Advertisement

Information Signaling and Competitive Effects of M&A: Long-Term Performance of Rival Companies

Abstract

In this essay, I investigate the longterm performance of rival companies related to acquisition targets. Using a sample of 2,511 deals from 1985 to 2005, I document an underreaction of capital markets to the information contained in M&A announcements. Following 6, 138 large rival gain events due to positive information signaling and 5,408 large rival loss events due to the negative competitive effects of the deal, I find a return drift for up to 12 months after the announcement. Hence, my results indicate that capital markets do not immediately incorporate the effects of M&A announcements into rival stock prices.

Keywords

Abnormal Return Cash Holding Cumulative Abnormal Return Announcement Date Rival Firm 
These keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.

Preview

Unable to display preview. Download preview PDF.

Unable to display preview. Download preview PDF.

References

  1. Jensen, Michael C., and Richard S. Ruback, 1983, The Market for Corporate Control: The Scientific Evidence, Journal of Financial Economics 11(1–4), 5–50.CrossRefGoogle Scholar
  2. Jarrell, Gregg A., James A. Brickley, and Jeffry M. Netter, 1988, The Market for Corporate Control: The Empirical Evidence since 1980, Journal of Economic Perspectives 2(1), 49–68.Google Scholar
  3. Fuller, Kathleen, Jeffry Netter, and Mike Stegemoller, 2002, What Do Returns to Acquiring Firms Tell Us? Evidence from Firms That Make Many Acquisitions, Journal of Finance 57(4), 1763–1793.CrossRefGoogle Scholar
  4. Mitchell, Mark, Todd Pulvino, and Erik Stafford, 2004, Price Pressure around Mergers, Journal of Finance 59(1), 31–63.CrossRefGoogle Scholar
  5. Moeller, Sara B., Frederik P. Schlingemann, and Rene M. Stulz, 2004, Firm Size and the Gains from Acquisitions, Journal of Financial Economics 73(2), 201–228.CrossRefGoogle Scholar
  6. Masulis, Ronald W., Cong Wang, and Fei Xie, 2007, Corporate Governance and Acquirer Returns, Journal of Finance 62(4), 1851–1889.CrossRefGoogle Scholar
  7. Moeller, Sara B., Frederik P. Schlingemann, and Rene M. Stulz, 2007, How Do Diversity of Opinion and Information Asymmetry Affect Acquirer Returns?, Review of Financial Studies 20(5), 2048–2078.Google Scholar
  8. Asquith, Paul, 1983, Merger Bids, Uncertainty, and Stockholder Returns, Journal of Financial Economics 11(1–4), 51–83.CrossRefGoogle Scholar
  9. Loderer, Claudio, and Kenneth Martin, 1992, Postacquisition Performance of Acquiring Firms, Financial Management 21(3), 69–79.CrossRefGoogle Scholar
  10. Agrawal, Anup, Jeffrey F. Jaffe, and Gershon N. Mandelker, 1992, The Post-Merger Performance of Acquiring Firms: A Re-Examination of an Anomaly, Journal of Finance 47(4), 1605–1621.CrossRefGoogle Scholar
  11. Andrade, Gregor, Mark Mitchell, and Erik Stafford, 2001, New Evidence and Perspectives on Mergers, Journal of Economic Perspectives 15(2), 103–120.CrossRefGoogle Scholar
  12. Shahrur, Husayn, 2005, Industry Structure and Horizontal Takeovers: Analysis of Wealth Effects on Rivals, Suppliers, and Corporate Customers, Journal of Financial Economics 76(1), 61–98.CrossRefGoogle Scholar
  13. Fama, Eugene F., and Kenneth R. French, 1997, Industry Costs of Equity, Journal of Financial Economics 43(2), 153–193.CrossRefGoogle Scholar
  14. Akhigbe, Aigbe, and Anna D. Martin, 2000, Information-Signaling and Competitive Effects of Foreign Acquisitions in the US, Journal of Banking and Finance 24(8), 1307–1321.CrossRefGoogle Scholar
  15. Brown, Keith C., W. V. Harlow, and Seha M. Tinic, 1988, Risk Aversion, Uncertain Information, and Market Efficiency, Journal of Financial Economics 22(2), 355–385.CrossRefGoogle Scholar
  16. Bremer, Marc, and Richard J. Sweeney, 1991, The Reversal of Large Stock-Price Decreases, Journal of Finance 46(2), 747–754.CrossRefGoogle Scholar
  17. Cox, Don R., and David R. Peterson, 1994, Stock Returns Following Large One-Day Declines: Evidence on Short-Term Reversals and Longer-Term Performance, Journal of Finance 49(1), 255–267.CrossRefGoogle Scholar
  18. Park, Jinwoo, 1995, A Market Microstructure Explanation for Predictable Variations in Stock Returns Following Large Price Changes, Journal of Financial and Quantitative Analysis 30(2), 241–256.CrossRefGoogle Scholar
  19. Pritamani, Mahesh, and Vijay Singal, 2001, Return Predictability Following Large Price Changes and Information Releases, Journal of Banking and Finance 25(4), 631–656.CrossRefGoogle Scholar
  20. Brown, Stephen J., and Jerold B. Warner, 1980, Measuring Security Price Performance, Journal of Financial Economics 8(3), 205–258.CrossRefGoogle Scholar
  21. Song, Moon H., and Ralph A. Walkling, 2000, Abnormal Returns to Rivals of Acquisition Targets: A Test of the ‘Acquisition Probability Hypothesis.’, Journal of Financial Economics 55(2), 143–171.CrossRefGoogle Scholar
  22. Fee, C. Edward, and Shawn Thomas, 2004, Sources of Gains in Horizontal Mergers: Evidence from Customer, Supplier, and Rival Firms, Journal of Financial Economics 74(3), 423–460.CrossRefGoogle Scholar
  23. Barber, Brad M., and John D. Lyon, 1997, Detecting Long-Run Abnormal Stock Returns: The Empirical Power and Specification of Test Statistics, Journal of Financial Economics 43(3), 341–372.CrossRefGoogle Scholar
  24. Kothari, S. P., and Jerold B. Warner, 1997, Measuring Long-Horizon Security Price Performance, Journal of Financial Economics 43(3), 301–339.CrossRefGoogle Scholar
  25. Fama, Eugene F., 1998, Market Efficiency, Long-Term Returns, and Behavioral Finance, Journal of Financial Economics 49(3), 283–306.CrossRefGoogle Scholar
  26. Lyon, John D., Brad M. Barber, and Chih-Ling Tsai, 1999, Improved Methods for Tests of Long-Run Abnormal Stock Returns, Journal of Finance 54(1), 165–201.CrossRefGoogle Scholar
  27. Mitchell, Mark L., and Erik Stafford, 2000, Managerial Decisions and Long-Term Stock Price Performance, Journal of Business 73(3), 287–329.CrossRefGoogle Scholar
  28. Kothari, S. P., and Jerold B. Warner, 2007, Econometrics of Event Studies, in B. Espen Eckbo, ed.: Handbook of Corporate Finance: Empirical Corporate Finance, Elsevier/North Holland, Amsterdam/Oxford.Google Scholar
  29. Fama, Eugene F., and Kenneth R. French, 1993, Common Risk Factors in the Returns on Stock and Bonds, Journal of Financial Economics 33(1), 3–56.CrossRefGoogle Scholar
  30. White, Halbert, 1980, A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity, Econometrica 48(4), 817–838.CrossRefGoogle Scholar
  31. Fama, Eugene F., and Kenneth R. French, 2007, Dissecting Anomalies, Journal of Finance, forthcoming.Google Scholar

Copyright information

© Gabler | GWV Fachverlage GmbH, Wiesbaden 2008

Personalised recommendations