Short-term Value Creation from Announcements of Mergers & Acquisitions in Western Europe: Empirical Contributions to Value Creation and Value Drivers

Michael Krogh

Student thesis: Master thesis


This thesis researches the value creation from Mergers & Acquisitions, as well as the value drivers in Western Europe between year 2014 and 2018. Mergers & Acquisitions is a popular growth strategy used by many companies to either establish a foothold in new markets, increase their market share in established markets or to acquire new competencies. Although it is a popular strategy, it is also a risky strategy that often do not deliver shareholder returns which justify the high premiums paid. The value creation is examined by applying an event study methodology to analyze the market reactions to announcements of Mergers & Acquisitions. This is done by calculating and testing the abnormal returns from stock price developments in event windows around the announcement date. To test market efficiency and the sensitivity of abnormal returns, four event windows with different length are constructed. To evaluate and test the transaction specific value drivers, this thesis applies cross-sectional regression. The final dataset includes announcement data from 189 bidders and 142 target across 202 transactions. All bidders and targets are publically traded companies and originate from 18 different countries. The analysis of abnormal returns shows bidders earn zero abnormal returns in a 21-day event window, while targets on average earn 13.68% abnormal return over the 21-day event window. When testing value drivers, I find both bidders and targets earn higher abnormal returns, when payments are made in cash compared to payment in stocks. Bidders earn 7.1% more and targets 10.2% more in a 21-day event window. This finding is in line with both the signalling theory and the pecking-order theory. Further I find no statistical difference in abnormal returns between cash and mixed payment. Testing for differences in abnormal returns from focused (i.e. intra-industry) and diversifying transactions, I find zero statistical difference. The same result is found when I test the difference between domestic and cross-border transactions. These results suggest Western European capital markets are too efficient and integrated for significant differences to occur. Finally, I test the free cash flow hypothesis, which states cash rich bidders often make value destroying investments. I find this not to be true, as my analysis suggests higher abnormal returns to bidders with higher cash flows, however this finding lack the statistical significance to be conclusive. For targets, I also find evidence of higher value creation to companies with high cash flows, although this result also lack statistical significance to be conclusive.

EducationsMSc in Applied Economics and Finance, (Graduate Programme) Final Thesis
Publication date2019
Number of pages102
SupervisorsLisbeth la Cour