Merger and Acquisition

Journal of Money, Investment and Banking ISSN 1450-288X Issue 16 (2010) © EuroJournals Publishing, Inc. 2010 http://www.eurojournals.com/JMIB.htm

Stock price reaction to M&A announcements: Evidence from the London Stock Exchange

Spyros I. Spyrou Athens University of Economics and Business, Department of Accounting and Finance Patission 76 10434, Athens Greece E-mail: sspyrou@aueb.gr Tel +0030-210-8203169 Georgia Siougle Athens University of Economics and Business, Department of Accounting and Finance Patission 76 10434, Athens Greece E-mail: gsiougle@aueb.gr Abstract This paper investigates whether short-term reversal/continuation patterns are present in security returns following M&A announcements, for stocks listed in the London Stock Exchange. News items are sorted by whether the firm is a bidder or a target, by the level of information disclosure, by the size of the firm, by whether the announcements generate a positive or negative reaction, and by whether the initial reaction is of a strong magnitude. The results suggest that investors generally react efficiently; however, there is also evidence of short-term return reversals following the arrival of M&A information. Further analysis indicates that reversals are due to few high-magnitude announcements.

Keywords: Mergers and acquisitions, overreaction, undereaction, market efficiency.

1. Introduction

The literature on stock return behavior around Merger and Acquisition (M&A) announcements is extensive and covers many aspects and implications of takeover activity. The results indicate, on average, positive returns following M&A announcements for target firm and negative, zero, or small positive returns for acquirer firm (depending on sample, methodology, etc). Many previous studies focus on wealth effects in the short run and typically employ an n-day window around an M&A announcement in order to capture the initial arrival of information to the market.1 This methodology reveals a lot about wealth...