Shareholders wealth and mergers and acquisitions (M&As)

  • 1604 Views
  • 301 Downloads

Creative Commons License
This work is licensed under a Creative Commons Attribution-NonCommercial 4.0 International License

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.

view full abstract hide full abstract
    • Table 1. Descriptive statistics of M&As announced over the period 1991 to 2013
    • Table 2. Average AR measures for acquirers and targets around merger announcements using the four-factor CAPM under the OLS method and the GJR-GARCH method
    • Table 3. Bootstrapping simulations of AR measures for acquirers and targets around merger announcements
    • Table 4. Average ARs measures around announcements for acquirers by payment method
    • Table 5. Average AR measures around announcements for targets by payment method
    • Andrade, G., Mitchell, M., Stafford, E. (2001). New evidence and perspectives on mergers. Journal of Economic Perspectives, 15, 103-120.
    • Alexandridis, G., Petmezas, D., Travlos, N.G. (2010). Gains from mergers and acquisitions around the world: New evidence. Financial Management, 39, 1671- 695.
    • Anslinger, P. L., Copeland, T. E. (1996). Growth through acquisitions: A fresh look. McKinsey Quarterly, 2, 96-109.
    • Baillie, R. T., Bollerslev, T. (1989). The message in daily exchange rates: A conditional-variance tale. Journal of Business and Economic Statistics, 7, 297-305.
    • Bi, G. X., Gregory, A. (2011). Stock market driven acquisitions versus the Q theory of takeovers: The UK evidence. Journal of Business and Accounting, 38, 628-656.
    • Bigelli, M., Mengoli, S. (2004). Sub-optimal acquisition decision under a majority shareholder system. Journal of Management and Governance, 8, 373-405.
    • Bild, M., Guest, P., Cosh, A., Runsten, M. (2002). Do takeovers create value? A residual income approach on UK data. (Working Paper). University of Cambridge.
    • Brown, S. J., Warner, J. B. (1985). Using daily stock returns: The case of event studies. Journal of Financial Economics, 14, 3-31.
    • Blonigen, B. A., Pierce, J. R. (2016). Evidence for the Effects of Mergers on Market Power and Efficiency. (Working Paper). University of Oregon.
    • Boehmer, E., Masumeci, J., Poulsen, A. B. (1991). Event-study methodology under conditions of event-induced variance. Journal of Financial Economics, 30, 253-272.
    • Campa, M. J., Hernando, I. (2006). Mergers and acquisitions performance in the European financial in industry. Journal of Banking and Finance, 30, 3367-3392.
    • Carhart, M. M. (1997). On persistence in mutual fund performance. Journal of Finance, 52, 57-82.
    • Carline, N. F., Linn, S. C., Yadav, P. K. (2009). Operating performance changes associated with corporate mergers and the role of corporate governance. Journal of Banking and Finance, 33, 1829-1841.
    • Carletti, E., Hartmann, P., Ongena, S. (2015). The economic impact of mergers control legislation. International Review of Law and Economics, 42, 88-104.
    • Chang, S. (1998). Takeover of privately held targets, methods of payment and bidder returns. Journal of Finance, 53, 773-784.
    • Chatterjee, R. (2011). Mergers and acquisition: The impact of share price. Journal of Institute of Management Study, 11, 123-148.
    • Dickerson, A. P., Gibson, H. D., Tsakalotos, E. (1997). The impact of acquisitions on company performance: evidence from a large panel of U.K firms. Oxford Economic Papers, 49, 344-361.
    • Draper, P., Paudyal, K. (2006). Acquisitions: private versus public. European Financial Management, 12, 57-80.
    • Dutta, S., Jog, V. (2009). The long-term performance of acquirer firms: A re-examination of an anomaly. Journal of Banking and Finance, 33, 1400-1412.
    • Dutta, S., Saadi, S., Zhu, P. (2013). Does payment method matter in cross-border acquisitions? International Review of Economics and Finance, 25, 91-107.
    • Dutordoir, M., Rosenboom, P., Vasconcelos, M. (2014). Synergy disclosures in mergers and acquisitions. International Review of Financial Analysis, 31, 88-100.
    • Eckbo, E. B., Thorborn, S. K. (2000). Gains to bidder firms revisited: Domestic and foreign acquisitions in Canada. Journal of Financial and Quantitative Analysis, 35, 1-25.
    • Erickson, M., Wang, S. W. (1999). Earnings management by acquiring firms in stock for stock mergers. Journal of Accounting and Economics, 27, 149-176.
    • Faccio, M., McConnell, J. J., Stolin, D. (2006). Returns to acquirers of listed and unlisted targets. Journal of Financial and Quantitative Analysis, 41, 197-220.
    • Fama, F. E., & French, K. R. (1993). Common risk factors in the returns on stocks and bonds. Journal of Financial Economics, 33, 3-56.
    • Fama, F. E., & French, K. R. (1996). Multifactor explanations of asset pricing anomalies. Journal of Finance, 51, 55-84.
    • Fuller, K., Netter, J., Stegemoller, M. (2002). What do returns to acquiring firms tell us? Evidence from firms that make many acquisitions. Journal of Finance, 57, 1763-1793.
    • Glosten, L. R., Jagannathan, R., Runkle, D. E. (1993). On the relation between the expected value and the volatility of the nominal excess return on stocks. Journal of Finance, 48, 1779-1801.
    • Goergen, M., Renneboog, L. (2004). Shareholder wealth effects of European domestic and cross-border takeover bids. European Financial Management, 10, 9-45.
    • Gregory, A., 1997. An examination of the long run performance of UK acquiring firms. Journal of Business Finance and Accounting, 24, 971-1002.
    • Hillier, D., Grinblatt, M., Titman, S. (2011). Financial Markets and Corporate Strategy. Mcgraw Hill Irwin Publishers in Boston.
    • Hackbarth. D., Morellec, E. (2008). Stock returns in mergers and acquisitions. Journal of Finance, 63, 1213-1252.
    • Haleblian, J., Devers, C. E., McNamara, G., Carpenter, M. A., Davison, R. B. (2009). Taking stock of what we know about mergers and acquisitions: A review and research agenda. Journal of Management, 35, 469-502.
    • Heron, R., Lie, E. (2002). Operating performance and the method of payment in takeovers. Journal of Financial and Quantitative Analysis, 37, 137-155.
    • Lang, L. H. P., Stulz, R. M., Walking, R. A. (1989). Managerial performance, Tobin’s Q and gains from successful tender offers. Journal of Financial Economics, 24, 137-154.
    • Leland, H. E. (2007). Financial synergies and the optimal scope of the firm: Implications for mergers, spinoffs, and structured finance. Journal of Finance, 62, 765-807.
    • Lewis, D., & Webb, J. R. (2007). Potential cost synergies from banks acquiring real estate brokerage services. Journal of Banking and Finance, 31, 2347- 2363.
    • Inoue, K., Uchida, K., Bremer, M. (2010). Post-restructuring performance in Japan. Pacific- Basin Finance Journal, 18, 494-508.
    • Kolari, J. W., Pynnönen, S. (2010). Event study testing with cross sectional correlation of abnormal returns. Review of Financial Studies, 23, 3996-4025.
    • Kothari, P. S., Warner, B. J. (1997). Measuring long-horizon security price performance. Journal of Financial Economics, 43, 301-339.
    • Martin, K. J. (1996). The method of payment in corporate acquisitions, investment opportunities, and management ownership. Journal of Finance, 51, 1227-1246.
    • Martynova, M., Oosting, S., Renneboog, L. (2007). The long-term operating performance of European mergers and acquisitions. In Gregoriou, G. and Renneboog L. (Eds.), International Mergers and Acquisitions Activity since 1990: Quantitative Analysis and Recent Research. Massachusetts, Elsevier.
    • Moeller, S. B., Schlingemann, F. P., Stulz, R. M. (2005). Wealth destruction on a massive scale? A study of acquiring-firm returns in the recent merger wave. Journal of Finance, 60, 757-782.
    • Myers, S. C., Majluf, N. S. (1984). Corporate financing and investment decisions when firms have Information investors do not have. Journal of Financial Economics, 13, 187-221.
    • Napier, N. K. (1989). Mergers and acquisitions, human resource issues and outcomes: A review and suggested typology. Journal of Management Studies, 26, 271- 289.
    • Reynolds, N.-S, Teerikangas, S. (2016). The international experience in domestic mergers – are purely domestic M&As a myth. International Business Review, 25, 42-50.
    • Sharma, D. S., Ho, J. (2002). The impact of acquisitions on operating performance: Some Australian evidence. Journal of Business Finance and Accounting, 29, 155-199.
    • Shleifer, A. A., Vishny, W. R. (2003). Stock market driven acquisitions. Journal of Financial Economics, 70, 295-311.
    • Savor, P. G., Lu, Q. (2009). Do stock mergers create value for acquirers? Journal of Finance, 64, 1061-1097.
    • Stunda, R. (2014). The market impact of M&As on acquiring firms in the U.S. Journal of Accounting and Taxation, 6, 30-37.
    • Tuch, C., O’Sullivan, N. (2007). The impact of acquisitions on firm performance: A review of the evidence. International Journal of Management Reviews, 9, 141-170.
    • Wong, B., Cheung, K., Mun, T. (2009). The effect of merger and acquisition announcements on security prices of acquiring firms. International Journal of Economics and Finance, 2, 119-132.
Related Articles

  • Evaluating the performance of the Motley Fool’s Stock Advisor™

    Greg Filbeck , Alexander Lyon , Xin ZhaoORCID doi: http://dx.doi.org/10.21511/imfi.14(3-1).2017.12
    Investment Management and Financial Innovations Volume 14, 2017         Issue #3         pp. 280-290 Views: 2844 Downloads: 1152 TO CITE АНОТАЦІЯ

    Since March 2002, The Motley Fool’s founders, David Gardner and Tom Gardner, have published monthly stock recommendations under Motley Fool’s premium Stock Advisor service. In this paper, the authors investigate whether analysts’ recommendations can add value for investors by examining the performance of portfolios constructed based on Motley Fool’s recommendations. They evaluate the announcement effect on share price corresponding to the publication of stock recommendations. Additionally, the researchers examine holding period returns for a portfolio imitating the actions of Stock Advisor. They find portfolios composed of recommendations through Stock Advisor added value initially upon recommendation and across extended holding periods. Additionally, the authors find that the Stock Advisor sample outperforms other sample portfolios on a risk-adjusted basis and over several subperiods. The findings contribute to the literature on the usefulness of analysts’ recommendations in adding value to investors’ portfolios.

Download Preview
Close
Investment Management and Financial Innovations
Investment Management and Financial Innovations