Value Creation in Pharmaceutical Mergers and Acquisitions: An Empirical Study of Stock Price Movements

Giulia Bosis & Sarah Herrmann

Student thesis: Master thesis


The pharmaceutical industry is a highly regulated industry with tremendous R&D costs when it comes to the development of new drugs and its applications. Mergers and acquisitions are often used to achieve cost synergies, to gain competitive advantage and to grow the business. Much research of general M&A activities has been conducted over the last years, but not many scholars have investigated value creation of M&A for the pharmaceutical industry. When trying to identify M&A drivers and how value was created, stock returns are measured against market returns to see if there have been abnormal returns for shareholders of the bidding firm. Our research focused primarily on the stock market reaction when a deal was announced, to see if the stock returns have been different from zero for shareholders. This is carried out by applying the event study methodology which has gained much recognition in previous literature. As a next step we tried to identify potential firm-specific value drivers by applying a cross-sectional regression. For the purpose of our event study analysis we used a data set of 196 horizontal acquisitions that were announced between 2007 and 2018. We find that shareholders of the bidding firms earn significant abnormal returns when the deal is announced, which is not in line with most previous research that suggests zero abnormal return at the day of the announcement. The same applies for shareholders of Indian and Chinese companies with showing significant returns. We see higher significant returns when the deal is carried out domestically, which is in contrary to literature which indicates a preference for cross-border deals. Our findings show that the preferred method of payment in pharmaceutical M&A is other payments, which means that the from other researchers suggested preference for cash-financed deals cannot be confirmed by our results. For shareholders of Indian companies, we find higher returns on average for cross-border deals but without proven significance, whereas for shareholders of Chinese companies we find that on average, cross-border deals achieve significant higher cumulative abnormal returns. Finally, we find statistical evidence that the CAAR on the event day in the year of the financial crisis is lower for shareholders than the CAAR on the event day post-crisis.

EducationsMSc in Accounting, Strategy and Control, (Graduate Programme) Final Thesis
Publication date2019
Number of pages135
SupervisorsCaspar Rose