article review

1. Critical Review of Article
entitled as:
Do Minority shareholders
benefit from parent-subsidiary
mergers?

2. Table of content
• Citation
• Summery
• Study purpose
• Relevant background literature review
• Methodology
• Results
• Discussion
• Reference
• Suggestion for further research
• Synthesis with class material

3. Citation
• It is appropriately cited as:
• Koerniadi, H. and Tourani-Rad, A. (2021), "Do
minority shareholders benefit from parent-
subsidiary mergers?", International Journal of
Managerial Finance, Vol. 17 No. 1, pp. 166-
183.

4. Summery
• The main objective of this study is to:
examine whether parent–subsidiary mergers are
harmful to minority shareholders of subsidiary
companies by testing the earning management
hypothesis prior to these mergers.
• Earning management hypothesis:
• Subsidiaries’ operating performance prior to a
parent–subsidiary merger is likely to be
manipulated downward, which negatively
affects the firms’ stock price prior to such a
merger

5. Summery
• The purpose of this study is to investigate the
operating and stock performance of subsidiaries
prior to a parent–subsidiary merger and examine
whether minority shareholders benefit from such a
merger.
• Source of date. Data on:
parent–subsidiary mergers,
stock returns and
accounting variables from 1989 to 2013 are collected
from
• Thomson Reuters SDC Platinum and Thomson
Reuters Datastream databases.

6. Summery
• Sampling: Multi stage and purposive sampling
• Stage 1:
Majority-controlled (more than 50 per cent) publicly
listed company six months prior to a merger
announcement date
Target companies owned at least 5 per cent from six
months prior to merger announcement dates as
subsidiaries in our sample.
• Using this search criterion, the initial sample
consists of 2,799 completed mergers from the
SDC Platinum database.

7. Summery
• Stage 2
 Report availability publicly
 type of share data ( dual class of shares)
 Percentage of shareholding vs percentage of control
 Government, joint venture, private and financial companies are
excluded from the sample
 Target firms are also required to be 100 per cent owned by the
acquirers after the mergers
• After imposing these restrictions, the sample reduced to
1,237 mergers
• Stage 3
• After excluding observations with
 missing price and
 the relevant accounting variables,
• the final sample consists of 284 firms with available data
one year prior to merger announcement dates.

8. Summery
• Methodology: This study employs a refined
performance-adjusted discretionary accrual model as a
measure for earnings management prior to parent–
subsidiary mergers.
• The study used regression analysis and developed 3
models:
• Model 1: to estimate earnings management and
abnormal returns.
• Discretionary accruals estimated from Jones’ (1991)
model as a proxy for earnings management
• Dependent variable:
 ACC is total accruals measured as the difference between
operating earnings and operating cash flows (OCF)

9. Summery
• Dependent variables
Independent variables
. ΔREV is the change in in revenues;
PPE is gross property, plant and equipment;
A is total ass; and
Sample firms’ current ROA
• Model 2:
• Pre-merger operating performance is negatively
related to their announcement returns.
• To test this hypothesis, subsidiaries’ announcement
returns are regressed on subsidiaries’ accruals and
discretionary accruals

10. Summery
• Dependent variable:
• AR is the three-day market-adjusted or buy and
hold abnormal announcement returns.
• Independent variables
ACCRUAL is measured as earnings before interest
expenses and taxes minus OCF.
DISCRETIONARY ACCRUALS is discretionary accruals
estimated either from the Jones model (DA) or from the
performance-adjusted Jones model (PDA)
NONDISCRETIONARY ACCRUALS are the fitted values
from model 1
B/M is the book to market ratio.

11. Summery
SIZE is the natural logarithm of market capital.
SHARES is the per cent of shares acquired.
CHALLENGE is a dummy variable for a challenged deal.
CASH is a dummy variable if a merger is finance at least
with cash.
STOCK is a dummy variable if a merger is finance at
least with cash.
• Model 3:
• To examine whether values of merger transactions
have impact on earnings management, the
following variables were considered in the
regression model :

12. Summery
• Dependent variable
ACC is either total accruals or discretionary accruals
• Independent variables
Deal Value is the total transaction value scaled by a
subsidiary’s market value three years prior to mergers
B/M is the book to market ratio.
SIZE is the natural logarithm of market capital.
SHARES are the per cent of shares acquired.
OCF is operating cash flows scaled by total assets at the
beginning of year.
ΔSALES is the change in sales from year t−1 to year t.

13. Summery
DEBT is the ratio of total debt scaled by total assets at
the beginning of year.
MAJOR is a dummy variable if a parent’s ownership six
months prior to a merger is greater than 50 per cent
• Results:
• finds that total accruals and discretionary
accruals of these firms prior to mergers are
negative.
• Given this evidence, minority shareholders in the
subsidiaries within this particular ownership
category may not necessarily benefit from such
mergers.

14. Summery
• In the multivariate analysis, this study finds that:
pre-merger discretionary accruals are negatively
related to announcement returns and
the size of transactions or deal value (DV) has
significant impact on earnings management, which,
again, is consistent with earnings management prior
to parent–subsidiary mergers.
Further analysis shows, however, that earnings
management is likely to occur when parents’
ownership is in the range of 20–80 per cent of their
subsidiaries

15. Study purpose
• Purpose: to investigate the operating and stock
performance of subsidiaries prior to a parent–
subsidiary merger and examine whether minority
shareholders benefit from such a merger.
• Research problem is clearly defined as follows:
• there is no empirical study formally examining
the earnings management hypothesis in a
parent–subsidiary merger research setting.
• Research variables are clearly identified and
defined.
• Specialised terminologies are not defined
• Example: discretionally accruals and non-
discretionally.

16. Relevant background LR
• Relevant and recent empirical literature have
been reviewed to show the knowledge gap and
give background information to the study.
• From Brudney (1978) to Bonacchi et al., (2018).
• After thoroughly reviewing the relevant
empirical evidence the researcher has shown
clearly how this study is different from those
reviewed studies, i.e identified the existing
knowledge gap which are used as justification
or rational of the study.

17. Relevant background LR
• “To date, however, there is no empirical study
formally examining the earnings management
hypothesis in a parent–subsidiary merger
research setting.”
• “Thus, this paper posits that earnings
management practices could play a role in
explaining subsidiaries’ pre-merger stock
underperformance when parents decide to
acquire them.”
• Objective of the study is clearly stated.

18. Relevant background LR
• H1. Subsidiaries’ total and discretionary accruals
are negative prior to mergers
• H2. Subsidiaries’ abnormal returns surrounding
merger announcement dates are negatively related
to pre-merger discretionary accruals
• H3. The DV are negatively associated with the
subsidiaries’ pre-merger discretionary accruals.
• H4. Earnings management occurs when parents’
ownership of their subsidiaries prior to parent–
subsidiary mergers is between 20 per cent and less
than 80 per cent.
• No conceptual framework

19. Methodology
• Methodology: a refined performance-adjusted
discretionary accrual model as a measure for
earnings management prior to parent–
subsidiary mergers
• Research design is not clearly stated
• The way samples are selected has been
properly narrated, but the name of that specific
sampling technique is not clearly indicated.
• Instrument: the study is based on secondary
data which is very appropriate for the study.

20. Methodology
• Regression analysis has been used as a
method of data analysis techniques
• The dependent and independent variables are
not clearly identifies, however it is possible to
understand them from the model itself.
• The limitation of the research design is not
indicated
• How results are measured and estimated has
been clearly explained and it is appropriate for
the research objective

21. Results
• finds that total accruals and discretionary
accruals of these firms prior to mergers are
negative.
• Given this evidence, minority shareholders in
the subsidiaries within this particular ownership
category may not necessarily benefit from such
mergers.

22. Results
• In the multivariate analysis, this study finds
that:
pre-merger discretionary accruals are negatively
related to announcement returns and
the size of transactions or deal value (DV) has
significant impact on earnings management,
which, again, is consistent with earnings
management prior to parent–subsidiary mergers.
Further analysis shows, however, that earnings
management is likely to occur when parents’
ownership is in the range of 20–80 per cent of
their subsidiaries

23. Discussion
• The author has thoroughly discussed the
result of his study visa vies the reviewed
empirical evidence.
• The conclusion and recommendation are in
line with the result of the study

24. Reference
• It is reference not bibliography or footnote
• The reference are very related with the issue
raised by the researcher and most of the
references are recent.
• The references have been used in the
discussion part for support as well as rebuttal.

25. Suggestion for future research
• The study didn’t suggest anything for further
research, however, further reading material
has been suggested by the researcher

26. Synthesis with class materials
• The article is very useful and related with
what we have been discussed in class related
with research methodology and Adv financial
management course materials