Corporate Acquisitions: A Theory of Special Cases? A Review of Event Studies Applied to Acquisitions

Abstract

MERGERS OCCUR WHEN an acquiring firm and a target firm(s) agree to combine under legal procedures established in the states in which the merger participants are incorporated. A tender offer is an offer to purchase a proportion of the outstanding shares of the target firm at specified terms on or before a specified date. Those shareholders not tendering their shares retain an ownership interest in the firm. The term is used in a generic sense to refer to any takeover. Economists, especially those specializing in industrial organization, have theories to explain the motivations for horizontal acquisitions and to a lesser extent, vertical acquisitions. However, conglomerate acquisitions appear to present problems to some economists and Governmental organizations. The literature on mergers is replete with studies which evaluate the impact of acquisitions on the participants. The original studies consider the impact of mergers on the risk of the resulting firm and on its profitability. In investigating these isssues the pre and post acquisition behaviour of both bidders and targets is examined, and there is an attempt to isolate and measure the impact of the acquisition from other events that affect the firm. Performance measures are based either on accounting data or on stock price reactions to the acquisition; to identify acquisition specific influences comparisons of the merger sample to a non-merger control group are used. These studies are seriously compromised for the following reasons: accounting data do not provide information on the expected long-run impacts of the acquisition on the participants; there are serious problems in defining a comparable control group; and the comparison group does not provide information on how the specific firms would have performed without the acquisition.' This review focuses on those studies which utilize stock market data and measure the performance of merger participants over the acquisition period as