Abstract
The authors examine, in a cumulative average abnormal return (CAAR) framework, the effect of four easily identifiable features of merger activity on acquirer/target shareholder wealth. The features considered are the relatedness of the acquiring and target firms involved in the merger, the relative sizes of the acquirer and target, the prior control position, and the medium of exchange. The results indicate that the relatedness of the acquirer and target firm and the prior control position are strong factors in determining the distribution of any wealth effects between the shareholders of the target and acquiring firms. The size and the medium of exchange are shown to be weaker factors in determining the distribution of wealth. In all cases it is seen that the shareholders of acquiring firms do not tend to benefit in the short term from the merger while those of the target firms show significant gains.
Highlights
The high level of merger act1v1ty on international markets in recent years has given rise to substantial work on the subject in the current financial literature
Similar results hold for the case where prior control is held by an acquiring firm, i.e. acquirers do not lose by merger if they held prior control, but their value is reduced if they did not have prior control. This may be due to the fact that acquirers who do hold prior control are involved in the target firm and are familiar with the business
An identical result held when the medium of exchange was the variable under consideration - acquiring firms decreased in value and targets gained
Summary
The high level of merger act1v1ty on international markets in recent years has given rise to substantial work on the subject in the current financial literature. AffleckGraves, Flach & Jacobson ( 1987) have considered this issue for the Johannesburg Stock Exchange and have established that shareholders of the acquired firms experience abnormal positive returns immediately prior to the announcement date, but could find no evidence that shareholders of the acquiring companies benefit by merger activity in the short term. Their conclusions were consistent with research on the New York Stock Exchange (see Mandelker, 1974; Langetieg, 1978; Dodd, 1980; Shad, 1969; Jensen & Ruback, 1983). In a recent study Brews (1987) has considered the effect of relatedness and size on merger activity but has not quantified these effects
Sign-in/Register to view highlights & summary Sign-in/Register to access full text options 
Free) 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a call
