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European mega deals during the sixth merger wave. Is the legal origin of the bidder and the target a determinant of short-term investor reaction?

Monica Martinez-Blasco

Francesc Martori

Xavier Auguets-Pratsobrerroca

DOI: 10.26595/eamr.2014.4.2.2

Abstract

In the context of the mega merger and acquisition announcements during the sixth merger wave in Continental Europe, this paper presents an analysis of the influence of the bidder and target legal origins in the short-term reactions of the cumulative abnormal returns, the cumulative absolute abnormal returns and the volume traded. 92 bids occurred between 2003 and 2007 have studied. Our main result is a short term negative abnormal return for the bidder stockholders’ firms as a consequence of the announcement, which can be mainly associated to the presence of companies whose legal origin is German. This reaction is also accompanied with a significant effect above the average level in the market volatility and the volume traded. Finally, there does not seem to be any significant different reaction depending on whether operations happen between companies from the same legal origin or from a different one.

Keywords

M&As
Mega deals
Continental Europe
Announcement effects
Legal origin

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The sixth merger wave and wealth effects of M&A announcements: an analysis of large European bidding companies

Xavier Auguets-Pratsobrerroca, Monica Martinez-Blasco and Josep García-Blandón

DOI: 10.26595/eamr.2014.4.1.2

Abstract

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.

Keywords