Short-term Value Creation in U.S. Mergers & Acquisitions

Caroline Boye Holm & Philip Claes Fredrik Söderberg

Student thesis: Master thesis

Abstract

This thesis investigates short-term value creation in 5,464 mergers and acquisitions (henceforth, M&A) undertaken in the United States (U.S.) between 2011 and 2023. The thesis aims to analyze the factors contributing to short-term abnormal returns for shareholders of acquiring firms. This phenomenon is investigated through the application of well-established theoretical frameworks. The theoretical landscape is divided into two groups the neoclassical theory and behavioral theories. From these foundational perspectives, five hypotheses have been developed. These hypotheses provide potential explanations for the short-term abnormal returns experienced by shareholders of acquiring firms. Hence, the thesis can guide managers and investors by identifying factors influencing shareholder wealth.
Short-term abnormal returns are analyzed through an event study methodology, which evaluates market reactions to M&A announcements. The method involves calculating the abnormal returns derived from stock price fluctuations during the event window surrounding the M&A announcement date. This thesis employs event window lengths of (-5;+5) and (-1;+1).
Five primary conclusions are drawn from the analysis of the hypotheses. Initially, the analysis identified a statistically significant short-term average cumulative abnormal return (CAAR) of 0.56% for the acquiring firm's shareholders. Secondly, the thesis identified a statistically significant disparity in value creation between cross-border and domestic M&As. Domestic M&As generated a positive and significant CAAR of 0.51%, in contrast to cross-border M&As, which exhibited a negative and significant CAAR of -0.11%.
Third, the analysis reveals a statistically significant difference of 2.88% between M&As financed by cash versus those financed by stock. Fourth, diversified transactions are associated with lower abnormal returns for the bidder compared to focused transactions. Fifth, a greater relative size between the transaction value and the market capitalization of the acquiring firm significantly correlates with higher abnormal returns.
We wish to thank our supervisor, Dr. Björn Preuß, who guided us throughout this thesis.

EducationsMSc in Applied Economics and Finance, (Graduate Programme) Final ThesisMSc in Finance and Investments, (Graduate Programme) Final Thesis
LanguageEnglish
Publication date2024
Number of pages116
SupervisorsBjörn Preuss