A Study on the Long-Term Performance of Mergers in the Korean Stock Market

Abstract

This study analyzes the merger-related hypotheses which are managerial overconfidence hypothesis, controlling shareholder interest hypothesis, synergy hypothesis, financial constraint hypothesis, and momentum hypothesis through long-term performance analysis of acquiring firms. As a result of empirical analysis, first, the three-year event-time buy-andhold excess return (BHAR) was about -10% for both the average and median values which is statistically significant. Second, through both calendar-time portfolio excess return and BHAR, we find that the stronger the management's overconfidence is, the lower the longterm performance is. On the other hand, in the case of mergers by horizontal combinations, there was a positive synergy effect. This means that the management overconfidence hypothesis, the financial constraint hypothesis, the momentum hypothesis of merger performance, and the synergy hypothesis are established. Despite the poor long-term performance of mergers between domestic companies, this study provides implications that the merger may be mainly due to unreasonable overconfidence of managers and short-term perspectives of management.