Price Reaction To Merger And Acquisition Announcements Finance Essay

Price Reaction To Merger And Acquisition Announcements finance EssayEvent dissect of stock equipment casualty answer to conjugation and acquisition proclamation has been concerned by experts since it started cosmos developed. The common system to theme the harm reply roughly the slip is residual analysis, which mode that visitation whether in that respect atomic number 18 ab universal lessens out front and subsequently contract epoch. Also, residual analysis fecal matternister be use as a hatch to political campaign the foodstuff efficiency. In this paper, it concentrates on the champaign of the notion of unification and acquisition promulgation on tract prices of privy companies and thence tests the merchandise efficiency by analyzing the extend of affected fathers out front and subsequently annunciation date, whether in that respect is inside(a) teaching influence forward proclamation date and whether the price reflection public readin g quickly afterward the annunciation. The paper first leave review the literature of development of particular studies and methodological analysis utilise in take studies. Then, it will illustrate the data and methodology of the font study of this paper. Last but not least, it will analysis the effect of announcement on price reaction and commercialise efficiency according to the statistic result.Literature reviewAn levelt study is a method to ideas the stock price concern of certain corporate events, much(prenominal) events tidy sum be dividend announcements, mergers and acquisitions. jibe to S.P. Kothari and J.B. Warner(2004), event studies that focus on announcement effects for a short-horizon around an event provide indicate germane(predicate) for understanding corporate policy decisions. In fiscal merchandises, event studies toilet be apply to specify and test sparing hypotheses. Besides, event studies in like manner research on evidence of market efficien cy foc victimisation on coherent-horizon tests at least twelve months. The evolution of event studies started from Dolley(1933), who examined stock price reaction to stock splits, pl apply several another(prenominal) published papers indicating that by the 1960s, which made their way into leading business economics journals(C.J. Corrado). S.P. Kothari and J.B. Warner(2004 ) report that the amount modus operandi of papers reporting event study results is 565 in v leading journals from the year 1974 to 2000, Journal of Business(JB), Journal of Finance (JF), Journal of pecuniary Economics (JFE), Journal of pecuniary and Quantitative Analysis (JFQA), and the Review of Financial Studies (RFS). The number of papers published per year additiond in the 1980s. Among these papers, Fama(1991) give attention to the relation of event studies to tests of market efficiency and Kothari and Warner(1997) summarized of long-horizon tests. Beyond fiscal economics, event studies are also resea rched by experts in related areas, such as accounting literature (Kothari(2001)), law and economics.As a exemplar method of measuring security price reaction to certain corporate events, the methodology of event studies is also concentrated by experts and developed in par exclusivelyel with the event studies. Initially from event study methodology being introduced by Fama, Fisher,Jensen and Roll(1969), the basic format of methodology of event studies has not changed everywhere time. The key focus is to measure the sample securities mean and cumulative mean atypical present around the event(S.P. Kothari and J.B. Warner(2004)). There are devil areas of changes that unsex the methodology more than precise and sophisticated, virtuoso is the use of daily or else of monthly security reelect data. According to S.J. Brown and J.B. Warner(1984), as long as methodologies are based on the OLS market manikin and using timeworn parametric tests, the characteristics of daily data pre sent a couple of(prenominal) difficulties in the context of event study methodologies. For example, the non-normality of daily drive aways has no obvious come to on methodologies of event studies. The other is the long-horizon event study methods apply to estimate atypical returns and calibrate their statistic signifi netce, although there are more limits in using long-horizon event study methods compared with short-horizon methods. The basic of methodology is to measure unnatural returns as residual by using some benchmark model of normal return. Specifically, there are a variety of models crumb be used to measure the normal rate of return, with the addition of certain variables, and then to go abnormal return estimates. J.J. Binder(1998)reported that abnormal returns attain be measured as mean-adjusted returns, market-adjusted returns, divergences from the market model, deviations from the ane factor Capital Asset Pricing Model(Sharpe(1964), Lintner(1965), Black(1972)), deviations from a multifactor model like Arbitrage Pricing Theory(Ross(1976)).Stock price reaction to merger and acquisition eventsThere are a large number of literatures pay offing the impact on the market range of merging homes out fronthand and after the merger and acquisition events and numerous studies have examined the impact of merger announcements on the prices of the stocks of the pay offr and target firms(M.F. Leong, B. Ward and C. Gan(1996)). Hawawini and Swary(1990) reported the stock market reaction by examining 130 acquirer buzzwords and 123 target banks during 1980s, they found that targets banks perform bettor than that of acquirer banks in mergers and the manage price of a target bank increased by 11.5 percent during the week of the merger announcement on average. Dodd and Asquith(1980) reasond the evidence that mergers have a favourable effect on the common stocks of the merging companies, besides, they found that acquired firms stockholders earn large p ositive abnormal returns from the merger and acquisition events and the acquiring firms stockholders are affected little if at all. The same results comes from Asquith and Kim(1982)s research, which concluded that abnormal returns are positive and statistically in acquired firms significant but are not significantly different from zero. The apprehension why target companies performed salubrious is established at a condition, which is that investors do not anticipate the event before the announcement percentage point, in some other words, the market is at least semi- salutary. If not, the returns of the target company around merger announcement date do not reflect the complete economic impact of the event(M.F. Leong, B. Ward and C. Gan(1996)). Leong, Ward and Gan(1996) concluded that if the market doesnt reflect to an event, it can be interpreted as evidence of the irrelevancy of the event kinda of an indicator of market efficiency. They also directed that market price reaction next the announcement of the merger can be affected by either the content of the tuition or how its relation to previous instruction expectations. Gopalaswamy, Acharya and Malik(2008) reported that there was an upward trend of target companies in India mingled with the year of 2000-2007 in the cumulative average abnormal return few mean solar geezerhood before the announcement of mergers because of anticipation or leakage of information. Besides, there is sudden downfall in the CAAR for the target companies from the mean solar twenty-four hours after the announcement and the average abnormal return is negative and significant after two sidereal daylights of announcements, as a result, they concluded that the India market is semi-strong efficient.Data and methodologyTo analyse the stock price reaction around merger announcement date, it is unavoidable to choose the appropriate sample in recount to represent the entire trend of the stock market in one country. In this pape r, it chose 50 target companies of France that were announced during1/ 2010 to 3/2012. The more the companies are chose, the more the result is closed to normality. The announcement date is identify as the day when the target company first publishes disclosed information about the merger and this was specified as day zero in the event time. In order to be included in the event study, all target companies should be listed in France-continuous market. Besides, the sectors of selected companies are widely spread so that it can avoid the market impact on the specific sectors. According to S.P. Kothari and J.B. Warner(2004), constructing a portfolio of event firms for a number of days around the announcement can address the bias of estimated standard deviation of cumulative abnormal return. The information and the data of each company are obtained from the website http//banker.thomsonib.com/ta/. The data of each company are selected 100 days prior to the announcement date and 10 days aft er announcement date. The data obtained is daily price other than monthly price or else.OLS Market modelIn order to measure the magnitude of the share price variation around the announcement date, abnormal return should be calculated. According to A. Leemakdej(2009), since an abnormal return is unobserved, it is identified by taking the difference between an actual return and an expected return derived from a fiscal model. There are a variety of expected return model can be used in event studies to calculated the expected return of stocks. Here, the market model is selected to be used to calculate the expected return of stocksIn order to calculate the expected return of stocks around the announcement date, the event study separates the data of the sample into two sections, namely estimated periods and test periods. Estimated periods are identified as the day 100 before the announcement to the day 15 before the event. While, test periods are identified as ten days before and after th e event and the event window is-10, 10. Speaking of event window, it is a consideration that the dissemination of company-specific information may extend over more than one day. Because the release of information of a company and the financial ex twitch reporting information may not happen simultaneously, it is unsure that whether market participants had information released by companies when they are trading. So, it is necessary to extend the day of event into multiple days(M.F. Leong, B. Ward and C. Gan(1996)). Data during the estimate period is used to estimate the expected return model by representing the return of stocks in -100, -15 as expected return. Rmt is the market return calculated by using the SBF120 index of France. The objective of estimate period is to calculate two parameters in the market model alpha and beta in order to estimate the expected return of the stock in event period. and are obtained by an ordinary least-squires reasoning backward of E(R) and Rm, whi ch are used to estimate the true value of and . Besides, event period data can investigate the impact from the event and the abnormal return should be calculated in this period in order to get the cumulative abnormal return. The return of stocks can be calculated using the formulaThe equivalence of abnormal return isThe equation of cumulative abnormal return isThe sample has chose 50 target companies, in order to avoid the specific influence of some special companies, it is necessary to calculate the average cumulative abnormal return of each day in test period. The equation of average cumulative abnormal return isNote that by using a time-series of average excess returns, the test statistic below can take into account cross-sectional dependence in the excess returns of specific securities(S.J. Brown and J.B. Warner(1984)).Hypotheses testingThe objective of this event study is to access whether there are any abnormal returns in the test period. So the trifling hypotheses is there is no abnormal performance darn the alternative hypotheses is that abnormal return is not equal to zero.H0 ARi,t = 0H1ARi,t 0The test statistic used sampling distributions and it is a random variable because abnormal returns are measured with error, which comes from two reasons, predictions about securities unconditional expected return are imprecise and individual firms realised returns at test period are affected for reasons unrelated to the event. In order to reduce this error, the estimated standard deviation of cumulative abnormal return is the portfolio of 50 target firms of 10 days before and after the announcement. M. Barakat and R. Terry(2011) concluded that OLS market model is well specified under a variety of condition, for example, non-normality of daily returns has no impact on event study methods. As the deviation of abnormal return is estimated by the sample,so the hypotheses used t-statisticAs there are two variables and that have been used, the degrees of emancipa tion is (n-2). The significant level is 5%. With the two-tail test, the null hypotheses should be spurned ifA test statistic larger than the upper-tail critical value t0.025 provides statistical evidence that the announcement had a significant positive impact on the price. While, a test statistic less than the lower-tail critical value -t0.025 provide evidence that the announcement had a significant negative impact.Furthermore, the hypotheses can also test the market efficiency. If the market is efficient, the share price will reflect all getable information and the announcement will cause the abnormal return performance. a posteriori result on stock returnsThe event study chose two event windows to analyse the result from the empirical research. First, when the event window is -10, 10, the estimated standard deviation of the mean abnormal return is 1.626. Putting the figure into the t-statistic test can obtain the daily critical value used to test the null hypotheses. The table b elow illustrated the critical determine 10 days before and after the announcement.event windowaverage CARt-statistic-10-0.34-0.207671297-90.100.061251696-80.070.040681124-70.210.130356535-60.220.135745854-5-0.01-0.003102476-40.170.101805486-3-0.25-0.155581646-20.580.355347928-10.630.38668066302.731.67990490213.812.34201484323.832.35672488933.692.26657985543.252.00036978852.991.83812739362.751.69404597972.771.7051029383.241.99162651693.402.093802276102.931.800949686As the significance level is 5% and the degrees of freedom is 48, the critical value of two-tail test is 2.01. According to the table above, the t values in day 1,2,3 and 9 are greater than critical value, which nitty-gritty that the abnormal return are significantly positive in the day 1,2,3 and 9 after the announcement. However, the t-values of the day before the announcement are all less than the t-value, which concludes that there is no abnormal return before announcement. So, it can infer that there is no informatio n of announcement leaking to certain market participants, the stock price does not change and investors can not acquire abnormal returns before announcement date.If there is abnormal return before announcement, according to M.F. Leong, B. Ward and C. Gan(1996), there are two reason can be explained. First, there is insider trading. The information is leaking to some investors who then buy stocks before the announcement, as a result, the stock prices will start to react the inside information and those investors will obtain abnormal returns before the announcement. It can conclude that the market is semi-strong efficient. However, the information may not be leaked, the reason of the increase of stock prices is that public may become suspicious of merger before the announcement. So, it is impossible to monitor directly all trading motivated by the possession of inside information. No matter what happen, it can conclude that the market in France may be not semi-strong efficient because if the inside information is leaked the share prices will reflect the insider information, however, the null hypotheses should be accepted as there is no abnormal returns before the announcement. So, in these condition, the market is strong efficient and prices incorporate all information that any investor can acquire. Therefore, non-public information is not useful for certain investors make abnormal return. On the other hand, the semi-efficient form market can not be rejected. The inside information may not be leaked and investors have no anticipation that the firm they they owned would be acquired by other companies, so they have no incentives to buy a large number of shares before the announcement and the share price would not increase beyond participants expectation.According to the table above, on the announcement date, the realised value is 1.68, although the figure is much larger than that one day before announcement, it salve smaller than the critical value. There are two reasons that can explain this condition. First, the market is not efficient because the share prices can not reflect the public information. This may be the result of European sovereign debt crisis, during the crisis, the bond market was influenced heavily in France, even in the stock market, investors had less confident to invest fund to financial market, so even the announcement of merger can not bring them confidence to investment. However, there is also evidence that the market is efficient. According to Mitchell Netter (1990), they reported that corporations may release information one day and the financial press may report this information on the following day, therefore, it is sometimes ill-defined on which day the information reaches the market. It can happen because market participants had the information during the market trading hours on the day is not the information that is released by corporations. So, the share price may not reflect to the announcement because inv estors did not receive the information if the financial market, or only a minority of investors have confidence to purchase stocks. From the table above, the t-value on day one is greater than the critical value. The null hypothesis is rejected from the first day after the announcement, so the share prices reflect the announcement start from the following day of the announcement until the third day after the announcement. However, there is an abnormal condition that the abnormal return is not equal to zero on the ninth day after the announcement, which can happen for the reason beyond the merger event. In order to clear away the influence this abnormal return, the event window can shrink to five days before and after the announcement date.event windowCARt-statistic-5-0.01-0.003182304-40.170.104424975-3-0.25-0.159584813-20.580.364491149-10.630.39663008502.731.72312941413.812.40227566323.832.41736420433.692.32489970843.252.05183996852.991.885423021The table illustrates the t-value wh en the event window is -5, 5. Similarly, there is no abnormal return before the announcement. Although the t-value on the announcement date is much larger than that before the announcement, the abnormal return is still equal to zero. The share prices begin to reflect the announcement from the following day of the announcement. So, it would thus appear that the market is efficient in France.ConclusionAccording to the statistic result, there is no abnormal return before announcement, which concluded that no inside information was leaked before announcement date. On the day of announcement, there was still no abnormal return, this can not be explained that the market is not efficient because there may be a counterpane between the releasing of information and reporting of information. It can be present that the abnormal return emerged after announcement until the third day. However, this method used to test market efficiency has its weakness generated in its estimation of regression o f market model. Nevertheless, the result presented that the market is efficient.