The Measurement of the Market's Reaction to Merger Announcements

Abstract

This paper measures the capital markets’ reaction to merger announcements within the announcement month using the sample of 37 mergers from USA. Research findings indicate that targets earn positive average abnormal returns of 19 percent that is statistically significant, whereas acquirers earn positive average abnormal returns of 5 percent that is not statistically significant. The weighted average of the abnormal returns to acquirer and targets is 7 percent and statistically significant. These results indicate that the gains around the merger announcements reflect synergetic gains, not the wealth transfer from acquirer shareholders to target’s. The method of payment, business overlap degree of acquirer’s and target’s industries and the price-to-book ratio of acquirers significantly affect the division of the synergetic gains between the shareholders of target and acquirer firms.