Merger Announcement Research Articles

Analyzing Abnormal Return Before And After The Announcement Of Merger And Acquisition In 2018

This study aims to analyze the abnormal returns before and after the announcement of mergers and acquisitions in the companies listed on the IDX 2018. In this study the observation period taken was three days before and after the announcement of mergers and acquisitions with the number of samples observed were 9 companies. The method for calculating abnormal returns used is the market adjusted return by using an intraday stock price of 15 minutes. Based on testing hypotheses conducted by paired sample t-test, it was found that there were no significant differences in abnormal returns before and after the announcement of mergers and acquisitions in each 15 minute period.

Abnormal returns on Canadian insider purchases before press releases

PurposeThis study aims to examine whether insider purchases made within 30 days prior to the publication of various kinds of press releases earn higher abnormal returns (AR) than those in the absence of such announcements. It also attempts to identify the factors that explain ARs.Design/methodology/approachThis study considers data for Canadian insider purchases made on the Toronto Stock Exchange 60 Index. An event study methodology is used to calculate AR, and a mixed regression model is used to evaluate the effect of corporate news on AR.FindingsThe empirical results indicate that insiders achieve greater ARs when they purchase stock prior to press releases; findings also show that these returns are specifically related to purchases made before the announcements of mergers and acquisitions, ongoing projects, financial structure, financial results and asset disposals. This is because of the firm effect.Practical implicationsThese findings have important implications for Canadian market regulatory authorities, especially the Ontario Securities Commission and other market participants who are interested in corporate governance, such as boards of directors and shareholders.Originality/valueThe present findings show that regulatory bodies must work with companies to raise awareness of improper insider trading.

Stock price movements and trading behaviors around merger and acquisition announcements

Purpose The purpose of this paper is to examine the relationship between price movements of target firms’ stocks and behaviors of local individual, local institutional and foreign investors in trading target firms’ stocks around mergers and acquisitions announcements in Korea. Design/methodology/approach This study uses event study methodology and cross-sectional regressions for abnormal returns. Findings Results reveal that the average abnormal return becomes significantly positive three days prior to the announcement date and becomes insignificant after the announcement date. Results also show that local individual investors tend to sell more intensely prior to announcements for target firms with larger wealth effects. In contrast, foreign investors tend to buy target stocks with larger wealth effects more intensely prior to the announcement date, and then they sell them more intensely in the post-announcement period. Originality/value This paper provides evidence that foreign investors are able to identify target stocks with large wealth effects prior to the announcement date and they realize short-term profits by selling them following the announcement.

Do corporate governance and culture matter in cross-border acquisitions? Some Chinese evidence

The Chinese market for corporate control has recently gained much academic attention. This research constructs a sample of 159 cross-border acquisitions made by 123 Chinese firms between 2010 and 2014 and relates the roles of governance and culture to the wealth effects of mergers. First, the shareholders of Chinese bidders experience gains upon the announcement of overseas mergers. Second, country- and firm-level governance notably affects the cumulative abnormal returns of Chinese acquirers. Lastly, and however, the cultural distance per Hofstede’s (1980) four cultural dimensions does not appear to be a significant factor in determining the shareholder wealth of Chinese purchasers.

Financial Statement Comparability and the Efficiency of Acquisition Decisions

AbstractThis study examines whether acquirers make better acquisition decisions when target firms’ financial statements exhibit greater comparability with industry peer firms. We predict and find that acquirers make more profitable acquisition decisions when target firms’ financial statements are more comparable—as evidenced by higher merger announcement returns, higher acquisition synergies, and better future operating performance. We also find that post‐acquisition goodwill impairments and post‐acquisition divestitures are less likely when target firms’ financial statements are more comparable. Finally, we find that acquirers benefit most from comparability when acquirers’ ex ante information asymmetry is higher, acquirers operate in volatile operating environments, and management knows relatively less about the target. In total, our evidence suggests targets’ financial statement comparability helps acquirers make better acquisition‐investment decisions and fosters more efficient capital allocation.

The Anchoring Effect in Mergers and Acquisitions: Evidence from an Emerging Market

This article examines the presence of the reference price effect in mergers and acquisitions in Russia, which can act as a distortion in investor perception of the influence a deal has on a company. In this study we use the Russian market as a laboratory for the investigation of behavioral effects in a relatively inefficient market. We find a relationship between the acquirer’s announcement period return and the proximity of its pre-announcement share price to the 52-week high. The 52-week high serves as a salient anchor even though it is economically irrelevant for valuation purposes. This effect appears to be stronger for deals associated with higher levels of uncertainty. The findings confirm the presence of the anchoring bias in evaluating the effect of a merger or acquisition announcement by Russian investors. We demonstrate a significant anchoring effect even for deals with a blocking (>10%) or a controlling stake (>25%) in an emerging market with a highly concentrated ownership.

Exploiting Riskk in Risk Arbitrage: Evidence From Option Holdings of Risk Arbitrageurs

This paper examines the information content of option holdings of risk arbitrageurs after merger or acquisition announcements. A portfolio mimicking risk arbitrageurs’ post-announcement option and stock holdings delivers higher risk-adjusted returns than their stock-only portfolio. To understand the economic channel, we show that the option positions of risk arbitrageurs predict post-announcement stock price volatility and deal outcomes, but not the direction of stock prices. Hence, risk arbitrageurs do not only mechanically provide liquidity to selling shareholders but they are skilled to process the deal consummation probabilities. Indeed, risk arbitrageurs exploit the ‘risk’ in risk arbitrage by employing profitable straddles.

What drives effective competition in the airline industry? An empirical model of city-pair market concentration

Market concentration is a widely recognized metric for assessing effective competition, as it provides a quantification of the relative success of large, mid-sized and smaller firms in the battle for consumers. Concentration has been a public policy issue in the airline industry since deregulation, due to the long-standing airport dominance by major carriers, which is a concern that is recurrently intensified by merger announcements. This paper develops an empirical model to examine the evolution of concentration in the airline markets. We analyze the case of the Brazilian airline industry, in which the two major carriers acquired a combined market share of more than 90% in the late 2000s and have experienced a sharp reversion since then. We test hypotheses regarding the association of market concentration with market size and service quality, as well as the impacts of vertical relationships after airport privatization. Our results suggest that the entry-attraction effect of market size more than compensates for the economies-of-density effect, while the vertical product differentiation created by the strategic investment in capacity is a key driver of concentration in the airline industry.

Returns of merger and acquisition activities in the gaming industry

The gaming industry experienced numerous merger and acquisition (M&A) activities in the 1990s. This study examines the cumulative abnormal returns (CARs) for gaming target and bidding firms around the announcement of mergers and acquisitions (M&As) from 1985 to 2004. The results showed that both targets and bidders had significant positive returns. The study finds that gaming targets enjoy significant positive returns consistent with the literature. Gaming industry bidders earn significant, positive returns. The literature on bidder returns shows mixed results; some were positive, some were negative but many are not significantly different from zero. The positive bidder returns in the gaming industry found here are possibly caused by the high entry barriers to the gaming industry such as acquiring gaming licenses, familiarity of gaming regulations, and experience. It is generally much more difficult for a non-gaming bidder than a gaming bidder to acquire gaming industry targets. As a result, there is usually much less competition in gaming industry M&As than for other industries. This is likely a major cause of the higher returns for gaming bidders than found for bidders in most other industries.

A Run-Down of Merger Target Run-Ups

We show that run-ups in U.S. target firm stock returns preceding merger announcements have declined drastically over recent decades. The negative trend in target run-ups cannot be fully explained by changes in deal or target characteristics associated with merger anticipation. However, it disappears after controlling for changes in the strength of U.S. insider trading regulation over the research period. Our results, which survive robustness and placebo tests, suggest that U.S. insider trading rules are effective at curbing pre-announcement trading.

Challenging Management in Public

This paper provides evidence on institutional investors exerting governance by participating in conference calls surrounding merger announcement. Consistent with a number of governance theories, we document that the likelihood of participation increases in the ownership in the hosting firm and decreases the probability of future exit. Participation by institutional investors leads to a 25 basis points increase in stock price during the first hour after the start of the call. We document that questions asked by institutional investors not only are more negative, but also predict future return, in contrast to other call participants such as sell-side analysts. We conclude that call participation by institutional investors is an effective governance channel that creates value to shareholders.

Shareholders wealth and mergers and acquisitions (M&As)

We re-examine the abnormal returns (ARs) around merger announcements using a large sample of 8,945 announcements. We estimate the ARs using the Carhart (1997) four-factor model under the standard ordinary least square (OLS) method and the Glosten et al.’s (1993) asymmetric GARCH specification (hereafter, GJR-GARCH). Under the OLS method, acquirers do not generate significant cumulative ARs (CARs) in line with prior work. Our new results, however, show that under the GJR-GARCH estimation, acquirers generate positive and significant cumulative CARs. We attribute the gains to the use of the GJR-GARCH estimation method, as the GJR-GARCH method is more effective in capturing conditional volatility and asymmetry in the excess returns.

Informed Traders, Long-Dated Options, and the Cross Section of Stock Returns

Option prices predict the cross section of equity returns. We show that, unconditionally, the prices of long-dated options contain all the information relevant for predicting returns. Information, however, shifts towards short-dated options when an earnings announcement is imminent and when options are cheap to trade. The difference between short- and long-dated options also predicts the timing of merger announcements. Our results are consistent with option prices reflecting the actions of informed traders, and with these traders optimally choosing option maturities to maximize the value of their information.

Effect of Bank Mergers on Client Firms: Evidence from the Credit Supply Channel

This study investigates the effects of bank mergers on client firms. A rich panel of data detailing firm borrowing from individual banks enables controls for demand-side effects to isolate the effect of bank mergers on the supply of credit. The impact of bank mergers on other firm outcomes (growth in total borrowing, distance to default and investment) is also examined. A merger announcement by a firm’s main bank results in a contraction in credit supply from the merging bank. Firms are not able to compensate for the reduced credit supply from the main bank, so overall borrowing also declines.

PENGUJIAN REAKSI PASAR TERHADAP PERISTIWA MERGER DAN AKUISISI DI BURSA EFEK INDONESIA (BEI)

This study aimed to see whether there abnormal returns around the period of mergers and acquisitions, using a market model and the expected returns of 100 days, as well as using the event period is seven days before and seven days after the announcement of mergers and acquisitions. The sample was a company for mergers and acquisitions in Indonesia Stock Exchange during the years 2013-2015, sampling in this study did not consider the corporate Action others besides mergers and acquisitions alone, so it acquired 30 companies as the sample material, the analysis tools used in this research is multiple linear regression with Level of Singnificance by 5%. The results showed that there were no abnormal returns around the period of the study, so it can be said that there is no market reaction around the announcement of mergers and acquisitions as evidenced by a greater significance than 0.05%. Most likely this is because there is no leakage of information during the period of the study.

Do Outside Directors with Government Experience Create Value?

AbstractWe examine whether outside directors with government experience add value to their firms. We find that government directors are more likely to miss board meetings and that their appointment announcements are greeted more negatively. Firms with government directors also experience poorer operating performance and more negative merger announcement returns, although their mergers are less likely to be challenged by antitrust authorities. These adverse valuation effects are largely alleviated when firms have large government sales, when they operate in regulated industries, or when government directors are politically connected. Using close gubernatorial election outcomes as a natural experiment and an instrumental variables approach to control for endogeneity bias do not change the results.

The Impact of Mergers and Acquisitions on Shareholders' Value : An Empirical Analysis of Select Indian Companies

The present study analyzed the shareholder value creation by examining the short-run abnormal returns accruing to the shareholders of acquiring, target, and hypothetical combined entities on announcement of mergers and acquisitions (M&As) during 2000 - 2010 using the market-adjusted model of the popular event study methodology. This study used a sample of 29 pairs of acquiring and target firms involved in M&As during the period from April 1, 2000 to March 31, 2010. The study developed four hypotheses examining separately the impact of M&As on shareholder value of acquiring, target, and combined firms. The study reported little but significant positive abnormal returns accruing to the shareholders of acquiring firms, while shareholders of target firms were found to have suffered significant losses over a 41-day event period around the announcement of M&As, which is contrary to existing literature in Western countries, which has stated that only the targets create value, and the acquirers are value destructive. This is an important contribution to the existing literature that the theories in the Western countries may not necessarily hold valid in India, and they need to be reassessed before being implemented in the Indian context. Another important findings of the study was that M&As overall were found destroying value for the shareholders of the hypothetical combined entity.

Telecommunications deregulation and the motives for mergers

We study mergers in the regulated telecommunications industry to test theories of merger gains. We find that mergers yield positive returns to the combined firms. Because this effect is consistent with the collusion, competitive advantage and anticipation hypotheses, we study returns to rivals to differentiate the hypotheses. Our results indicate that rival firms earn positive abnormal stock returns upon the announcement of an industry merger and that returns exhibit substantial cross-sectional dispersion. Rivals that become targets in subsequent mergers earn significantly greater announcement returns than do subsequent non-targets. Financial characteristics of initial target firms and subsequent targets are statistically indistinguishable. Finally, rival abnormal returns are insignificantly related to market concentration and horizontal vs. vertical deal status. These results are consistent with predictions of the anticipation hypothesis and inconsistent with collusion. Thus, our findings indicate that deregulation did not foster collusion in mergers in the telecom industry but, instead, merger gains are due to merger-induced efficiencies.

Entire Fairness: A Call to Preserve Delaware Doctrine

Appraisal arbitrage has been on the rise. Institutional investors — namely, hedge funds — buy into target companies after their merger announcements and bet on the price. By purposely taking a minority position, these funds proceed to court to obtain what they otherwise could not in the market: a “fair value.” Where there is no allegation of wrongdoing or injury, these plaintiffs nonetheless successfully divert deal value away from business combinations. Based on a misunderstood statute, appraisal arbitrage has exploded into a multi-billion dollar industry for large fund investors. In June 2016, amid growing concerns, the Delaware General Assembly amended § 262, Delaware’s appraisal statute. While the effort is a start, it can by no means be an end. This Note examines the development of appraisal arbitrage and calls for unification of two competing areas of law. Both common law fiduciary duties and statutory appraisals under § 262 would naturally fit under an entire fairness test. As such, the author argues that statutory implementation of the fair process standard follows from the principles of Delaware lawmaking and its deference to judicial expertise. As an example, the Note recommends a simple, but meaningful proposal, after which the General Assembly can model future changes.

Real activities manipulation by bidders prior to mergers and acquisitions

PurposeThis study aims to examine the ability of investors to process signs of real activities manipulations at bidder firms in the quarters leading to the announcement of a merger. It further provides a supplementary explanation for the post-merger underperformance puzzle.Design/methodology/approachExamining a sample of cash-only, stock swap and mixed mergers completed between 1980 and 2011, it was found that bidder firms increase the use of real activities manipulation in the quarters leading up to the merger announcements. Using average abnormal stock return method, it is shown that the short-term positive effect of real activities manipulation on share prices is stronger than accrual-based earnings management.FindingsWhile bidders are able to escape investors’ scrutiny in the short run, it is not the case in the long run. It was found that bidders’ long-run stock performance, measured by matched buy-and-hold stock returns, is inversely related to their pre-announcement level of earnings management. This paper contributes to the literature on earnings management by considering how real activities manipulations affect stock prices in mergers and acquisitions.Originality/valueThis study tests whether real activities manipulation, in addition to accrual-based earnings management, explains the underperformance puzzle of the acquiring firms in M&As. Zang (2012) argues that there is a greater likelihood for firms to engage in real activities manipulation, especially when firms are constrained in their use of accrual-based earnings management owing to heightened scrutiny or overuse in prior years.