which is practically
justifiable. However, we note that 15.10 % of acquirers remain inactive even though they
have dealt with “payers” companies. These results confirm those of the previous matrix and
refute any possibility of post-merger dividend adjustment in light of the target distribution
strategy prior to the target. However, a categorical grouping of firms between payers and non-
payers may hide several cases of deviation in distribution particularly within the groups of
paying firms.
3.3. Regression on average dividend
Rosenbaum and Rubin (1983) propose an estimation of treatment effects based on propensity
scores to reduce evasion of various confounding effects observed. These methods based on
the propensities have become increasingly popular in the evaluation of economic policy
interventions.
Beforehand, we examine the acquirer dividend policy each year after the operation according
to the anterior mean distributions of the firms involved, and then we investigate the link
between the tendencies of posterior acquirer distribution relative to previous trends. Panel A
of table 4 reveals regressions on average yields. The regressions show positive and significant
coefficients of the acquirer average yield before the merger in relation with its average yield
after, for the purely stock-financed deals as well as cash/mixed deals. This result conveys the
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regularity of acquirer dividend policy surrounding its acquisition. On the other side, the
coefficient of the target average yield before the merger is too low and marginally significant
for the entire sample.
We will also apply regressions trends by reference to the average dividend payout in panel B.
The regressions coefficients exhibit positive and significant average payouts of the acquirer
before the merger with its mean payout after the merger. Furthermore, the target’s mean
payout before the announcement is positively (to a lower extent than the pre-merger
acquirer’s mean payout) and significantly related to the ex-post average payout of the
acquirer. Thus, as opposed to the yield regression, the regression on payout ratio show some
evidence that the acquirer takes into account the ex-ant dividend policy of the target when it
traces the dividend policy of the combined entity. The comparison of the coefficient of
target’s mean payout between the two groups of deals clearly exhibit a higher coefficient for
the sub-sample of purely stock-based deals than for the cash/mixed deals. This evidence
points the interest of the acquirer to adjust its dividend policy in the case of stock acquisitions
since this M&A currency will enable target shareholders to integrate the shareholding of the
new merged entity, whereas this is not the case in cash acquisitions.
Nevertheless, the lack of significance related to the prior distribution of the target in trends by
dividend yields, makes our inference on the link between ex-post dividend policy of the
acquirer and ex-ante dividend policy of the target a little confused. Hence we need to opt for
the modeling of Lintner (1956) on dividends, which is based on the comparison of adjustment
speeds of dividends over time and between firms involved.
3.4. Lintner Model
The partial adjustment model of dividends considers that the dividend desired D* in year t of
firm i is determined by the net income and a target payout ratio ri:
D*i,t = riEPSi,t (1)
For each year, the model of Lintner (1956) assumes that firms make a partial adjustment of
dividends paid according to their desired dividend. This partial adjustment is based on the
following equation, where ai is the constant representing "resistance to the reduction
ofdividends" and bi is the “adjustment speed” of the dividend.
15

∆Di,t= Di,t- Di,t-1 = ai + bi (D*i,t - Di,t-1 ) (2)
The substitution of equation (1) in equation (2) provides:
∆Di,t= Di,t- Di,t-1 = ai + biriEPSi,t- bi Di,t-1 (3)
The estimation of Lintner model parameters is performed through balanced panel data taking
into account a fixed effect, where the constant model is specific to the characteristics of the
firm. This technique allows collecting information specific to each behavior as part of a global
estimation of total firms in our sample. Table 5 presents the results of Lintner model and
reports, using the coefficients obtained from explanatory variables, the speed of adjustment of
dividends and the target payout ratio of merged firms. The parameters relative to the variation
of pre-merger dividends are estimated using a time series of length 5 since 5 variations of
dividends are observed from data of 6 years over [-5, 0]. All the same, we use time-series of
length 4 for the variation of dividends following the announcement over [+1, +5].
The dependent variable, which is the variation of the dividend per share (∆Di, t), is regressed,
on fixed effects, according to the earning per share (EPS) of the same year and the dividend
per share of the previous year. The coefficient estimated from EPSt reports the product of the
speed of adjustment and the target payout ratio while the coefficient of Dt features the
opposite of the adjustment speed. The principle is to compare between the coefficients of the
independent variable (D-1), which feature the speed of adjustment of merged firms to adapt
their current dividends to dividends paid before.
Panel A shows the Lintner model parameters for acquirers before the merger for the total
sample, subsample of all-stock deals and subsample of cash/mixed deals. The dependent
variable is the change in acquirer DPS prior to the merger. Modeling ex-ante variation in
acquirer dividend per share reveals a positive but insignificant coefficient of the earning per
share in connection with the change in dividend per share. This result isn’t consistent with
previous studies mainly that of Lintner (1956) who find that dividends follow the evolution of
earnings and that managers attach great importance to the change in the level of income when
determining the dividend to be paid. Lintner also notes that societies attribute great
importance to dividends from the previous year, which generally gives rise to a significant
16

speed of adjustment. In our case, the speed of adjustment of the acquirer over the period [-5,
0] is 0.63. It is significant and approximately similar for the two groups of acquisitions.
In the same way, we obtain, in Panel B, the model coefficients related to the target pre-merger
dividend. In contrast with acquirer coefficient, the coefficient of EPS is significant. Moreover,
we observe a significant target speed of adjustment of 0.61 for the whole sample. As with the
comparison on the basis of payout ratio, dividend yield and distribution frequency, the
difference of ex-ante average adjustment speed between merged firms highlights a higher
level of distribution of the acquirer compared to the target’s. Nevertheless, the comparison of
adjustment speed between firms involved in stock deals shows a higher quality of adjustment
for the target, while we observe a lower adjustment speed of the target relatively to the
acquirer’s in the case of cash/mixed acquisitions. It remains now to verify the ex-post change
in the acquirer speed of adjustment.
Panel C displays the Lintner model parameters for acquirers after the merger. Modeling the
posterior dividend policy of the acquirer according to the formulation of Lintner shows a
positive coefficient of EPS and a positive and significant speed of adjustment (1.11).
Obviously, the acquirer speed of adjustment is increasing after the merger. This tendency
cannot be the result of an attempt to fit with the target speed of adjustment since the new
quality of adjustment of the acquirer is widening the gap between them. However, it can be
the case if we look at the adjustment speeds for stock-based deals. Indeed, the acquirer adjusts
better its dividend after the merger in the sense of the target quality of adjustment. This result
confirms average regression finding based on payout ratio. All the same, the acquirer
adjustment speed increases in cash/mixed deals but at a lower proportion.
The comparison between merged firms dividend policies in terms of adjustment speed leads
us to classify our mergers in different cases depending, on the one side, on the disparity
between ex-ante adjustment speed of the target and ex-ante adjustment speed of the acquirer,
and on the other side, on the disparity between ex-ante adjustment speed of the target and ex-
post adjustment speed of the acquirer. The purpose behind this showdown is to estimate the
effect of the dividend policy adopted by the acquirer on target shareholders wealth if they
accept a stock payment, and whether there is a shortfall for them if they agree on cash
payment terms.
17

3.5. Dynamics of takeover premium with the difference in distribution between merged firms
Debate has rarely been evoked concerning the intrinsic value of takeover premium that may
indemnify a future shortfall for target shareholders. In this sense, and according to the method
of payment used in the transaction, a higher bid premium may compensate target shareholders
loss when they receive, in exchange for their shares, acquirer shares paying lower dividend
than that they have used to receive in the absorbed company. In addition, a higher bid
premium may also compensate target shareholders shortfall when they accept a cash deal
instead of a stock exchange that may provide them a higher dividend than that distributed by
the target firm before the merger. Therefore, the objective of this section will be to test this
twofold compensation effect of the premium on our two subsamples of deals. First, we
investigate the role of bid premium paid in compensating the opportunity cost of target
shareholders receiving cash in lieu of higher-dividend shares of the acquirer. It’s expected that
the premium will be higher in the case of cash transactions involving an acquirer more
generous than the target. Then, we look into the premium dynamics in stock-based deals with
less generous acquiring firms. In such conjecture, we expect that the premium will increase
with the target level of distribution relatively to the acquirer’s in a stock merger. Nonetheless,
it looks rather to get no effect of the premium, in this state of mind, since our first hypothesis
showed that the acquirer rather tend to adjust its policy after a stock merger. As a result, we
anticipate no significant link between the premium value and the difference in dividend
between firms merged by stock.
For this purpose, we will use an OLS regression where the dependent variable is the bid
premium defined as the ratio of the offer price at the announcement date divided by the target
share price four-weeks before the announcement reported in the SDC database. Instead, in
order to examine how sensitive our results are to the choice of the payment method, we
compute our regressions for the pure stock offers and cash/mixed offers. To capture the
dividend shock caused by the merger and based on the significant results obtained previously
on payout ratio and adjustment speed, we introduce four explanatory variables of interest:
Diff.Payout_B, Diff.Payout_A, Diff.Adjust_B and Diff.Adjust_A. Indeed, we take into account
using both payout and adjustment speed, firstly, the difference between the acquirer dividend
policy before the merger and that of the target, and second, the difference between the
acquirer dividend policy after the merger and the target dividend policy before the merger
(See Appendix A. Variables definition).
18

In our regressions, we control for the effects of other variables related to acquirer, target and
deal characteristics. We take the precaution not to put variables correlated more than 20% in
the same regression. Table 6 reports estimates of OLS regressions on the bid premium as a
function of the shock-dividends variables and the control variables chosen. In the first
regression, where the reference explanatory variable is the difference in payout ratio before,
the coefficient of this variable is statistically insignificant for both stock deals and cash/mixed
deals, which invalidates our double compensating effect of the premium. In the second
regression, when the difference in payout ratio after is used as the independent variable, its
coefficient is significantly positive (at 0.05 level) for all-cash/mixed deals, whereas it’s
statistically insignificant for all-stock deals. We observe the same for the other regressions
based on the difference in adjustment speed. This result suggests that the more the opportunity
cost target shareholders are expected to endure, the more likely the premium to will be higher.
This empirical result is consistent with the hypothesis that the premium bid can have a
compensating effect when the acquirer cover the shortfall of target shareholders subsequently
deprived from the higher dividend of the combined entity. In other words, the cash acquirer
compensate ex ante for depriving target shareholders from dividend benefits ex post.
The findings of regressions on stock-based mergers suggest that there is no significant

relationship between the difference in dividend policy and the premium paid. This implies
that, in the case of stock deals, the acquirer with lower dividend don’t consider the premium
as a compensating means since it will be more likely to adjust its dividend policy after the
merger, as proved by the outcome of our fist conjecture.
We perform our regression tests by including various bid specifics’ control variables. Our
coefficient estimates for hostility is significantly positive for cash deals. Similar to Officer
(2003), larger takeover premia are associated with higher number of competing bids4. All
other coefficient estimates of deal characteristics are statistically insignificant for the two
subsamples. Further, we select a set of control variables related to firms’ characteristics. In
turn, we find, as shown by Walking and Edmister (1985), that declining amounts of acquirer
leverage command significantly higher takeover premium in stock deals, and larger offer
premia are associated with higher bidder profitability in stock offers (See Dimopoulos and
4 According to the preemptive bidding theory, takeover premia are determined by actual competition.
19

Sacchetto, 2011). The estimate of target cash ratio coefficient is significantly positive for pure
stock offers. Although acquiring firm cash and target firm leverage5 appear to influence
premiums in the anticipated manner, none of these variables proved statistically significant.
4. Conclusion:
The overall aim of this paper has been to investigate if M&As spark off a shock in acquirer
dividend policy after the merger. More specifically, we have researched if we can find
tendency of adjustment in dividends when examining mergers involving firms with different
dividend policies. This aim has been operationalized by analyzing the effect of ex-ante
dividend policy of the target on the ex-post dividend policy of the acquirer. Dividend yield,
payout ratio and dividend frequency have been used as proxies for dividend policy. Important
to bear in mind is that we base our study on a precursor paper of Black and Scholes (1974)
which provides evidence that the dividend policy of the company reflects the shareholders
preferences according to the clientele effect. Our hypothesis is that acquirer may change its
dividend policy after the merger for various reasons including the type of clientele of target
shareholders.
To capture this idea, we refer to Lintner model. The estimation of Lintner model parameters
emphasizes the change in dividend adjustment speed of merged firms surrounding the deal.
This technique allows collecting information specific to each ex-ante dividend policy as part
of a global estimation of the ex-post dividend policy of the acquirer. Our estimation is based
on a dataset of 663 M&A transactions during 1987-2005. Our findings show that acquirer is
disposed to adjust its dividend policy in the accordance with the ex-ante dividend policy of
the target. In additional analysis, we investigate the compensating effect of bid premium in
covering dividend loss or opportunity cost for target shareholders. Based on an OLS
regression, our findings highlights the role of the premium in cash offers to offset the shortfall
of target shareholders since they will be deprived from acquirer higher dividend. This result
sheds some light on puzzling features of the premium in redressing dividend differences
issues resulting from the strategic interactions between merged firms’ shareholders.
5 Financial restructuring motive by using target’s latent debt capacity suggests a positive correlation
between premium size and the degree of target leverage. Lewellen (“A Pure financial rational for the
conglomerate merger”, 1971, Journal of Finance) has suggested that merging firms may enhance their debt
capacity through a co-insurance effect.
20

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22

Appendix A. Variables definition, Symbols and Data Sources
Symbol Definition Source

Panel A. Dividend measures
Distribution frequency The payment frequency of dividend is equal to one if
the firm pay dividend at least once over the reporting
period, and 0 otherwise.
CRSP/Compustat
Dividend yield The mean of annual dividend yields, which are sums of
Merged Database.
quarterly dividend yields.
Payout ratio The mean of annual payout ratios, which are means of
quarterly payout ratios.
Panel B. Average regression Variables
Average dividend yield of the acquirer along the
A.Y.Acq[-5, 0]
period prior to the merger.
Average dividend yield of the target along the period
A.Y.Targ[-5, 0]
prior to the merger.
Average dividend yield of the acquirer along the
A.Y.Acq[1, 5] CRSP/Compustat
period after the merger.
Average payout ratio of the acquirer along the period Merged Database.
A.P.Acq[-5, 0]
Average payout ratio of the target along the period
A.P.Targ[-5, 0]
Average payout ratio of the acquirer along the period
A.P.Acq[1, 5]
after the merger.
Panel C. Lintner Model Variables
Dt Dividend per share in year t
Dt-1 Dividend per share in year t-1 CRSP/Compustat
EPSt Earnings per share in year t Merged Database.
∆Dt Dividend variation between t and t-1
D*t Target payout ratio in year t
Panel D. OLS regression Variables
Dependent Variable
Bid Premium The share price offered by the acquirer to target
shareholders deflated by the price of the target 4 weeks SDC Database
prior to the announcement date.
Variables of Interest
Diff.Adjust_B Difference between the acquirer adjustment speed
before the merger and the target adjustment speed
before the merger.
Diff.Adjust_A Difference between the acquirer adjustment speed after
the merger and the target adjustment speed before the CRSP/Compustat
merger. Merged Database
Diff.Payout_B Difference between the acquirer payout before the
merger and the target payout before the merger.
Diff.Payout_A Difference between the acquirer payout after the
merger and the target payout before the merger.
Control Variables
Deal Characteristics
23

Deal size Total value of the consideration paid by the acquirer,
excluding fees and expenses.
Toehold Percentage of stocks held by the acquirer prior to the

announcement date. Table 6 has a dummy version of SDC Database
this variable, which has a value of 1 if the acquirer
holds any shares of the target before the announcement
date and 0 otherwise.
Hostile Dummy variable, which has the value of 1 for hostile

deals, 0 otherwise.
Horizontal Dummy variable that takes value of 1 for horizontal
deals (which involve firms with the same two-SIC
codes), 0 otherwise.
Multiple bidders The number of entities (including the acquirer) bidding
for the target. Table 6 has a dummy version of this
variable, which has the value of 1 for deals involving
more than one bidder, 0 otherwise.
Relative size Ratio of target total assets to acquirer total assets.
Firm Characteristics
Leverage Liabilities deflated by Common Equity.
ROA EBITDA scaled by Total Assets.
Cash ratio Total Cash divided by Total Assets.
24

Table 1. Sampling Procedure
This tables details takeovers that satisfy the sample selection criteria. Our sample includes
completed US mergers involving listed companies between 1987 and 2005. These deals are
extracted from the Securities Data Company’s (SDC) US M&As Database. We also impose
other criteria relative to deal value and percent of shares acquired, to emphasize our study on
important deals. The sample is reduced to 663 deals due to the non-availability of financial
and accounting data, required to estimate our key variables, in the CRSP-Compustat Merged
Database.
Sampling Criteria Number of deals Value of

remaining transactions($Mil)
Initial data set of US completed M&As between Public

firms : January 1987 - December 2005 10 903 5 611 504
After removing operations where:
. Deal value is less than 1$ Mil. 9 425 5 611 277

. Percentage of shares acquired in transaction is less 4 897 4 828 350
than 50%.
Data collected from CRSP-COMPUSTAT merged

Database.
After removing firms with insufficient:
. CRSP permanent number 3 129 3 576 151

. Financial data (DPS, EPS and stock price) 1 025 2 023 542
. Accounting records 663 1 561 179
Final sample of deals that satisfy all data requirements 663
25

Figure 1.Sample distribution by year over 1987-2005
This figure displays the distribution of operations between all years and provides the
corresponding aggregate deal value. We sort 663 deals reported as mergers/acquisitions,
which the announcement date is between January 1, 1987 and December 12, 2005. Deals’
values are extracted from SDC Database.
Number of deals Deals Total value ($mil)
90 400000
80 350000
70
300000
60
250000
50
200000
40
150000
30
100000
20
10 50000
0 0
26

Table 2a. Summary Statistics for acquisitions
This table reports summary statistics for our sample of acquisitions. Variable definitions are in
Appendix A. Panel A, B and C focus on summary statistics of variables grouped in terms of
deal and firm characteristics. N denotes sample size.
N Mean Median St-Dev Low High
Panel A. Deal Specifics 663
Deal value 2 354 365 7 566 1.8 89 168

Bid premium 46 40.8 29 0 100
Relative Size 0.34 0.15 0.65 0.0002 7.19
% of stock 45.36 36.3 45.3 0 100
Toehold 1.08 0 4.89 0 41
Multiple bidders 1.10 1 0.37 1 4
Hostile 0.03 0 0.18 0 1
Horizontal 0.66 1 0.47 0 1
Panel B. Acquirer Specifics 663
Leverage 2.29 1.26 5.61 -14.42 120.22

ROA 0.15 0.15 0.09 -0.29 0.57
Cash ratio 0.104 0.04 0.138 0.0004 0.796
Panel C. Target Specifics 663
Leverage 1.94 1.13 9.92 -205.74 48.4

ROA 0.1 0.12 0.167 -1.39 0.494
Cash ratio 0.137 0.052 0.184 0 1.078
27

Table 2b. Summary Statistics for dividends
This table displays summary statistics of dividends. Panel A reports the descriptive statistics
of acquirers’ distribution measures, when panel B reports summary statistics of targets’
dividend measures. The reported statistics in parentheses are relative to active
acquirers/targets only (those for which the average distribution frequency is higher than zero).
N denotes sample and sub-sample sizes.
N Mean Median St-Dev Low High
Panel A. Acquirer dividends
Dividends over [-5, 0] 663 (430)
.Distribution Frequency 0.619 1 0.474 0 1

(0.955) (1) (0.158) (0.166) (1)
.Dividend Yield 0.011 0.004 0.016 0 0.11
(0.017) (0.011) (0.017) (0.001) (0.11)
.Payout Ratio 0.249 0.149 0.313 -0.223 1.928
(0.384) (0.327) (0.315) (-0.223) (1.928)
Dividends over [+1, +5] 663 (446)

(0.911) (1) (0.220) (0.2) (1)
.Dividend Yield 0.01 0.003 0.015 0 0.107
(0.015) (0.008) (0.016) (0.001) (0.107)
.Payout Ratio 0.232 0.122 0.305 -0.464 1.712
(0.346) (0.310) (0.316) (-0.464) (1.712)
Panel B. Target dividends
Dividends over [-5, 0] 663 (298)

(0.889) (1) (0.229) (0.166) (1)
.Dividend Yield 0.011 0 0.019 0 0.145
(0.025) (0.018) (0.022) (0.001) (0.145)
.Payout Ratio 0.152 0 0.276 -0.694 1.457
(0.338) (0.28) (0.327) (-0.694) (1.457)
28

Table 3. Cross Tab of dividend payment
This table presents the cross-tabulation of pre-merger acquirer activity of distribution with
that of the target over the same period (Panel A) and with the acquirer activity after the
merger (Panels B and C). The crossing of the two statuses of the two merged firms leads to a
table with 4 boxes. Each one contains the number of transactions that meet the relevant
statuses. The percentage of deals corresponding to each case is indicated in parentheses. Panel
A identifies all possible scenarios depending on whether the firm involved is previously
paying dividend or not. Panels B and C report the changes of acquirer category after the
merger compared to its previous activity. More specifically, Panel B presents cases of
acquisition where the target can be payer or non-payer. Panel C concerns in part one the
apportionment of acquisitions of non-paying targets only (N=365), and in part two, the sorting
of paying-targets’ acquisitions only (N=298).
Panel A. Matrix of pre-merger dividend payment of involved firms

Target category[-5, 0]
Non-payer Payer
181 52
Non-payer
Acquirer (27.30%) (7.84%)
category
[-5, 0] 184 246
Payer
(27.75%) (37.10%)
Panel B. Matrix of Acquirer category change for All targets (N=663)
Acquirer category[+1, +5]

Non-payer Payer
204 13
Non-payer
Acquirer (30.77%) (1.96%)
category
[-5, 0] 29 417
Payer
(4.37%) (62.90%)
Panel C. Matrix of Acquirer category change for non-paying targets and paying targets.
( Non-paying targets ) ( Paying targets)

Acquirer category [+1, +5] Acquirer category [+1, +5]
Non-payer Payer Non-payer Payer
159 22 45 7
Non-payer
Acquirer (43.56%) (6.03%) (15.10%) (2.35%)
category
[-5, 0] 10 174 3 243
Payer
(2.74%) (47.67%) (1.01%) (81.54%)
29

Table 4. Average regression on dividend policy
This table reports the results of the average regression of post-merger acquirer dividends according to average dividends of acquirer and target
over the pre-merger period [-5, 0]. Panel A reports results of regressions on dividend yield, while panel B presents those on payout ratio. The
average payout (yield) over a determined period is calculated using annual measures previously computed from quarterly records of dividends.
Panel A. Average regression on Dividend Yield
Dep. Var. Y.Acq+1 Y.Acq+2 Y.Acq+3 Y.Acq+4 Y.Acq+5 A.Y.Acq [+1, +5]
All-sample All-stock All-cash/ Mixed
Indep. Var. (1) (2) (3) (4) (5) (6) (7) (8)
Intercept 0.001 0.001 0.001 0.001 0.001 0.001 0.0006 0.001

A.Y.Acq[-5, 0] 0.772*** 0.748*** 0.773*** 0.657*** 0.698*** 0.729*** 0.777*** 0.706***
A.Y.Targ[-5, 0] 0.017 -0.003 0.039 0.062** 0.065** 0.036* 0.034 0.031
No. Obs. 663 663 663 663 663 663 210 453
R-square 0.59 0.68 0.49 0.52 0.52 0.69 0.72 0.68
Panel B. Average regression on Payout Ratio
Dep. Var. Y.Acq+1 Y.Acq+2 Y.Acq+3 Y.Acq+4 Y.Acq+5 A.Y.Acq [+1, +5]
Indep. Var. (1) (2) (3) (4) (5) (6) (7) (8)
Intercept 0.048 0.047 0.056 0.049 0.103 0.061 0.076 0.054

A.Y.Acq[-5, 0] 0.654*** 0.649*** 0.773*** 0.673*** 0.201*** 0.590*** 0.529*** 0.627***
A.Y.Targ[-5, 0] 0.054 0.173*** 0.091* 0.143** 0.342*** 0.161*** 0.268*** 0.085**
No. Obs. 663 663 663 663 663 663 210 453
R-square 0.22 0.23 0.27 0.25 0.09 0.46 0.41 0.51
*Significant at 0.1 level ** Significant at 0.05 level *** Significant at 0.01 level
30

Table 5. Estimation of Lintner model parameters
This table presents the results of Lintner model. The parameters are estimated using
time-series of length 5 (5 variations of dividends are observed from data over 6 years
[-5, 0]) for the variation of pre-merger dividends and time-series of length 4 for the
variation of dividends following the announcement [+1, +5]. The dependent variable,
which is the variation of the dividend per share (D), is regressed, on fixed effects
with 663 cross-sections for all sample (210 for all-stock subsample, and 453 for All-
cash and mixed subsample), according to the earnings per share (EPS) of the same
year and the dividend per share of the previous year. The coefficient estimated from
EPSt reports the product of the speed of adjustment and the target payout ratio while
the coefficient of Dt features the opposite of adjustment speed value. Panel A (C)
shows the Lintner model parameters for acquirers before (after) the merger. Panel B
presents Linter parameters relative to target firms before the announcement.
Panel A. Acquirer’s parameters over [-5, 0]

Coefficient
Dep. Var. ∆Dt over [-5, 0]
EPSt 0.0002 0.0023** 0.0001

Dt -0.6327*** -0.6182*** -0.6343***
No. Obs. 663 210 453

R-square 0.56 0.49 0.58
Panel B. Target’s parameters over [-5, 0]

Coefficient
Dep. Var. ∆Dt over [+1, +5]
EPSt 0.0104*** 0.0133*** 0.0095***

Dt -0.6148*** -0.6573*** -0.5154***
No. Obs. 663 210 453

R-square 0.42 0.42 0.43
Panel C. Acquirer’s parameters over [+1, +5]

Coefficient
Dep. Var. ∆Dt over [+1, +5]
EPSt 0.00017 0.00008 0.00019

Dt -1.1104*** -1.2519*** -0.9331***
No. Obs. 663 210 453

R-square 0.62 0.65 0.55
31

Table 6. OLS Regression of Bid Premium
This table presents the results of an OLS regression to predict the premium dynamics with the differences in dividend between merged firms. The
dependent variable is the premium paid in the transaction. The explanatory variables of interest concerns difference in payout and quality of
adjustment of dividends between merged firms (see variables definitions in Appendix A). The goodness of the fit is measured by R-square.
Dep. Var Bid Premium

(1) (2) (3) (4)
Indep. Var
All-stock All-cash/ Mixed All-stock All-cash/ Mixed All-stock All-cash/ Mixed All-stock All-cash/ Mixed
Intercept 72.52*** 54.06*** 71.89*** 53.82*** 72.06*** 55.20*** 72.17*** 54.85***
Variables of interest
Diff.Payout_B -0.05 7.11 - - - - - -
Diff.Payout_A - - 2.76 9.35** - - - -
Diff.Adjust_B - - - - 4.16 5.30** - -
Diff.Adjust_A - - - - - - 2.72 4.65*
Deal Charac.
Relative size -0.98 -0.45 -0.76 -0.29 -0.81 -0.44 -0.97 -0.66
Toehold -6.85 6.79 -7.28 6.94 -7.52 6.91 -7.72 5.49
Hostile 5.01 17.41** 4.80 17.51** 4.62 16.13** 5.41 15.93**
Horizontal -3.57 0.011 -3.50 0.09 -3.41 0.14 -3.10 0.35
Multiple bidders 15.78* 14.7*** 15.60* 14.58*** 14.37 14.34*** 15.65* 13.84**
Acquirer Charac.
Leverage -0.43** 0.42 -0.43** 0.42 -0.43** 0.39 -0.43** 0.40
ROA 36.34* 27.91 35.30* 27.40 32.43 22.72 36.79* 24.81
Cash ratio -19.57 2.01 -19.30 1.62 -18.14 1.78 -18.30 1.38
Target Charac.
Leverage 0.19 0.08 0.20 0.08 0.19 0.07 0.23 0.07
ROA -14.29 -8.89 -14.17 -8.45 -12.59 -9.82 -13.50 -9.49
Cash ratio 25.36** -5.67 25.51** -6.22 26** -6.61 25.88** -6.71
No. Obs. 210 453 210 453 210 453 210 453
R-square 0.19 0.07 0.19 0.08 0.19 0.08 0.19 0.08
32

Turki Et Dreeper 2012 The Dividend Policy of The Merged Firm, Method of Payment, and Takeover Premium

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The Dividend Policy of the Merged Firm,

Method of Payment, and Takeover Premium

First version: December 25, 2011

SEBASTIEN DEREEPER* and AYMEN TURKI*

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1.2. Bid Premium and the Difference in Dividend Policy

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2. Hypotheses, data and methodology

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[Insert table 1 about here]

[Insert figure 1 about here]

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3. Empirical results and discussion

[Insert table 2 about here]

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3.2. Associating distribution attitudes of merged firms

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3.3. Regression on average dividend

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3.4. Lintner Model

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∆Di,t= Di,t- Di,t-1 = ai + biriEPSi,t- bi Di,t-1 (3)

[Insert table 5 about here]

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The findings of regressions on stock-based mergers suggest that there is no significant

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Symbol Definition Source

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Toehold Percentage of stocks held by the acquirer prior to the

Hostile Dummy variable, which has the value of 1 for hostile

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Sampling Criteria Number of deals Value of

Initial data set of US completed M&As between Public

After removing operations where:

. Deal value is less than 1$ Mil. 9 425 5 611 277

Data collected from CRSP-COMPUSTAT merged

After removing firms with insufficient:

. CRSP permanent number 3 129 3 576 151

Final sample of deals that satisfy all data requirements 663

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Number of deals Deals Total value ($mil)

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N Mean Median St-Dev Low High

Panel A. Deal Specifics 663

Deal value 2 354 365 7 566 1.8 89 168

Panel B. Acquirer Specifics 663

Leverage 2.29 1.26 5.61 -14.42 120.22

Panel C. Target Specifics 663

Leverage 1.94 1.13 9.92 -205.74 48.4

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N Mean Median St-Dev Low High

Panel A. Acquirer dividends

Dividends over [-5, 0] 663 (430)

.Distribution Frequency 0.619 1 0.474 0 1

EPSt 0.0104* 0.0133* 0.0095***