This study aims to investigate short-term market reaction, including stock returns, volatility, and trading volumes of bidder firms, around the announcement dates of relevant merger and acquisition (M&A) transactions in the Eurozone during the sixth takeover wave. We emphasize the observed change in the behavior in the reaction of investors while acquiring firms in the transactions before the global financial crisis.
We use the classical Brown and Warner (1985) event studies method, and Corrado’s (1989) non-parametric test of ranks to detect abnormal behavior during the days being examined. The results allow us to make inferences about the relevance of the information released during the transaction announcement period. We add to the classical study of returns the use of a more powerful framework that investigates not only the abnormal returns but also their volatility and the abnormal changes in trading volumes around the announcement dates.
Our results indicate that M&A announcements convey relevant information to investors. Furthermore, we show that investors seem to adjust their investment portfolio to this new information. For the constituents of the Eurostoxx 50, there is no change in returns, while the short-term reaction is positive and highly significant in terms of volatility of returns and trading volume. Our framework, which includes not only returns but also volatility and volume, is particularly useful when M&A news are not probably interpreted equally by all the investors, and therefore we cannot observe a direct response directly in the returns.
This finding contrasts with previous similar studies in the nineties in Europe that did not use the framework of returns, volatilities and volumes by looking only to the returns aspect. In addition, the most compelling results were, on one side, that we found more significant reaction in the sub segment of large transactions, and null reaction on average in the sub segment of smaller transactions, and, on the other side, that we found relevant reaction in the period before crisis and null on average for the period after the crisis.
To our best knowledge, this is the first study to analyse the market reaction to big M&A announcements by European companies during the sixth wave. We also contribute to the existing literature by being the first study to examine the European M&A market using three indicators of market reaction.