Mergers and acquisitions (M&A) are one of the most important events in corporate finance, both for the firms involved, as well as the economy. Empirical research on these events has revealed a great deal about their trends and characteristics over the last century.
Many researchers have addressed the question of gains from acquisitions. Typically, target shareholders earn significantly positive abnormal returns from all acquisitions while acquiring shareholders earn none or negative abnormal returns from mergers. The evidence is usually based on returns computed over a pre-acquisition period starting immediately before the announcement date and ending on or before the effective date. This assumes that prices fully adjust to the likely efficiency gains from acquisitions.
Our study attempts to examine the effects of M&A announcements on acquiring firms listed on the SGX through the event study methodology. At the same time, we will also to draw insights on the efficiency of the Singapore stock market with relation to M&A announcements. This paper starts with a review of past literature, followed by description of our methodology and data, motivations for M&A, empirical results of study, and ends with an interpretation of results.
REVIEW OF LITERATURE
Several studies indicate the presence of large abnormal returns accruing to shareholders of merged firms in the period immediately before the merger. However, evidence suggests that shareholders of acquiring firms earn, on average, no abnormal returns at the acquisition's announcement, though there is tremendous variation in these returns. Researchers have been unable to successfully explain much of this variation, partially because the announcement of a takeover reveals information about numerous things.
For example, Grinblatt and Titman (2002) state that the stock return at the time of the bid cannot be completely attributed to the expected effect of the acquisition on profitability, arguing that, "the stock returns of the bidder at the time of the announcement of the bid may tell us more about how the market is reassessing the bidder's business than it does about the value of the acquisition."
Hietala, Kaplan, and Robinson (2001) note that the announcement of a takeover reveals information about the potential synergies in the combination, the stand-alone values of the bidder and target, and the bidder overpayment. They argue that it is often impossible to isolate these effects and, thus, know the meaning of the market's reactions to a takeover announcement.
Empirical studies by Keown and Pinkerton (1981), Malatesta and Thompson (1985), and Mikkelson and Ruback (1985) provide some support for the notion of mergers being partially anticipated events. Keown and Pinkerton find that market reactions to mergers occur before the first public announcement of the event, and conclude that “merger announcements are poorly held secrets and trading on this non-public information abounds”.
These earlier studies are of a much larger scale and are generally more descriptive of the American and European equity markets during the merger booms. Our study attempts to supplement research in this area by concentrating on the Singapore market.
METHODOLOGY & DATA
Event studies methodology
The event date is taken to be the first day when publicly available information indicative of the acquirers’ intentions to acquire the companies was released. In most instances, the event date is the day of announcement made by the company. Daily data is used as the market is typically responsive to news on business combinations.
For this study, we establish an event period of -30 to +30 trading days. As mentioned, the stock prices of the acquirers and targets typically shift before any publicly information is made available to justify the price changes, and therefore prices of trading days before the announcement date are included in the study to examine these...
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