Escolar Documentos
Profissional Documentos
Cultura Documentos
GROUP ASSIGNMENT
MINING LTD
In order to evaluate the corporate governance of Galaxy Resources, one needs to take into
institutional investors.
Mr. Martin Rowley, who is the chairman of the board, is an independent and non-executive
director. This signals good corporate governance as it makes the executive head (CEO) of the
monitoring of employees. The members are paid for their services and the respective amount is
decided by an independent remuneration committee. It was decided in 2007 that they will also be
offered stock-based compensation to align their interests with shareholders. Almost all members
of the committee have served at relevant positions and possess tremendous industry experience.
However, the company usually elects members for their successive terms and this may lead to
impartiality in their decision-making. Currently, two members are serving their successive term.
This can, partially, be attributable to the fact that the company still does not have an independent
nomination committee, which is responsible for electing board members (Financial Staements).
The management has established an internal audit committee, which is responsible for ensuring
that effective mechanisms are put in place to ensure true and fair reporting. The company also
hires an independent audit committee on yearly-basis to verify the financial statements. The
recommendations of audit committee are made public and this reduces information asymmetry
for stakeholders.
The presence of institutional investors signals good corporate governance and increased firm
value (Chang et al). Top 6 institutional investors roughly own 35% of shares of the company. With
such a large stake in the company, these institutions will monitor the company, offer strategic
advice to the company and act as a check on the actions of executives. Usually, the presence of
such investors has an effect of monitoring and signals good corporate governance.
The presence of anti-takeover provisions in the by-laws of the company has the effect of
entrenching managers and reducing the overall operating and takeover performance of the
company. These options have the effect of insulating managers from external monitoring and
checks. When looking at galaxy resources, the company does not have mechanisms in place to
b) To measure the benefits of takeover for the parties involved, one can measure the abnormal
returns earned by the shares and the operating performance of the companies.
The markets reaction can be measured using the abnormal return. It allows to measure the
portion of ACQs stock return attributable to the takeover announcement. The abnormal return is
the differential between the observed return and the return predicted by Capital Asset Pricing
Model. The following assumptions were made to calculate the expected return of the stock:
1. Risk free rate Average US Treasury 10 years rate during period observed
2. Expected market return Average return of S&P/ASX 200 during period observed.
According to Bloomberg, the announcement of the takeover was released in May 30th of 2016
The calculation of abnormal return was done using three periods of time.:
The first one was between the date of announcement and completion of the takeover.
The second between the date of announcement until one year after the announcement.
The last period after the completion until one year after the announcement.
Date Trading days Rf (Treasury 10y) S&P/ASX200 Expected (GXY) Observed (GXY) Abnormal return
(30/05/2016 - 5/09/2016) 70 1,57% 0,01% 0,97 0,06% 0,13% 0,07%
(30/05/2016 -30/05/2017) 254 2,05% 0,02% 1,33 -0,64% 0,04% 0,69%
(5/09/2016 - 30/05/2017) 184 2,22% 0,04% 1,50 -1,06% 0,03% 1,09%
It is evident that the takeover created value for the company. Positive values for excess return
created value for the company. The operating performance of a company considers the calculation
of return on assets (ROA). The ROA of the company is calculated by the EBIT/the assets for the
period. Growth in ROA is an important factor to analyse the operating performance of the
company. The following data was taken into consideration while calculation the ROA:
Total assets of the company during and after the year of takeover
announcement
takeover
takeover
announcement
As we can see the ROA of the company after the takeover announcement shows a difference of
0.007% which gives an evidence that the takeover did create value as the operating performance
company.
Q2) Empirical studies demonstrate that market will react negatively to this specific announcement
as the result of pure stock-exchange bidding firms show that their stockholders experience
significant losses at the announcement of the takeover proposal. Now we discuss why market
One of the reasons is stock exchange offers are associated with negative abnormal returns
regardless of the outcome of the bid. This evidence is supported by regression analysis of the
common stock. Financing a takeover through exchange of common stock conveys the negative
information that the bidding firm is overvalued. Recent studies on new stock offerings report an
acquisition. (Travlos 1987) Ronald W. Masulis found that issuer exchange offers that involve the
issuance of common stock are associated with average announcement period stock returns of
9.91%. (Masulis 1983) As a result bidding firms suffer significant losses in pure stock exchange
acquisitions, but they experience normal returns in cash offers. Evidences provided as supporting
arguments are consistent with the recent findings provided by the empirical literature on new
Market participants interpret a cash offer as good news and a common stock exchange offer as
bad news about the bidding firms true value. Therefore because of the importance of such
information, the bidding firms stock price change at the proposals announcement will reflect on
In summary, we can clarify that the method of payment employed to finance a takeover has an
impact on the announcement-period common stock returns of bidding firms. Common stock
financing is expected to have a negative impact (due to signalling and co-insurance effects) on
Corporate Takeover Bids, Methods of Payment, and Bidding Firms' Stock Returns
NICKOLAOS G. TRAVLOS
September 1987
RONALD W. MASULIS
March 1983
CHANG ET. AL
2013
Financial Statements
2016