Reaction of Stock Market to M&a Announcement

The Effect of M&A Announcements on the Stock Price Behavior in the Greater China Area

Master Thesis in Corporate Finance at

Swiss Banking Institute University of Zurich PROF. DR. MICHEL HABIB

Author:

Chi-Vi Ly

Filing Date: April 22, 2011

Executive Summary

Problem Over the recent years, M&A transactions have been announced in business related press on a daily basis. Rapid globalization, low interest rates and excess liquidity were shown to be common forces for boosting M&A activities. Often, the benefits of conducting M&A are referred to as obtaining synergy gains and creating shareholder value. There is a large western economic literature that investigates the abnormal returns of the bidding and target firms upon the M&A announcement day, and to what extent company- and deal specific factors have an influence on the stock price reaction. This thesis should contribute to the knowledge of the field from the perspective of the Chinese market with an additional focus on regulatory aspects, China’s unique share segmentation and the government’s role in participating in M&A activities. Research Objective The primary objective of this research is to empirically investigate whether M&A activities can create value for the shareholders of publicly listed Chinese acquirer companies by measuring abnormal returns on the M&A announcement date. The second objective is to evaluate the M&A success factors, which have an effect on the cumulative abnormal returns (CAR) of the bidding firms. In addition to a selection of value drivers that have been present in the Anglo-Saxon market, such as the offer of payment in cash, inclusion of a financial advisor, industry relatedness between the acquirer and target company, relative deal size and the market-to-book value of the bidding firm a few Chinese market and regulatory environment specific considerations are also examined in this research. In order to expand the results of those two objectives and to provide a more...