Abstract
In stock-exchanged mergers, the determination of an exchange ratio is an important issue. The exchange ratio represents the number of shares that the acquiring firm offers in exchange for one share of the target firm. The ratio is critical since it does not only determine how the possible synergy gains are shared between the firms involved, but it also determines whether the wealth positions of the parties will experience improvement or diminution as a result of the proposed merger. The purpose of this paper is to verify the validity of the LG model which is based on the expected post-merger price-earning and the Yagli model which is based on the post-merger dividend growth, respectively. The models are tested on the sample of mergers which involved only stock offers for the period from 1994 to 2004. The results show that the LG model has greater empirical validity than the Yagli model. There are 20% of the sample mergers are conforming to the stockholder wealth premise predicted in the LG model at least, but only 4% of the sample mergers are conforming to the stockholder wealth premise predicted in the Yagli model. In addition, this paper also finds that the chance to improve the wealth position of the stockholders of the target firm is relatively larger than the acquiring firm. The empirical results not as good as the expectations are due to the limitations of the models. For example, the one period wealth constraint is too restrictive. It is believed that benefits of the merger may take a period longer than a year; hence, the PE ratio and the growth rate after a year may be greater. If this is the case, the first year stockholder loss could be more than offset.