American Mergers & Acquisitions: An Empirical Analysis of Short-Term Stock Price Reactions

Erik Adam Ginsberg

Student thesis: Master thesis


Mergers and acquisitions (M&A) are risky but potentially yielding highly profitable growth. The bidder’s shareholders usually pay the target’s shareholders a substantial premium, justified by the hopes of valuable synergies. Not surprisingly, empirical research proves that the target’s shareholders receive significant abnormal returns as a consequence of being acquired. However, the results from the acquiring shareholder’s point of view are more diverse. The aim of this thesis is to investigate what factors in M&Atransactions influence value creation or value destruction for the bidder’s shareholders. The thesis carries out an extensive investigation to measure the short-term value effect for the biddercompany upon the announcement of a M&A-transaction. Specifically, the event window lengths are [- 2,2], [-5,5] and [-10,10] days before and after the M&A announcement date. The event study methodology is applied as a tool to conduct the investigation by measuring the abnormal return in three short-term event windows surrounding the announcement date. The hypotheses are tested for if they significantly differ from an abnormal return of 0%. The dataset consists of 1127 announcements of M&A-transactions from publicly listed American companies from 1 August 2007 to 1 August 2017. The results of the investigation are summarized as follows: (1) On an overall level, acquirer’s shareholders earn a significant positive abnormal return upon the announcement of a transaction, which interestingly contradicts previous research. (2) Consistent with historical empirical research, horizontal and vertical transactions earn significant positive abnormal returns while conglomerate transactions fail to do so. (3) In terms of payment method, equity financed transactions generate abnormal returns of 0%. However, transactions funded by internally generated cash or external debt earn significant positive abnormal returns, which supports the pecking-order theory. (4) In conflict with the control hypothesis, the biddercompanies with the 25% highest financial leverage generate the poorest abnormal returns. (5) The biddercompanies with the 25% lowest and 25% highest Tobin’s Q-ratios both generate abnormal returns of 0%, which partially contradicts previous empirical research. (6) Cross-border transactions earn significant positive abnormal returns, which are higher than national transactions. (7) The largest transactions, i.e. the largest sized deals relative to the size of the acquiring company, earn significant positive abnormal returns. (8) Finally, the smallest bidder-companies in the sample, measured in absolute terms, earn significant positive abnormal returns.

EducationsMSc in Finance and Accounting, (Graduate Programme) Final Thesis
Publication date2018
Number of pages88