FINANCIAL ANALYSIS

Empirical Study: Impact of Mergers and Acquisitions on Stock Price

Introduction2

Literature Review2

Selection of Data and Description5

Methodology5

Hypothesis6

Result6

Presentation of Result6

Discussion of Result9

Martket Returns9

Conclusion10

Empirical Study: Impact of Mergers and Acquisitions on Stock Price

Introduction

Mergers and Acquisitions, referred to as M&A's are becoming common in thriving economies as benefitting variables. Mergers and Acquisitions represent massive reallocation of factors of production, both within and across industries and countries consequently for many years, has been the biggest interest of empirical studies. Talking about historical side, 3 merger waves were observed in 1960s as “organizational takeovers”, in the 1980's as “hostile takeovers” and in the 1990's as the “global takeovers”. These mergers and acquisitions were concentrated in the UK and also in the USA. Extensive studies have been undertaken on whether acquisitions tend to create wealth or reduce wealth for shareholders, some of which have revealed that mergers tend to emerge as best performers to various stakeholders involved. Although, shareholders of the target firms enjoy positive short-term returns, while investors in the acquiring firms often experience share price under performance in the month following the announcement of an acquisition or a merger. An interesting stance is to overview at the European Union with its single monetary policy. This assignment will focus on the effects of acquisitions and mergers in the UK within European Union.

Literature Review

The literature gives a brief overview of relevant empirical findings concerning acquisitions and mergers. To explain the phenomenon of Acquisitions and Mergers, different theories have been proposed; two of them were proposed by Scholes and Myron (1972) and Mahoney et.al, (1996) as substitute to the perfect capital market hypothesis: the “price-pressure hypothesis” and the “long-run downward-sloping curve hypothesis”. Highlighting the hypothesis regarding the price pressure is that the stock-prices will provisionally deviate from their subsequent standard values with unapprised changes in demand (surplus), to keep the liquidity ratio steady. The second substitute, demand curve hypothesis (downward sloping) imposes that the individual securities do not usually have perfect alternatives; and if they do not have them, arbitrage will be sterile and show no significant effect in keeping the surplus demand curves horizontal. Shleifer (1986) and Wang & Boateng (2007) estimate that the abnormal proceeds for the companies added to the stock exchange index to stand at 3% on the enclosure day. However, both papers disagree with the enclosures to the stock exchange index and express no change in in findings about forecasted return distributions. Mean while, Shleifer et.al. (1997) sees their result as substantiation of demand curves of securities due to the little evidence he finds of a price hindrance. Wurgler et.al,(2002) worked on the downward-sloping curve hypothesis by categorizing stock listed companies on the basis of close-natured alternatives (Clemons et.al, 1993, pp. 9). Following the hypothesis, excess demand shows downward sloping trend with greater effect of inclusion for companies that require close substitute companies for the organizations where it is riskier to keep demand curves flexible (Alfonsi et.al., 2010, pp. 143). Andrade (2001) relates the changes in the stock-price with other ...