Summary:
Stock exchanges implement merger and acquisition (M&A) comment letters as an important regulatory arrangement to protect the interests of individual investors during M&A activities. Unlike postevent supervision through financial report comment letters, M&A comment letters mainly intervene during the stage when listed companies submit their M&A proposals. These companies must respond to the letters within a specified period and failure to follow the requirements within the deadline puts them at risk of terminating their M&A deals. However, more than half of the companies that receive M&A comment letters cannot complete their responses within the specified period and must apply for an extension. Against this background, this paper investigates whether the delays in responses from listed companies to M&A comment letters presents any significant information and whether these delays can potentially impact the major shareholders' expropriation of interests during M&A activities. Using a cost-benefit analysis framework, we argue that companies with a high (low) suspicion of shareholders' expropriation tendencies are more (less) likely to request an extension to respond to M&A comment letters. Previous studies have shown that companies' timely responses alleviate adverse capital market reactions to M&A comment letters; therefore, companies have a strong incentive to respond promptly to facilitate M&As. However, the cost of timely responses varies between companies. On the one hand, companies with a higher interest expropriation tendency may face stricter inquiries from regulators, which results in increased remediation costs and makes it more challenging to respond within the designated time. On the other hand, exchanging comments prompts enhanced external monitoring and companies may need to invest more time and effort into hiding and manipulating information, which incurs higher information disclosure costs. In contrast, companies with a lower interest expropriation tendency are only required to provide additional disclosures and explanations about their M&A-related information, which reduces their information disclosure costs. We use the interactive Q&A data for the M&A comment letters from the Shanghai and Shenzhen stock exchanges about the M&A events of A-share listed companies from 2015 to 2019 to empirically test whether a delayed response to these comment letters signals major shareholders' interest expropriation. In addition, we show how the M&A comment letters can help to identify and suppress major shareholders' interest expropriation behavior during M&A activities. We find that companies with more related party transactions, fund occupation, higher value-added rates, and premiums in the proposed M&A deals are more likely to delay their response to M&A comment letters. Companies that delayed their responses face a higher risk of passive or initiative termination. Even if the M&A restructuring succeeds, their long-term risks are higher, while their returns are lower. Furthermore, our extended analysis verifies the specific mechanism from the perspective of corporate information packaging. We find that companies with higher suspicion of interest expropriation implemented more information packaging about the M&A deal; therefore, they are more likely to delay their responses to M&A comment letters. The two main contributions of this paper to the literature are as follows. First, we enrich research on the functional mechanism of M&A comment letters from the perspective of the interaction between the listed company and the regulatory agency. In addition, we comprehensively research the screening mechanism and governance effect of M&A comment letters on the major shareholders' interest expropriation during M&As from the perspective of pre-and in-process control. Second, we expand the literature on the timeliness of information disclosure and the encroachment of major shareholders' interests during M&As and provide new evidence for the effectiveness of the first-line supervision of China's capital market. Our findings have several practical implications. The simple indicator of whether a listed company responds to the comment letter in time can be clearly and effectively perceived by ordinary investors in the capital market, which provides some reference for these investors' investment practices. Exchanges can simultaneously pay more attention to the timeliness of responses from listed companies when implementing front-line supervision, and they can further identify and confirm suspicious clues from companies with delayed responses to improve their supervision efficiency.
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