Abstract

The paper examines market liquidity and size of 396 US firms engaged in mergers and acquisitions (M&A). The announcement-period returns are estimated using Carhart’s four-factor model and estimated using two regression specifications. The results suggest that the return continuation depends on the degree of liquidity and the firm size. The positive and significant cumulative abnormal returns (CARs) under both the specifications with exception to the acquiring firms are found. Under the generalized autoregressive conditional heteroskedasticity (GARCH) model due to Glosten et al. (1993), hereafter, GJR-GARCH, the pre-event CARs are significant and persistent in contrast to the estimation based on the ordinary least squares (OLS) regression. This suggests possible leakage of information prior to an event announcement and further lends support to the contract theory of information asymmetry and signalling. It is also found that the target firms exhibit positive and significant post-event CARs for the mid-cap stocks. Whereas, for the acquirer firms, the post-event CARs for the small trading volume stocks are positive and significant. The results are robust to bootstrapping simulations.

Highlights

  • Different theories are advanced to explain whether mergers and acquisitions (M&A) lead to predictable changes in the stock prices

  • We evaluate the impact of stock market liquidity on mergers and acquisitions and the size of the firm

  • Our results show that there are no short-term negative cumulative abnormal returns (CARs) for US acquirers under the GJR-generalized autoregressive conditional heteroskedasticity (GARCH)-M estimation method

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Summary

INTRODUCTION

Different theories are advanced to explain whether mergers and acquisitions (M&A) lead to predictable changes in the stock prices. It is generally acknowledged that augmenting the standard CAPM with the Fama and French (1993) size and value factors and the Carhart (1997) momentum factor (hereafter, the F-F-C pricing factors) captures better the cross-sectional variation in returns relative to the basic CAPM1 This means that prior estimates of the ARs may not be sufficiently reliable and this, in turn, may lead to differences in the results of mergers and acquisitions studies. We find a distinction between market capitalization value and trading volume to capture the impact of liquidity and the size of each firm on the magnitude of CARs for stocks that are associated with mergers and acquisitions.

LITERATURE REVIEW
RESULTS
Acquiring firms market capitalization
Findings
CONCLUSION
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