Redistribution of wealth on merger announcements in India

Abstract

PurposeResearch on mergers has made considerable progress over the last 50 years and has produced a vast body of literature, especially in the developed markets of the world. Little is known about the effect of announcements of mergers on shareholder wealth in the Indian context. Also unknown is the apparent influence of the market for corporate control on such wealth effects. The purpose of this paper is to fill gaps in this knowledge.Design/methodology/approachThe study uses a standard event study method and statistically analyses share price and other secondary data.FindingsIt was found that the acquired firm shareholders enjoy significant wealth gains of 11.6 per cent in a 21‐day event window period, whereas the acquiring and combined firm shareholders do not do so. Mergers that do not see transfer of corporate control bestow significant wealth gains of 21.1 per cent on announcement on the target firm shareholders, whereas those where such a transfer takes place do not witness such gains.Research limitations/implicationsOne of the limitations of the study is the period. This study, a part of research covering a larger gamut of issues, necessitated the restriction of the time to the seven‐year 1996‐2002 timeline. The sample size of 34 usable, finally merged pairs of firms may appear limited, though several studies of this genre have used smaller sample sizes. However, the findings obtained are of value. The study points towards further research using a longer period that might help one to understand longitudinal variations in merger announcement effects on shareholder wealth. It also encourages future studies on several other factors which influence such effects.Practical implicationsThe redistribution of shareholder wealth on merger announcement in India seems to be following a pattern similar to that found in many other studies, though the quantum of gains to the target shareholders is larger. Managers may also have to factor‐in the impact of the transfer of corporate control from the acquired to the acquiring firm on their assessment of shareholder wealth effects before announcing mergers.Originality/valueThe paper simultaneously adds to knowledge about wealth effects on merger announcement and the influence of the market for corporate control on this effect, in the Indian context.