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Stock Market Reaction to Acquisition Announcements using an
Event Study Approach
Isfandiyar Shaheen
Department of Economics
ECO490
Submitted May 5, 2006, in partial completion of the requirements for departmental honors.
Expected date of graduation: May 13, 2006.
Abstract
This paper uses an event study methodology to empirically examine stock market reaction to acquisition announcements. The results indicate that target firms experience significant positive abnormal returns surrounding an acquisition announcement. In case of hostile transactions, the abnormal returns are maximized one after event day as opposed to event day for target firms. Acquiring firms experience negative abnormal returns on announcement day for stock financed acquisitions. We observed abnormal returns on event day (Day 0) and the following day (Day 1). Based on this observation a linear regression model is developed to use publicly available information in predicting abnormal returns.
1
1. Introduction
Mergers and acquisitions represent a prevalent strategy in expanding distribution
channels, or entering new markets across most industries. A popular belief is that mergers
and acquisitions strengthen businesses by making their operations more synergetic.
Announcements of mergers and acquisitions immediately impact a target company’s
stock price, as induced reaction in the stock market cause investors to revise expectations
about the company’s future profitability (Panayides and Gong, 2002). According to the
Efficient Markets Hypothesis, “prices reflect all publicly available information on an
underlying asset” (Fama, 1970). Event studies are frequently used to test market
efficiency (Brown and Warner, 1980). An event study is a statistical method used to
gauge the impact of a corporate event, such as stock splits, earnings announcements and
acquisition announcements. The Synergy Trap Hypothesis posits that immediately before
and after an acquisition announcement, the acquiring firm’s stock price is negatively
affected and the target firm’s stock price is positively affected.
This paper utilizes an event study methodology to empirically test the Synergy
Trap Hypothesis using daily stock returns; its objective is to establish relationships
between abnormal returns, method of financing, deal premium and nature of bid.
Abnormal returns are defined as the difference between actual and predicted returns
surrounding a corporate event. Cumulative abnormal returns are the sum of abnormal
returns in a given time period. Brown and Warner (1980), Davidson, Dutia and Cheng
(1989) Mitchell, Pulvino and Stafford (2002) each utilize a similar event study approach
to examine stock market reactions to acquisition announcements. This paper extends the
2
literature by considering acquisition announcements between pairs of publicly traded
companies, and proposing a model for predicting abnormal returns.
Section 2 presents a series of literature concerning plausible explanations for
observed stock market reactions to acquisition announcements. Section 3 defines the
research objectives and describes the sample selection methodology. Section 4 provides
an analysis of results revealed by our data set and also compares acquisitions with
different specifications. Section 5 proposes a linear regression model, which may be used
as a predictor of abnormal returns. Section 6 presents the limitations of this study and
guidelines for future research. Section 7 outlines the conclusions of this research.
2. Fundamentals of stock price movements surrounding acquisition announcements
This section provides an overview of why companies merge, and of an existing trading
strategy called merger arbitrage. The trading patterns of merger arbitrageurs provide
valuable insights about fundamentals which affect stock prices surrounding acquisition
announcements.
2.1 Why Merge or Acquire?
To develop an understanding of stock market reaction to acquisition
announcements, it is essential to understand the rationale behind such transactions.
Buyers and sellers expect to benefit as a result of an acquisition. When companies are
acquired, the seller’s owners are usually attempting to diversify their portfolios or
3
increase liquidity. Sellers sell because buyers make sufficiently attractive offers
(Ravenscraft and Scherer, 1987). Why would an acquiring firm make such an attractive
offer? One plausible reason is differing opinions about the target firm’s future cash flow.
When companies are acquired, the seller’s owners are usually attempting to diversify
their portfolios or increase liquidity. Sellers sell because buyers make sufficiently
attractive offers (Ravenscraft and Scherer, 1987).
Economic analysis classifies acquisitions into two categories: disciplinary
takeovers and synergistic takeovers (Morck, Shleifer and Vishny, 1988).1 Disciplinary
takeovers are designed to replace managers who are not effectively maximizing
shareholder value as a result of non-value-maximizing practices. Synergistic takeovers
are motivated by possible benefits that would result from combining two firms. The
benefits include a possible increase in market share and even distribution channels, or
simply an elimination of overlapping functions. Morck, Shleifer and Vishny (1988)
conclude that disciplinary takeovers are likely to be hostile transactions, whereas
synergistic takeovers are likely to be friendly transactions. Hostile transactions are
acquisitions that go against the wishes of the target company’s management.
The predicted impact on the acquiring firm’s varies depending on the method of
financing. Acquirer’s stock price in cash financed mergers is expected to remain
unaffected due to acquisition announcement. Managers use cash as a means of financing
if they believe their company’s stock is fairly valued. Similarly, they will chose equity
1 Mergers and acquisitions are also classified as horizontal, vertical mergers or conglomerates. A horizontal merger is one which takes place between two companies with similar product lines, and a vertical merger is one which takes place between two companies is different industries.
4
financing if they believe their company’s stock is undervalued, therefore acquirer’s stock
price in stock financed transactions is likely to experience negative abnormal returns.
Preliminary evidence shows that acquiring firm’s do not experience significant abnormal
returns around the announcement date. Market participants receive no signal on
acquisition announcement day regarding the acquiring firm. In case of target firms,
information regarding deal premium is available on announcement day, these issues are
discussed in detail in Section 2.4. We next verify that acquisition announcements trigger
significant trading activity that leads to shifts in the demand for the securities of
participating firms (Morck, Shleifer and Vishny, 1988).
2.2 The Impact of Merger Announcements on Stock Trading Volumes
We verify that merger announcements are events which frequently cause investors
to revise their estimates of the future profitability of participating firms. The
methodology adopted shows that there is a spike in volume of shares traded due to an
acquisition announcement. The trading volume of a security j is given as jVol and total
volume of shares traded for a particular security on day t is given by jtVol . The sample
total volume, STVol , is given as equation (3) and defined as the sum of volumes across
80 securities (40 target firms and 40 acquiring firms), on day t.2
(3) != jtVolSTVol , where t= [-50,12]
t=[-50,12] is the time period 50 days before event day and 12 days after event day. Our
variable of interest is the percentage change in STVol, which is given as equation (4). 2 Sample selection is specified in Section 3.2.2.
5
(4) !
! !"
""=#
1
1
jt
jtjt
Vol
VolVolSTVol
Figure 3 shows the percentage change in Sample Total Volume in this sample of 80
securities for a [-50,10] day time window.
Figure 3: Percentage Change in Sample Total Volume for a [-50,10] day window
-50.00%
0.00%
50.00%
100.00%
150.00%
200.00%
-50
-47
-44
-41
-38
-35
-32
-29
-26
-23
-20
-17
-14
-11 -8 -5 -2 1 4 7 10
Day
ST
V
STV
A significant spike in volume is found to occur on day 0 across this sample of 80
firms. Based on this sample it is reasonable to assume that merger announcements cause
significant trading activity. The analysis which follows deals primarily with an
investment strategy called merger arbitrage. By analyzing such trading activities, we can
gain insight into why target firm’s stock prices are positively affected by merger
announcements.
6
2.3 The Trading Behavior of Merger Arbitrageurs
Merger arbitrage, also known as risk arbitrage, requires active trading surrounding
an acquisition announcement. Following an acquisition announcement, the target
company’s stock typically trades at a discount to the price offered by the acquiring firm.
The difference between the acquiring firm’s offer price and the target firm’s current price
is known as the arbitrage spread.3 As the merger approaches its completion date, this
spread diminishes (Mitchell, Pulvino and Stafford, 2002), because market participants
adjust their expectations by buying the target firm’s stock till the target’s stock price
reaches equilibrium. In this case, equilibrium price can be understood as the price offered
by the acquiring firm for each share of the target firm’s stock on announcement date.
Thus, if the merger is successful an arbitrageur can captures the arbitrage spread by
purchasing the target firm’s stock - while it is still trading at a discount compared to the
price offered the acquiring firm- and liquidate those shares once the merger
consummates. However, if a merger fails, then the target firm’s stock price often falls
dramatically (Davidson, Dutia and Cheng, 1989). Merger arbitrageurs are rewarded for
bearing the risk of an acquisition transaction not materializing. Acquiring firms may
finance their transaction using cash, cash with some equity or only equity. The trading
strategies for merger arbitrageurs vary depending on the acquirer’s financing method.
This research focuses on two broad categories:4
1. Merger arbitrage strategies appropriate for cash only transactions
2. Merger arbitrage strategies pertaining to fixed-exchange ratio offers in stock financed transactions.
3 Krishnaiyer, Dhrubo, Associate, Citigroup Corporate and Investment Bank, Personal Communication 4 Acquisitions may also be debt financed, cash and stock financed or stock financed with a floating exchange ratio offer
7
2.4 Trading Strategies in Cash Financed Acquisitions
A generic description of a possible trading strategy for cash financed transactions
is characterized as follows. Investors purchase shares of target firm’s stock on the
acquisition announcement date if they are trading at a discount compared with the
acquiring firm’s offer and hold the target firm’s stocks until the merger is completed. At
this time investors receive the arbitrage spread (defined earlier) and the transaction is
over. A review of the literature reveals that target firms in cash financed transactions
experience greater positive abnormal returns on announcement day as opposed to stock
financed acquisitions (Andrade, Mitchell and Stafford, 2002; Asquithe, Kim, 1982). The
fundamental reason is that cash financed transactions usually consummate quicker than
stock financed transactions. Also, stock financed transactions are often large transactions
between two major corporations who require approval from several regulatory bodies
before the acquisition materializes. For example, Exelon Corporation has to receive
approval from 9 regulatory commissions before their acquisition of Public Service
Enterprise Group is completed.5 The longer period the acquisition takes to consummate,
the greater is the uncertainty about whether it will consummate. The fact that cash
financed transactions consummate quicker as opposed to stock financed ones provides a
plausible explanation why cash financed acquisitions experience greater abnormal returns
on announcement day. Section 2.4.1 tests the hypothesis that the average consummation
period of cash financed mergers is less than stock financed mergers.
5 Hoffman, Andy, Financial Analyst, Exelon Generation, Personal Communication
8
2.4.1 Average Consummation Period for Cash and Stock Financed Transactions
To test the hypothesis that cash financed transactions take a longer period of time
to consummate, a sample of all acquisition announcements between 2 publicly traded
companies which are tracked against the NASDAQ Composite Index or NYSE Index
post-January 1, 1997 with an announced total value in excess of $300 million is
considered. In this sample there are a total of 467 announcements, of which 163 were
cash financed transactions with a mean consummation period of 84 days and a standard
deviation of 47 days. Furthermore, the distribution for the consummation period was
approximately normally distributed; the histogram plot of that distribution is presented in
Appendix A. There were a total of 404 transactions which used some form of equity as a
method of financing.6 The mean consummation period for these transactions was 163
days with a standard deviation of 108 days. The consummation period for stock financed
acquisitions also exhibits an approximately normal distribution. A t-test of the hypothesis
results in a value of 2.82, indicating that the mean consummation period of cash financed
transactions is less than the mean consummation period of stock financed transactions at
a α=0.05, where α is the significance level.
As noted in the previous section, shorter expected consummation periods result in
higher abnormal returns. Therefore, we expect larger positive abnormal returns for target
firms stock prices in cash financed acquisitions included in our sample. An investor’s
decisions are usually based on several factors, and a longer consummation period is likely
6 We are nit distinguishing between transactions where preferred stock, as opposed to common stock was used as a financing method.
9
to scare away potential investors, for whom a dollar today is worth more than a dollar
tomorrow. The hypothesis of greater abnormal returns of target firms in cash financed
transactions is tested extensively in Section 4.2.
2.5 Trading Strategies in Stock Financed Transactions
Trading strategies in stock financed transactions depend on the type of stock offer. There
are three types of offers: 1) Fixed-exchange ratio offers; 2) Floating-exchange ratio
offers; 3) Collar offers.7 Under a fixed-exchange offer the acquirer agrees to exchange a
fixed number of the target’s shares for its own shares. A floating-exchange offer specifies
the value of the acquirer’s stock to be exchanged for a target firm’s stock, therefore the
number of target’s stocks to be exchanged varies depending on the target firm’s share
price on acquisition completion date. A collar offer is a contract between acquirers and
targets which determines how the maximum or minimum number of target’s stocks that
will be exchanged with the acquirer’s stocks on completion date.8
For a fixed-exchange ratio stock merger, merger arbitrageurs simultaneously short
sell a fixed number of acquirer shares for every target share purchased (Mitchell, Pulvino
and Stafford, 2002). The short position in the acquirer’s shares is closed when the shares
owned in the target firm are exchanged for acquirer shares (Mitchell, Pulvino and
Stafford, 2002). This type of trading activity may cause a spike in volume around an
acquisition announcement similar to that observed in our sample of 80 securities (see
7 Biswas, Shubhomoy, Analyst, Lehman Brothers, Equity Derivatives Group. Personal Communication 8 Collar offers and floating-exchange offers are well beyond the scope of this paper and will not be elaborated any further.
10
Figure 3). Investors may view acquisition announcements as signals that the target’s
stock is undervalued, which results in an increase in demand of the target’s stock,
resulting in positive abnormal returns around an acquisition announcement. As
mentioned earlier, a cash financed merger is also understood as a signal that the
acquirer’s stock is fairly priced, whereas a stock financed, fixed-exchange ratio offer is
understood as a signal that the acquirer’s stock is overvalued. Thus, it is reasonable to
expect no abnormal returns for the acquiring firm in cash financed acquisitions and
negative abnormal returns in stock financed acquisitions. Tests of hypotheses are
discussed in Section 5.
3. Research and Data Selection Methodology
This section outlines the research objectives and model specifications. The event study
model used tests the null hypothesis of no abnormal returns for target and acquiring firms
around an acquisition announcement.
3.1 Research Objectives
When an acquisition is announced, a considerable amount of information is
revealed about the potential transaction,9 and this information can be used to assess the
stock market reaction to an acquisition announcement. We focus on three primary
research objectives:
1. Determine whether abnormal returns of target firms are significantly different from abnormal returns of acquiring firms;
9 This information is readily available on the Bloomberg terminal on announcement day.
11
2. Compare abnormal returns experienced by target versus acquiring firms in cash financed versus stock financed acquisitions;
3. Establish a relationship between abnormal returns, method of financing,
nature of bid and the size of deal premium.
To address objectives (2) and (3), comparisons between acquiring and target firms
are presented separately. For example, to determine whether abnormal returns are
affected by the nature of the bid, a comparison between hostile targets and friendly
targets will be considered, followed by a comparison between hostile acquirers and
friendly acquirers. This method is employed as past studies indicate that abnormal returns
between target and acquiring firms are considerably different. Furthermore, we have
already established the fundamentals behind why target firms experience relatively
greater abnormal returns as opposed to target firms, thus it is logical to treat them as
separate populations.
3.2 Research Methodology
This section describes the event study approach developed by Brown and Warner
(1985). The primary concerns which arise when using daily data when using an event
study approach are also discussed in detail. Specifications of the Ordinary Least Squares
(OLS) market model, which is a commonly used event study approach, are also specified.
3.2.1 The Event-Study Approach
The event study methodology has been found to be consistent and valid when
attempting to quantify any corporate event (Wooldridge and Snow, 1990). Capital
12
markets views corporate events such as stock splits, earnings announcements and merger
announcements as signals describing management’s future expectations. We have
established in Section 2 that a merger announcement drastically increases the volume of
shares traded on a given day. According to Halpern (1983), the first public announcement
is the most appropriate event date to gauge an event’s impact. Abnormal returns set in
slightly before the actual event date, which is usually caused by leaks in information or
even market anticipation (Keown and Pinkerton, 1981). Despite concerns of possible
insider trading activity, as long as the market does not fully anticipate an event, abnormal
activity will be observable as a result of that event. The next section outlines the
specifications of an event study approach used while examining the impact of acquisition
announcements.
3.2.2 Sample Selection and Data Description
All data has been gathered using a Bloomberg Terminal and Yahoo! Finance. The
Bloomberg Terminal has no data on acquisition announcements prior to January 1, 1997.
As a result, only merger announcements after this date between two publicly traded
companies are considered. Historical prices were not available on Yahoo! Finance for
tickers10 that are not active on one of the major indices, so only merger announcements
where the target’s ticker is still tracked against one of the indices are considered. The
total number of available merger announcements is 467. Of these, 40 announcements
were randomly chosen. 40 announcements imply the sample consists of 80 securities,
which is large enough to test the null hypothesis of no abnormal returns for target and
10 A ticker is a symbol used by market indices in identifying a security. For example the ticket for Exelon Corporation is EXC.
13
acquiring firms. Of the 40 announcement in our sample, 10 were hostile takeovers and
30 were friendly mergers, 19 announcements were cash financed, 9 used some form of
equity along with cash, and 13 were financed entirely by equity.
3.2.3 The OLS Market Model
To test for the existence of abnormal returns, a benchmark for normal returns in
required. A parameter estimation period as suggested by Brown and Warner (1985) is
used to calculate a stock’s Beta value. The Beta value is the slope coefficient obtained by
regressing the index’s returns to the stock’s returns, and is also a measure of the stock’s
volatility as compared with the market (Panayides and Gong, 2002). According to
Panayides and Gong (2002), an 11 day event window fully captures the effects of an
event of interest. The window begins 5 days prior to the event date and ends 5 days after.
According to Brown and Warner (1985) and Dyckman, Philbrick and Stephan (1984), a
parameter estimation period of 120 days is adequate since daily returns data for the 120
days prior to the event date are sufficient in formulating a benchmark for normal returns.
Additionally, care has been taken to ensure that, during the parameter estimation period,
no other corporate event, such as a stock split or an earnings announcement, is taking
place which may cause abnormal returns.11 Figure 4 provides a graphical depiction of the
event study approach, where the event window is [-5,5] days and the estimation window
is [-120,-5] days.
11 This was achieved by analyzing press releases of individual firms and observing that no significant abnormal returns were experienced by individual firms in the parameter estimation period.
14
Figure 4: Illustration of the Event Study Approach
In the first step, a regression is estimated using the returns on a given stock j and
the returns of a stock market index m. The slope coefficient, i
^
! , is the Beta value and i
^
!
is the y-intercept. Assuming a constant Beta12 value for a given stock j, we calculate the
estimated return of stock j in the event window period as follows.
(5) mtiiit RE
^^
!" +=
where itE is the expected return at time t, i
^
! and i
^
! are parameters of the regression
equation. i
^
! is the stock’s Beta value andmtR is the daily return on a stock market index
m at time t. The abnormal return is defined as the difference between the actual return on
a stock i and its expected return, itE . Therefore, the abnormal return of a stock i at time t
is given as equation (6).
12 Beta’s in the parameter estimation period and post event period were constant for all securities in this sample. The OLS market model was employed in the post event period, i.e. [5,120] day time window and a constant Beta value was observed for all securities in the parameter estimation period and post event period.
Parameter Estimation
Period
Event Period
Post Event
Period
15
(6) itititERAR !=
Once we have obtained the estimated equation, the actual return of a stock i at
time t is calculated using equation (7).
(7)
!
Rit
="^
i+ #^
iRmt
+ eit
Since mtiiit RE
^^
!" += , equation (7) simplifies to
!
Rit
= Emt + eit, which implies that
abnormal return of stock i at time t is simply given as equation (8).
(8)
!
ARit
= eit
The cumulative abnormal return for security i is the sum of abnormal returns in a given
time period [t0,t1].13
(9)
!
CARi(t0,t1) = AR
it
t= t0
t1
" = #it
t= t0
t1
"
The sample average abnormal return at time t, tAR , is the arithmetic mean of n stocks
13 It is important to note that that the estimated stock price is determined using the Parameter Estimation Period only, which is from 120 days to 5 days before the event. A common error which results in these types of studies is to regress the returns of the market to that of the stock for the entire period, including the event date, and then calculating the error terms as abnormal returns. This method results in an underestimation of abnormal returns.
16
(10) !=
=n
i
ittAR
nAR
1
1
The sample average cumulative abnormal average return of CAR from event time t0 to t1,
is the sum of tAR from t0 to t1.
(11) !=
=1
0
),( 10
t
tt
tARttCAR
To test the null hypothesis of no impact of a merger announcement on stock price,
the statistical significance of ),( 10 ttCAR and tAR is calculated according to Brown and
Warner (1980) and Panayides and Gong (2002). The test statistic is simply the ratio of
day t average abnormal returns to its estimated standard deviation, )(^
tARS , where
(12) )(/)(^
tttARARARt S=
(13) ])(*)(/[),()( 01
^
10 ttARttCARCARttS !=
Where 114/)(()( 26
119
^
ARARAR
t
t
tS != "!=
!= and !
"=
"=
=6
119114
1t
t
ARAR
The standard deviation is estimated from the time series of average abnormal returns
in the parameter estimation period. Time-series of average abnormal returns or portfolio
excess returns takes into account cross-sectional dependence in the security-specific
excess returns (Brown and Warner, 1980). However, the test statistic ignores any time-
17
series dependence in abnormal returns. Brown and Warner (1980) and later Panayides
and Gong (2002) have shown that benefits from autocorrelation adjustment appear to be
limited. Accordingly, no auto-correlation adjustments are made in this model. Several
issues that can potentially arise with daily data used in this study are discussed in the
following section. An illustration of how this model works is presented in Appendix A.
3.3 Issues Concerning Daily Data
Brown and Warner (1985) outlined several issues that should be taken into
consideration when choosing an event study model. These will be discussed very briefly,
followed by a brief description of excess return measures that may be used in an event
study to calculate abnormal returns. Based on the findings of Brown and Warner (1985)
an appropriate “Excess Return Measure” will be adopted.
To develop an appreciation of abnormal returns, a benchmark for measuring
normal performance is required. Brown and Warner (1980) originally used monthly data,
and described several techniques to calculate abnormal activity using an event study
approach.14 Their subsequent work involved the use of daily data, where they describe
problems pertaining to daily data. Brown and Warner (1985) note that daily data may
exhibit stock returns that are not normally distributed, and this raises the possibility of
daily returns exhibiting serial dependence. However, they conclude that methodologies
14 Brown and Warner (1980) used the Center of Research in Security Prices database to construct 250 samples, containing 50 securities. For each security they generated a hypothetical event month, where events were assumed to occur with equal probability each month. It is important to note that their work was a simulation where abnormal activity was induced, and did not actually occur.
18
based on the OLS market model are “well specified under a variety of conditions,”
including the use of daily price data (Brown and Warner, 1985). Several other authors
(Panayides and Gong, 2002; Davidson, Dutia and Cheng, 1989) have verified that the
OLS market model is well specified and provides the most accurate measure of abnormal
performance.
4. Analysis of Results
This section is divided into three parts. The first part involves applying the model to all
target firms and acquiring firms to compare abnormal returns of firms in two categories.
The second part compares abnormal returns of target firms with varying deal
specifications. The third part compares abnormal returns of acquiring firms with different
deal specifications.
4.1 Target Firms
There are 40 target firms in this sample. The average abnormal returns for each
target firm for the [-5, 5] day window, can be found in Appendix B. Abnormal returns for
each security are represented by their ticker symbols. The results for this sample’s
abnormal returns and associated tests of significance are summarized in Appendix C. The
evidence supporting the existence of abnormal returns surrounding the event day in this
sample of target firms is overwhelming. Average abnormal returns and cumulative
average abnormal returns around the event window are statistically significant.
19
Furthermore, the cumulative abnormal returns for the entire parameter estimation are
insignificant indicating that no major corporate event took place in the estimation period,
and that our initial Beta value estimates are accurate.
Target firms in this sample did not experience any abnormal performance during
the parameter estimation period, but when the acquisition announcement was made,
significant positive abnormal returns. Our data also indicates that abnormal returns are
maximized on the day of announcement and remain significant for one day following the
announcement. Two days after the announcement, no abnormal returns observed.
Abnormal returns are not statistically significant in the parameter estimation
period and post event period. However, on the event date abnormal returns are
statistically significant. On the announcement date, the average abnormal return for target
firms is 6.35 percent, and on day 1 it is 4.79 percent. Both these values are statistically
significant (p<0.0001). Also cumulative average abnormal returns are statistically
significant during the event window. Therefore, we conclude that target firms experience
positive, significant abnormal returns for a 3 day period around an acquisition
announcement. The following section provides an in-depth analysis of target firm
abnormal returns based on method of financing and nature of bid.
20
4.2 Method of Financing: Abnormal Returns of Target Firms in Cash versus Stock Financed Transactions
Acquirers can be classified in to two categories: financial buyers and strategic
buyers.15 Strategic buyers are those whose motivations for acquiring another firm are
potential synergies that would result from combining two firms. Our sample of 40
acquisition announcements has 13 stock financed, 9 cash and stock financed and 19 cash
financed transactions. Financial buyers are private equity funds who typically purchase
undervalued companies and later sell them for a profit once they are fairly valued.16
4.2.1 Target Firms Abnormal Returns in Cash Financed Acquisitions
A review of event study literature reveals that target firms in a cash financed acquisition
experience greater abnormal returns than in stock financed acquisitions (Travlos and
Waegelein, 1992; Myers and Majluf, 1987; Wansley, Lane and Yang, 1983). Most
researches suggest that the method of payment provides a valuable signal to the market
(Wansley, Lane and Yang, 1983). Target firms are expected to experience positive
abnormal returns. Preliminary evidence indicates that all target firms experienced
abnormal returns as a result of the acquisition announcement, but acquiring firms did not.
These results have been summarized in Table 1.
In our sample of 40 acquisition announcements, 19 transactions were cash
financed. As expected, the abnormal returns of target firms in cash financed transactions
are positive and significant (p<0.0001) on day 0 and day 1. Average abnormal return on 15 Singhal, Amit, Analyst, Morgan Stanley, Mergers and Acquisitions Group, Personal Communication 16 Biswas, Shubhomoy, Analyst, Lehman Brothers, Equity Derivatives Group. Personal Communication
21
day 0 is 6.54 percent, and on day 1 it is 4.57 percent. Average abnormal returns on day 0
are slightly greater than the average abnormal returns of all target firms on day 0.
Cumulative average abnormal returns for the parameter estimation period and post event
period are not significant. However, cumulative average abnormal returns in the event
period, i.e. in a [-5,5] day window, are positive and significant.
4.2.2 Target Firm Abnormal Returns in Transactions Employing Some Form of Equity
The sample of 40 acquiring firms consists of twenty one transactions in which
some form of equity is used as a financing method. Nine transactions were cash and stock
financed and twelve transactions were stock financed. Whenever a transaction uses any
form of equity as a financing method, investors can expect the consummation period of
such transactions to be longer than purely cash financed transactions (See Section 2.4.1).
Since investors expect greater uncertainty about merger consummation in stock financed
mergers, we would still expect positive abnormal returns for target firms, but they are
likely to be lesser than the abnormal returns of target firms in cash financed transactions.
For the sample of 21 acquisition announcements which used some form of equity
as a financing method, the average abnormal return on day 0 is 6.12 percent and on day 1
it is 4.98 percent and these are statistically significant (p<0.0001). Cumulative average
abnormal returns are not significant in the estimation period and post event period.
Although these abnormal returns are slightly less than those observed in cash financed
transactions, we do not have enough evidence to conclude that target firms in cash
financed acquisitions experience abnormal returns greater than target firms in stock
22
financed transactions. At this stage it is becoming increasingly clear that target firms
experience abnormal returns irrespective of deal specifications. Thus, a simple trading
strategy which involves simply buying a given target firm’s stocks on day 0 and
liquidating them on day 3 could prove to be very profitable.
4.3 Target Firm Abnormal Returns in Hostile Transactions
A hostile transaction is defined as one which goes against the management’s will.
These transactions involve a bid from the acquiring firm which is considerably greater
than a bid in a friendly transaction (Acquithe and Kim, 1982). Shareholders invariably
opt for the maximum value they can expect to receive in an acquisition. Therefore, it is
reasonable to expect that abnormal returns will be greater for target firms in hostile
transactions than friendly transactions because in hostile transactions the target firm is
likely to trade at a greater discount on acquisition announcement day than in a friendly
transaction. A review of the literature reveals varying results regarding this hypothesis.
Jensen and Ruback (1983) argue that returns to the target’s share holders are greater in
hostile transactions because a hostile transaction is one in which the price offered by the
acquirer is significantly greater than the existing market price of the target firm.17 Travlos
(1987) proposes an explanation for this hypothesis. He argues that since hostile takeovers
are usually cash transactions, and the difference in earlier findings between hostile and
friendly transactions is because researchers failed to control for the method of payment.
In our sample of 40 firms, there are 10 hostile transactions, of which only 3 are cash
17 Market price is determined by market capitalization, which is the total number of shares outstanding multiplied by the shares’ market price.
23
financed. This may be a limitation of the data set, but for now we will not control for the
method of payment variable.
We notice that in hostile transactions abnormal returns are greater on day 1 as
opposed to day 0 (See Table 1). On day 0 the average abnormal return is 5.96 percent and
on day 1 the abnormal return is 8.8 percent; both these figures are statistically significant
(p<0.0001). Also, cumulative average abnormal returns are insignificant in the estimation
and post event periods. Thus, it is reasonable to conclude that the nature of bid has an
impact on abnormal returns; this result has also been verified by Wansley, Lane and
Yang (1983). We also noticed a significant difference in abnormal returns with respect to
method of payment. The only limitation is that this is a much smaller sample size, 10
hostile acquisition announcements as opposed to 30 friendly acquisition announcements.
The following section provides an analysis of abnormal returns experienced by target
firms in friendly transactions.
4.4 Target Firm Abnormal Returns in Friendly Transactions
A friendly transaction is one for which the target firm’s management and
shareholders are in agreement that the transaction is desirable. Management’s agreement
indicates that the target firm views the transaction to be beneficial for them. This implies
that both parties are equally keen on the acquisition consummating. Therefore, the size of
the announced total value of a friendly offer is not likely to be significantly greater than
the company’s actual worth, where the announced total value is the total amount an
acquiring firm is willing to pay. If this is true, then market participants will revise their
24
expectation accordingly, and an increase in the target’s share price will not be as large as
in hostile transactions.
The abnormal returns on day 0 and day 1 for friendly offers are 6.47 percent and
3.45 percent respectively, and are also statistically significant (See Table 1). Again,
cumulative average abnormal returns are not significant in the estimation and post event
periods. Comparing these abnormal returns to those experienced by target firms in hostile
transactions (See Table 1) we can reasonably conclude that the nature of the bid is a
determinant of abnormal returns. The most striking observation is that abnormal returns
on day 1 for hostile transactions are significantly greater than abnormal returns on day 1
for friendly transactions. Our results provide compelling evidence that abnormal returns
are significantly greater in hostile transactions than friendly transactions for target firms.
Our analysis shows that abnormal returns are statistically significant for target
firms around an acquisition announcement. The method of financing does not have a
significant impact on abnormal returns. Considering the sample of 40 target firms,
abnormal returns were maximized on the announcement day; a similar pattern was
observed for both cash financed transactions and stock financed transactions. The greatest
abnormal returns for hostile transactions were on day 1, i.e. one day after the acquisition
announcement. The next section provides an in-depth analysis of acquiring firm’s stock
price movements surrounding an acquisition announcement. These results are
summarized in Table 1.
25
Table 1: Target Firm Average Abnormal Returns and Cumulative Average Abnormal Returns with Different Deal Specifications
** T-values are reported in parentheses. AAR on Day 0 and Day 1 are statistically significant (p<0.0001)
4.5 Acquiring Firms
There are 40 acquiring firms. Average abnormal returns for acquiring firms in a 10 day
period [-5,5] can be found in Appendix B. The results for average abnormal returns and
associated tests of significance for acquiring firms are given in Appendix C. The
cumulative average abnormal returns for the entire sample of 40 firms were insignificant
in the parameter estimation period and post event period. Abnormal returns were
significant only on the event day. However, cumulative average abnormal returns were
negative in the event window for all acquiring firms and these results were statistically
significant.
Sample Average
Abnormal Returns Cumulative Average Abnormal Returns
Sample
Size Day0 Day1 Day2 CAR [-119,-6]
CAR [-5,5]
CAR [6,12]
Target Firms 40 6.3% (17.32)
4.7% (13.07)
0.47% (1.24)
-0.0013 (-0.35)
0.121 (4.14)
0.0016 (0.44)
Target Firms in Cash Financed Acquisitions
19 6.59% (7.38)
4.57% (5.12)
-0.53% (-0.6)
-0.00074 (0.082)
0.1304 (8.28)
0.0031 (0.89)
Target Firms in Stock Financed
Transactions 21 6.12%
(7.22) 4.98% (5.88)
-0.38% (-0.454)
-0.00834 (-0.1034)
0.1139 (9.15)
0.00356 (0.56)
Target Firms involved in Hostile
Transactions 10 5.96%
(4.84) 8.8% (7.15)
-0.83% (-0.67)
0.000045 (0.084)
0.0972 (2.45)
0.089 (1.05)
Target Firms involved in
Friendly Transactions
30 6.47% (8.44)
3.45% (4.49)
-0.33% (-0.428)
0.00876 (0.324)
0.129 (5.07)
0.0098 (0.678)
26
4.6 Acquiring Firms Abnormal Returns in Cash Financed Transactions
An acquiring firm will chose cash as the method of financing, when managers
believe that their firm’s shares are fairly valued. If they believe that their company’s
stock is over valued, then financing a transaction using their company’s equity allows
managers to conduct a transaction in which they end up paying less than the announced
total amount18, by using their already over valued shares as a method of payment. In this
scenario market participants will eventually realize the acquiring firm’s true value, and
will adjust their expectations accordingly. By the time this process takes place an
acquiring firm would have already signed the contract regarding exchange of stock with
the target firm. This case is most obvious in fixed-exchange stock transactions as opposed
to floating-exchange transactions or collar transactions.
As indicated in Appendix C, the abnormal returns in cash financed transactions
for acquiring firms are -0.7 percent and -0.82 percent on day 0 and day 1 respectively.
Cumulative average abnormal returns in the event window, [-5,5] days, are not
statistically significant, therefore it is reasonable to conclude that acquiring firms
experience no abnormal performance in cash financed transactions in the period
surrounding an acquisition announcement.
18 The announced total amount for a purely stock financed fixed-exchange transaction would be the number of shares committed to financing the transaction multiplied by the current market price. In the scenario described, this market price is greater than the acquiring firm’s fair value. Thus, managers will end up paying a lesser amount than the announced total value.
27
4.7 Acquiring Firms Abnormal Returns in transactions employing some form of Equity
The sample of 40 acquiring firms includes 21 transactions where some form of
equity was used to finance the acquisition. Average abnormal returns on Day 0 are
negative and significant, but on Day 1 they are insignificant. Cumulative average
abnormal returns in the event window were negative and statistically significant (See
Figure C-8 in Appendix C). Furthermore, cumulative average abnormal returns were
insignificant in the estimation and post event periods. These results indicate that when
some form of equity is used as a financing method, market participants treat it as a signal
that the acquiring firm’s stock is over valued. They accordingly adjust their expectations,
resulting in a negative impact on the acquiring firm’s stock price.
4.8 Acquiring Firms Abnormal Returns in Hostile versus Friendly Transactions
An acquiring firm may initiate a hostile transaction if it values a given target firm
at a price higher than the target firm’s existing market price. The acquirer will make a
hostile bid only if it feels that potential synergies outweigh the premium which the
acquirer is currently willing to pay (Travlos, 1987). Market participants, however, may
view a hostile bid as a desperate attempt on the acquirer’s part to buy a target firm to
improve the acquirer’s business outlook. This sends a negative signal to participants, who
may speculate that the acquirer’s stock is over valued (Wanseley, Lane and Yang, 1983),
based on that it is reasonable to expect negative abnormal returns for acquiring firms
involved in hostile transactions.
28
As summarized in Table 2, the average abnormal returns on day 0 and day 1 are -
0.37 percent and -2.05 percent, although only average abnormal returns on Day 1 are
significant. Thus, we notice that acquiring firms experience negative abnormal returns in
hostile transactions immediately after the acquisition announcement, but not on the
announcement date. Cumulative average abnormal returns in the event window are
statistically significant and negative (p<0.005). Cumulative average abnormal returns
were greater than those observed in friendly transactions. It remains unclear why
acquiring firms in hostile transactions experience negative abnormal returns on Day 1 and
not on Day 0. We have already observed that abnormal returns for target firms were
maximized on Day 1 and not Day 0. One possible explanation is that hostile transactions
are less likely to consummate than friendly transactions, because there is a greater risk
profile associated with them.
The sample of 30 acquiring firms involved in friendly transactions experienced no
abnormal returns in the period surrounding the acquisition announcement. As proposed
by our preliminary hypothesis, no abnormal returns are observed for acquiring firms
engaged in friendly transactions, cumulative average abnormal returns are also
insignificant in the event window. Average abnormal returns and cumulative average
abnormal returns for acquiring firms are summarized in Table 2.
29
Table 2: Acquiring Firm Average Abnormal Returns and Cumulative Average Abnormal Returns with Different Deal Specifications
Sample Average Abnormal Returns
Cumulative Average Abnormal Returns
Sample Size Day0 Day1 Day2 CAR[-119,-6] CAR[-5,5] CAR[6,12]
Acquiring Firms 40 -0.95% (-2.59)
-0.44% (-1.18)
-0.48% (-1.31)
0.0025 (0.070)
-0.0289 (-2.42)
-0.0061 (0.76)
Acquiring Firms in Cash Financed Acquisitions
19 -0.7% (-1.04)
-1.2% (-2.33)
-0.42% (-1.15)
-0.000021 (0.00032)
-0.0216 (-1.89)
0.0012 (0.16)
Acquiring Firms in Stock Financed
Transactions 21 -1.09%
(-1.94) -0.04% (-0.06)
-0.77% (-
0.981)
-0.0000834 (-0.0001034)
-0.03 (-2.65)
0.000256 (0.026)
Acquiring Firms involved in Hostile
Transactions 10 -0.37%
(-0.611) -2.05
(-3.42) -0.75% (-1.25)
0.0000007 (0.0012)
-0.064 (-3.37)
0.0124 (-1.034)
Acquiring Firms involved in
Friendly Transactions
30 -0.25% (-0.418)
-0.58% (-0.98)
-0.33% (-
0.558)
0.00000048 (0.000074)
0.0209 (1.1)
0.0032 (-0.266)
** Associated t-values are reported in parentheses. P-values can be calculated using statistical tables
5. A proposed model for predicting abnormal performance
As summarized in Table 1 and 2 abnormal returns for target firms are significant on Day
0 or Day 1. In some instances abnormal performance is also observed on Day -1, which
may result from leakages in information. This section describes a model for predicting
abnormal performance. The model uses information about the pending acquisition
transaction which is made available on announcement date. The dependent variable in
this model is cumulative abnormal return in a [0,1] day time window. Cumulative
abnormal return for a security j, ]1,0[jCAR , is defined as the sum of abnormal returns
observed on Day 0 and Day 1. Equation (12) illustrates.
(12) 10]1,0[ jjj ARARCAR +=
30
The Bloomberg terminal provides substantial information regarding deal specification on
the announcement day, which will serve as independent variables in this linear regression
model. We have already established that acquiring firms and target firms are separate
populations, the model will be applied to target firms and acquiring firms separately.
1. Deal Premium: The total value paid by the acquirer in excess of a target firm’s pre-announcement date market capitalization. Our preliminary hypothesis predicts a positive relationship between the absolute value of ]1,0[jCAR and Deal Premium.19 Data for this variable has been obtained from the Bloomberg terminal; both the market capitalization and deal premium were publicly available on the announcement day. In the proposed model we will consider the natural log of this variable.20 Using natural logs makes it easier to interpret regression results, since
jCAR is the sum of two percentages, and is therefore a percentage as well.
2. Nature of Bid: The dependent variables, nature of bid can be either hostile or friendly. Our linear regression model will make use of dummy variables when accounting for its impact on ]1,0[jCAR , using 1 for hostile transactions and 0 for friendly transactions.
3. Method of Financing: The dependent variable, method of financing, uses a value of 1 for cash only transactions and a value of 0 for transactions employing some form of equity.
This model intends to isolate the impact of each variable. The proposed linear
regression model is given in (13) as Specification I:
(13) )()(]1,0[ 210 FINANCINGOFMETHODBIDOFNATURECAR j !!" ++=
+ β3(DEAL PREMIUM) + β4(METHOD OF FINANCING *
NATURE OF BID) + εj
19 A negative deal premium is defined as deal discount. 20 For deal discounts, (i.e. negative deal premiums) natural log of the inverse of the absolute value is considered. For example, a deal premium of -2 is calculated as ln(1/2).
31
A robust regression was carried out to account for heteroscedasticity consistent standard
errors. Results for target firms and acquiring firms are reported in Table 3 and Table 5
respectively.
Table 3: OLS Regression Estimation Results for Target Firms
Explanatory Variables: Coefficients t-statistics P-value Nature of Bid -0.037 -0.62 0.537 Method of Financing -0.034 -0.78 0.442 Nature of Bid x Method of Financing 0.14 1.97 0.048 Ln(Deal Premium) 0.053 3.49 0.001 Constant -0.028 -0.49 0.625 Number of observations 40 F-statistic (joint significance) 4.25 Prob > F 0.0066 R-squared 0.2785
Two variables are significant at α=0.05, Nature of Bid x Method of Financing and Deal
Premium. Our results indicate that hostile transactions which are cash financed are
significant determinants of abnormal returns for target firms. Also, we observe that the
size of deal premium is positively correlated with the size of abnormal returns. Results
also indicate that there is a 5.3% increase in deal premium corresponds to a percentage
increase in cumulative abnormal returns in a [0,1] day window for target firms. Minimal
multi co-linearity was observed in this regression; the results are shown in Table 4.
Table 4: Multi Co-linearity Matrix of Independent Variables
Deal Premium Nature of Bid Method of Financing Deal Premium 1 Nature of Bid 0.1713 1 Method of Financing -0.086 -0.2366 1
32
Table 5: OLS Regression Estimation Results for Acquiring Firms
Explanatory Variables: Coefficients t-statistics P-value Nature of Bid -0.003 -0.13 0.895 Method of Financing -0.0084 -0.78 0.442 Nature of Bid x Method of Financing -0.04 -0.83 0.414 Ln(Deal Premium) -0.00415 0.97 0.001 Constant 0.0072 0.57 0.571 Number of observations 40 F-statistic (joint significance) 0.57 Prob > F 0.0.6868 R-squared 0.1161
Our results indicate that none of the explanatory variables are significant, and that
acquiring firms do not experience significant abnormal returns. In the case of target
firms, deal premium indicates that a major market participant is valuing a given target
firm at a price higher than the current market price. In case of the acquiring firm, no new
information is revealed which can directly contribute to an increase share price. Also, a
target firm is likely to get acquired by any other acquirer, whereas it is less likely that the
acquirer announcing the acquisition will successfully purchase that particular target firm.
Therefore, based on our results we can conclude that an acquisition announcement causes
a revision of expectations by market participants about the target firms, but not
necessarily about the acquiring firms.
6. Limitations of this Study and Recommendations for further Research
Numerous studies (Asquithe and Kim, 1982; Mitchell, Pulvino and Stafford, 2002) have
established that target firm’s share price experience positive abnormal returns because of
an acquisition announcement, and acquiring firms’ share price remains unaffected. Even
33
though acquiring firms share experience no abnormal returns, there is a considerable
spike in volume. Further research on this issue can be conducted for stock financed
transactions with varying share- exchange agreements. For example Market participants
are likely to respond differently to floating exchange-ratio offers as compared with fixed-
exchange ratio offers (Mitchell, Pulvino and Stafford, 2002). Similarly, collar offers may
provide further insights in gauging the relationship between acquisition announcement
and share-exchange specifications.
As is the case with most event studies, it is difficult to use larger samples because
a security’s abnormal returns have to be calculated individually. Using larger samples,
however, can allow us more robust tests of hypotheses. Another approach would be to
use a different event study models to test the same hypothesis. For example instead of
using the market index, an industries’ index may be used. Finally, further research can be
conducted by using a sample of similar size, but performing more extensive analysis and
controlling for several variables when analyzing the impact of a single variable. For
example, to gauge the impact of hostile transactions on acquiring firms more fully, we
should control for method of financing variables.
7. Conclusion
This study had three primary objectives. First, we sought to determine whether abnormal
returns of target firms are significantly different from abnormal returns of acquiring
firms. Second, we compared abnormal returns experienced by target versus acquiring
34
firms in cash financed versus stock financed acquisitions. Third, we examined a potential
relationship between abnormal returns and nature of bid. This research’s major result is
the linear regression model proposed in Section 5. The proposed model works very well
in predicting abnormal performance, but can be further improved by adding more
explanatory variables.
The research found, as hypothesized, that abnormal returns of target firms are
significantly different from acquiring firms. In the sample of 40 acquisitions
announcements, target firms experienced positive abnormal returns irrespective of deal
specifications. Acquiring firms experienced negative, significant abnormal returns in
stock financed transactions on event day. Acquiring firms in hostile transactions
experienced negative, significant abnormal returns on Day 1 as opposed to event day, and
acquiring firms in friendly transactions experienced no abnormal returns. By analyzing
publicly available information, this research has analyzed the stock market reaction to
acquisition announcements and identified the deal premium as an important determinant
of abnormal returns.
35
Bibliography
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Mitchell, M. T. Pulvino and E. Stafford, “Limited Arbitrage in Equity Markets,” The Journal of Finance, Vol. 57, No. 2 (2002) Myers, S.C., and N.S. Majluf, “Corporate Financing and Investment Decisions when firms have information investors do not have,” Journal of Financial Economics, Vol 13, (1984) Panayides, M. and X. Gong. “The Stock Market Reaction to Merger and Acquisition Announcements in Liner Shipping” International Journal of Maritime Economics, Vol. 4. (2002) Ravenscraft, D. J. and F. Scherer. Mergers, Sell-offs and Economic Efficiency. Washington, DC: The Brookings Institution (1987) Salinger, M. “Value Event Studies.” The Review of Economics and Statistics, Vol. 74, No. 4. (1992). Travlos, N. “Corporate Takeover Bids, Method of Payment, and Bidding Firms’ Stock Returns.” The Journal of Finance, Vol. 42, No.4. (1987) Travlos, N. and J. Waegelein, “Executive compensation, method of payment and abnormal returns to bidding firms at takeover announcements” Journal of Financial Economics Vol. 13. (1992) Woolridge, J. and C. Snow. “Stock Market Reaction to Strategic Investment Decisions.” Strategic Management Journal, Vol. 11, No.5. (1990) Wansley, J. W. Lane and H. Yang, “Abnormal Returns to Acquired Firms by Type of Acquisition and the Method of Payment,” Financial Management, Volume 12, pp 16-22 (1983)
37
Appendix A
Figure A-1: Histogram Plots for Consummation Periods of Cash and Stock Financed Acquisitions
Cash Financed Transactions Equity Financed Transactions
0.002
.004
.006
.008
.01
Density
0 50 100 150 200 250ConsummationPeriod
0.002
.004
.006
.008
Density
0 200 400 600 800ConsummationPeriod1
Figure A-2: An Illustration of the OLS Market Model used in Calculating Abnormal Returns
The shaded area represents cumulative abnormal returns.
38
Appendix B
Figure B-1: Target Firms Exhibiting Positive Abnormal Returns Surrounding Event Day Target Firm Abnormal Returns [-5,5] day time window
-0.05
0
0.05
0.1
0.15
0.2
0.25
-5 -4 -3 -2 -1 0 1 2 3 4 5
Day
AR
(%)
azrAR footAR nfbAR scAR ivilAR
Target Firm Abnormal Returns [-5,5] day time window
-0.05
0
0.05
0.1
0.15
0.2
0.25
0.3
-5 -4 -3 -2 -1 0 1 2 3 4 5
Day
AR
(%)
kriAR icbsAR jillAR lexrAR msbkAR Target Firms Abnormal Returns for [-5,5] day time window
-0.05
0
0.05
0.1
0.15
0.2
0.25
-5 -4 -3 -2 -1 0 1 2 3 4 5
Day
AR
(%)
adrxAR psegAR adexAR xltcAR jmdtAR
Target Firm Abnormal Returns in a [-5,5] day time window
-0.05
0
0.05
0.1
0.15
0.2
0.25
-5 -4 -3 -2 -1 0 1 2 3 4 5
Day
AR
(%)
prvdAR gdtAR nwecAR cscAR atsn1AR
Target Firm Abnormal Returns for [-5,5] day time window
-0.05
0
0.05
0.1
0.15
0.2
0.25
0.3
-5 -4 -3 -2 -1 0 1 2 3 4 5
Day
AR
(%)
idnxAR remAR atsnAR sfaAR pumpAR
Target Firm Abnormal Returns in a [-5,5] day time window
-0.25
-0.2
-0.15
-0.1
-0.05
0
0.05
0.1
0.15
0.2
0.25
-5 -4 -3 -2 -1 0 1 2 3 4 5
Day
AR
(%)
gdt1AR mygAR cdrAR mrxAR shuAR
Target Firm Abnormal Returns in a [-5,5] day time window
-0.05
0
0.05
0.1
0.15
0.2
0.25
-5 -4 -3 -2 -1 0 1 2 3 4 5
Day
AR
(%)
wsbAR ariAR antAR absAR
Target Firm Abnormal Returns in a [-5,5] day time window
-0.1
-0.05
0
0.05
0.1
0.15
0.2
0.25
0.3
-5 -4 -3 -2 -1 0 1 2 3 4 5
Day
AR
(%)
pixrAR bsxAR museAR coaAR
39
Figure B-2: Acquiring Firms Abnormal Returns Surrounding Event Day Acquiring Firm Abnormal Returns for [-5,5] day time window
-0.1
-0.05
0
0.05
0.1
0.15
0.2
0.25
-5 -4 -3 -2 -1 0 1 2 3 4 5
Day
AR
(%)
ahAR geAR mniAR sovAR tlbAR
Acquiring Firms Abnormal Returns in a [5,5] day time window
-0.1
-0.05
0
0.05
0.1
0.15
0.2
0.25
-5 -4 -3 -2 -1 0 1 2 3 4 5
Day
AR
(%)
stxAR impqAR pnkAR fcbpAR cofAR Acquiring Firms Abnormal Returns in a [-5,5] day time window
-0.1
-0.05
0
0.05
0.1
0.15
0.2
0.25
-5 -4 -3 -2 -1 0 1 2 3 4 5
Day
AR
(%)
muacAR bbtAR wpiAR excAR klacAR
Acquiring Firms Abnormal Returns in a [-5,5] day time window
-0.1
-0.05
0
0.05
0.1
0.15
0.2
0.25
-5 -4 -3 -2 -1 0 1 2 3 4 5
Day
AR
(%)
ge1AR gdAR cohAR wisAR helxAR Acquiring Firms Abnormal Returns in a [-5,5] day time window
-0.1
-0.05
0
0.05
0.1
0.15
0.2
0.25
-5 -4 -3 -2 -1 0 1 2 3 4 5
Day
AR
(%)
svuAR disAR abtAR emrAR cscoAR
Acquiring Firms Abnormal Returns in a [-5,5] day time window
-0.1
-0.05
0
0.05
0.1
0.15
0.2
0.25
-5 -4 -3 -2 -1 0 1 2 3 4 5
Day
AR
(%)
jnjAR ertAR ibmAR lAR jnj1AR
Acquiring Firms Abnormal Returns in a [-5,5] day time window
-0.15
-0.1
-0.05
0
0.05
0.1
0.15
0.2
0.25
-5 -4 -3 -2 -1 0 1 2 3 4 5
Day
AR
(%)
lizAR bkhAR caAR thoAR belfAR
Acquiring Firms Abnormal Returns in a [-5,5] day time window
-0.15
-0.1
-0.05
0
0.05
0.1
0.15
0.2
0.25
-5 -4 -3 -2 -1 0 1 2 3 4 5
Day
AR
(%)
bsxAR whrAR eqyAR mntAR psaAR
40
Appendix C Figure C-1: Average Abnormal Returns for the Sample of 40 Target Firms
Average Abnormal Returns
-1.00%
0.00%
1.00%
2.00%
3.00%
4.00%
5.00%
6.00%
7.00%
10 -9 -8 -7 -6 -5 -4 -3 -2 -1 0 1 2 3 4 5 6 7 8 9
Day
AR
(%)
AR(%)
Cumulative Abnormal Average Returns for Target Firms
Cumulative Abnormal Returns
-0.04
-0.02
0
0.02
0.04
0.06
0.08
0.1
0.12
0.14
-119
-111
-103 -95
-87
-79
-71
-63
-55
-47
-39
-31
-23
-15 -7 1 9
Day
CAR
CAR
Day AR(%) t(AR) 10 0.22% 0.6 -9 0.76% 2.07 -8 0.06% 0.17 -7 -0.42% -1.15 -6 0.28% 0.77 -5 0.05% 0.15 -4 0.33% 0.91 -3 -0.14% -0.37 -2 0.15% 0.42 -1 0.70% 1.9 0 6.35% 17.33 1 4.79% 13.07 2 -0.45% -1.24 3 0.39% 1.06 4 -0.03% -0.09 5 0.04% 0.11 6 -0.14% -0.38 7 -0.22% -0.6 8 -0.43% -1.16 9 0.48% 1.31
41
Figure C-2: Target Firm Average Abnormal Returns in Cash Financed Transactions
Average Abnormal Returns
-2.00%
-1.00%
0.00%
1.00%
2.00%
3.00%
4.00%
5.00%
6.00%
7.00%
-10 -8 -6 -4 -2 0 2 4 6 8 10
Day
AR
(%)
AR(%)
Target Firm Cumulative Average Abnormal Returns in Cash Transactions
Cumulative Abnormal Returns
-0.06
-0.04
-0.02
0
0.02
0.04
0.06
0.08
0.1
0.12
0.14
0.16
-118
-112
-106
-100 -9
4-88
-82
-76
-70
-64
-58
-52
-46
-40
-34
-28
-22
-16
-10 -4 2 8
Day
CA
R
CAR
Figure C-3: Target Firm Average Abnormal Returns in Stock Financed Transactions
Day AR(%) t(AR) -10 0.56% 0.63 -9 0.74% 0.83 -8 0.59% 0.67 -7 -0.09% -0.10 -6 0.74% 0.83 -5 -0.34% -0.38 -4 0.39% 0.44 -3 -0.34% -0.38 -2 0.33% 0.37 -1 1.33% 1.49 0 6.59% 7.38 1 4.57% 5.12 2 -0.53% -0.60 3 1.58% 1.77 4 -0.22% -0.25 5 -0.32% -0.36 6 -0.27% -0.30 7 -0.38% -0.42 8 -0.91% -1.02 9 -0.20% -0.23 10 0.25% 0.28
Day AR(%) t(AR)
42
Average Abnormal Returns
-2.00%
-1.00%
0.00%
1.00%
2.00%
3.00%
4.00%
5.00%
6.00%
7.00%
-10 -8 -6 -4 -2 0 2 4 6 8 10
Day
AR
(%)
AR(%)
Target Firm Cumulative Average Abnormal Returns in Stock Financed Transactions
Cumulative Abnormal Returns
-0.04
-0.02
0
0.02
0.04
0.06
0.08
0.1
0.12
0.14
0.16
-117
-111
-105 -9
9-93
-87
-81
-75
-69
-63
-57
-51
-45
-39
-33
-27
-21
-15 -9 -3 3 9
Day
CA
R
-10 -0.09% -0.10361 -9 0.77% 0.910797 -8 -0.42% -0.49814 -7 -0.72% -0.85434 -6 -0.13% -0.15869 -5 0.41% 0.480075 -4 0.28% 0.333445 -3 0.05% 0.060445 -2 -0.01% -0.01122 -1 0.12% 0.140627 0 6.12% 7.229016 1 4.98% 5.88143 2 -0.38% -0.45453 3 -0.69% -0.81149 4 0.14% 0.163418 5 0.37% 0.436244 6 -0.03% -0.03285 7 -0.08% -0.0931 8 0.02% 0.019706 9 1.10% 1.300695 10 1.16% 1.374686
43
Figure C-4: Target Firm Average Abnormal Returns for Hostile Transactions
Average Abnormal Returns
-3.50%
-1.50%
0.50%
2.50%
4.50%
6.50%
8.50%
-10 -8 -6 -4 -2 0 2 4 6 8 10
Day
AR
(%)
AR(%)
Target Firm Cumulative Average Abnormal Returns in Hostile Transactions
Cumulative Abnormal Returns
-0.04
-0.02
0
0.02
0.04
0.06
0.08
0.1
0.12
0.14
0.16
-118
-112
-106
-100 -9
4-88
-82
-76
-70
-64
-58
-52
-46
-40
-34
-28
-22
-16
-10 -4 2 8
Day
CA
R
CAR
Day AR(%) t(AR) -10 0.03% 0.023426 -9 0.59% 0.479797 -8 -0.61% -0.49904 -7 -1.09% -0.88859 -6 -0.09% -0.06955 -5 -0.19% -0.15462 -4 -0.40% -0.32586 -3 -1.14% -0.92937 -2 0.16% 0.127825 -1 -1.18% -0.95748 0 5.96% 4.843802 1 8.80% 7.152197 2 -0.83% -0.67641 3 -1.80% -1.46153 4 0.25% 0.20622 5 0.10% 0.07727 6 0.18% 0.148956 7 -0.36% -0.29387 8 -0.29% -0.23979 9 2.70% 2.193256 10 2.08% 1.689571
44
Figure C-5: Target Firm Average Abnormal Returns for Friendly Transactions
Average Abnormal Returns
-1.00%
0.00%
1.00%
2.00%
3.00%
4.00%
5.00%
6.00%
7.00%
-10 -8 -6 -4 -2 0 2 4 6 8 10
Day
AR
(%)
AR(%)
Target Firm Cumulative Average Abnormal Returns in Friendly Transactions
Cumulative Abnormal Returns
-0.06
-0.04
-0.02
0
0.02
0.04
0.06
0.08
0.1
0.12
0.14
-118
-112
-106
-100 -9
4-88
-82
-76
-70
-64
-58
-52
-46
-40
-34
-28
-22
-16
-10 -4 2 8
Day
CA
R
Day AR(%) t(AR) -10 0.28% 0.370774 -9 0.81% 1.058395 -8 0.29% 0.372738 -7 -0.20% -0.26023 -6 0.41% 0.52878 -5 0.13% 0.175537 -4 0.58% 0.755276 -3 0.20% 0.261154 -2 0.15% 0.199146 -1 1.32% 1.720806 0 6.47% 8.441379 1 3.45% 4.49917 2 -0.33% -0.42883 3 1.12% 1.459144 4 -0.13% -0.16893 5 0.02% 0.03003 6 -0.25% -0.32442 7 -0.17% -0.22546 8 -0.47% -0.61117 9 -0.26% -0.33612 10 0.28% 0.366817
45
Figure C-6: Average Abnormal Returns for the Sample of 40 Acquiring Firms
Average Abnormal Returns
-1.00%
0.00%
1.00%
2.00%
3.00%
4.00%
5.00%
6.00%
7.00%
-10 -8 -6 -4 -2 0 2 4 6 8 10
Day
AR
(%)
AR(%)
Acquiring Firms Cumulative Average Abnormal Returns
Cumulative Abnormal Returns
-0.06
-0.04
-0.02
0
0.02
0.04
0.06
0.08
0.1
0.12
0.14
-119
-111
-103 -95
-87
-79
-71
-63
-55
-47
-39
-31
-23
-15 -7 1 9
Day
CAR
CAR
Day AR(%) t(AR) -10 -0.20% -0.55696 -9 0.05% 0.134156 -8 -0.21% -0.56267 -7 0.24% 0.667394 -6 0.08% 0.220335 -5 -0.32% -0.86127 -4 0.08% 0.220131 -3 -0.02% -0.05133 -2 -0.17% -0.47351 -1 -0.28% -0.75524 0 -0.95% -2.59134 1 -0.44% -1.18775 2 -0.48% -1.3141 3 0.20% 0.537012 4 -0.44% -1.19715 5 -0.08% -0.2168 6 -0.23% -0.62524 7 -0.20% -0.5317 8 -0.17% -0.45867 9 0.12% 0.324196 10 -0.15% -0.39615
46
Figure C-7: Acquiring Firm Average Abnormal Returns for Cash Transactions
Average Abnormal Returns
-2.00%
-1.00%
0.00%
1.00%
2.00%
3.00%
4.00%
5.00%
6.00%
7.00%
-10 -8 -6 -4 -2 0 2 4 6 8 10
Day
AR
(%)
AR(%)
Acquiring Firm Cumulative Average Abnormal Returns in Cash Transactions
Cumulative Abnormal Returns
-0.04
-0.02
0
0.02
0.04
0.06
0.08
0.1
0.12
0.14
-117
-111
-105 -9
9-93
-87
-81
-75
-69
-63
-57
-51
-45
-39
-33
-27
-21
-15 -9 -3 3 9
Day
CA
R
Day AR(%) t(AR) -10 0.37% 1.014396 -9 -0.10% -0.27479 -8 -0.27% -0.74926 -7 -0.27% -0.75003 -6 0.24% 0.66267 -5 0.20% 0.543338 -4 -0.59% -1.65195 -3 -0.29% -0.81795 -2 0.63% 1.744371 -1 0.21% 0.592471 0 -0.70% -1.94382 1 -0.82% -2.33391 2 -0.42% -1.15589 3 -0.26% -0.7329 4 0.25% 0.705675 5 0.02% 0.042301 6 0.32% 0.888434 7 0.07% 0.206151 8 0.01% 0.014307 9 -0.03% -0.08584 10 -0.25% -0.68445
47
Figure C-8: Acquiring Firm Average Abnormal Returns for Stock Transactions
Average Abnormal Returns
-2.00%
-1.00%
0.00%
1.00%
2.00%
3.00%
4.00%
5.00%
6.00%
7.00%
-10 -8 -6 -4 -2 0 2 4 6 8 10
Day
AR
(%)
AR(%)
Acquiring Firm Cumulative Average Abnormal Returns in Stock Transactions
Cumulative Abnormal Returns
-0.11
-0.06
-0.01
0.04
0.09
0.14
-116
-110
-104 -9
8-92
-86
-80
-74
-68
-62
-56
-50
-44
-38
-32
-26
-20
-14 -8 -2 4
10
Day
CA
R
CAR
Day AR(%) t(AR) -10 -0.21% 0.626707 -9 0.45% 0.561695 -8 -0.34% -0.48902 -7 0.22% 0.234565 -6 0.01% 0.122259 -5 0.23% 0.280042 -4 -0.04% -0.10428 -3 0.02% -0.0342 -2 0.30% 0.364627 -1 -0.70% -0.91037 0 -1.09% -1.94273 1 -0.04% -0.06285 2 -0.77% -0.9817 3 -0.45% -0.55584 4 -0.60% -0.652 5 0.09% 0.097343 6 -0.76% -1.0809 7 -0.66% -0.73482 8 -0.18% -0.47493 9 -0.53% -0.65159 10 -0.28% -0.43428
48
Figure C-9: Acquiring Firm Average Abnormal Returns for Hostile Transactions
Average Abnormal Returns
-3.00%
-2.00%
-1.00%
0.00%
1.00%
2.00%
3.00%
4.00%
5.00%
6.00%
7.00%
-10 -8 -6 -4 -2 0 2 4 6 8 10
Day
AR
(%)
AR(%)
Acquiring Firm Cumulative Average Abnormal Returns in Hostile Transactions
Cumuative Abnormal Returns
-0.07
-0.02
0.03
0.08
0.13
-119
-111
-103 -95
-87
-79
-71
-63
-55
-47
-39
-31
-23
-15 -7 1 9
Day
CAR
CAR
Day AR(%) t(AR) -10 0.93% 1.552245 -9 0.18% 0.292676 -8 0.49% 0.825516 -7 -0.78% -1.29647 -6 0.56% 0.92805 -5 0.09% 0.158252 -4 -0.34% -0.56564 -3 -0.21% -0.35085 -2 0.30% 0.497481 -1 -0.01% -0.00937 0 -0.37% -0.61109 1 -2.05% -3.42774 2 -0.75% -1.25403 3 -1.37% -2.28252 4 0.33% 0.544746 5 -0.27% -0.45221 6 -0.26% -0.43474 7 -0.28% -0.46985 8 -0.19% -0.32188 9 -0.76% -1.26262 10 0.25% 0.421381
49
Figure C-10: Acquiring Firm Average Abnormal Returns for Friendly Transactions
Average Abnormal Returns
-1.00%
0.00%
1.00%
2.00%
3.00%
4.00%
5.00%
6.00%
7.00%
-10 -8 -6 -4 -2 0 2 4 6 8 10
Day
AR
(%)
AR(%)
Acquiring Firm Cumulative Average Abnormal Returns in Friendly Transactions
Cumulative Abnormal Returns
-0.1
-0.05
0
0.05
0.1
-119
-111
-103 -95
-87
-79
-71
-63
-55
-47
-39
-31
-23
-15 -7 1 9
Day
CAR
CAR
Day AR(%) t(AR) -10 0.22% 0.370953 -9 -0.33% -0.55995 -8 -0.10% -0.16835 -7 -0.02% -0.02689 -6 0.14% 0.238228 -5 0.08% 0.128781 -4 -0.31% -0.52131 -3 0.18% 0.300903 -2 -0.12% -0.21083 -1 -0.23% -0.38868 0 -0.25% -0.41819 1 -0.58% -0.98443 2 -0.33% -0.55853 3 -0.19% -0.31502 4 0.15% 0.260049 5 -0.49% -0.83765 6 -0.02% -0.03229 7 -0.21% -0.35841 8 -0.20% -0.33108 9 0.03% 0.047726 10 0.07% 0.125683
