Event Study on Mergers and Acquisitions on Stock Price

This paper aims to investigate the impact on the share price of the target company upon the release of an announcement of an acquisition. Based on the findings of the studies, the share prices of the target company do reflect an upward increase during the event period of 60-day contingent on the announcement. Concurrently, this paper provides an insight to the possible opportunities for investors through scenario planning of an announcement and demonstrates it under the current market conditions. 

LITERATURE REVIEW

Research on wealth creation from mergers and acquisitions has been primarily undertaken using the event study methodology. This approach is based on the proposition that in an efficient market, the immediate wealth effect reflects the capital market’s overall unbiased assessment of the present value of the future benefits of the merger or acquisition (Datta, Pinches and Narayanan, 1992). This focus on present value incorporates both the actual flow of cash or securities incurred by the bidder during the transaction; and the expected incremental cash inflow generated during the integration phase by combining the operations of the target and bidder.

Although negotiations may be started before public announcements and are conducted in secrecy, news of the negotiation usually gets leaked out and the market will start speculating on the merger. However, the market’s expectation are almost fully formed by the announcement date of the merger or acquisition with wealth effects being insignificant around the consummation date (Asquith, 1983; Dodd, 1980). As a consequence, studies examining the wealth creation in mergers and acquisitions have typically employed relatively short event periods surrounding the announcement date. This is consistent with the efficient market hypothesis as well as the empirical evidence (Datta, Pinches and Narayanan, 1992).

To develop an understanding of stock market reaction to acquisition announcements, it is essential to...