Abnormal Returns to Mergers and Acquisitions in Ten Asian Stock Markets

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ABSTRACT

The number of mergers and acquisitions (M&A) in emerging markets is growing at a rapid pace partly as a result of their usefulness as a corporate tool to pursue strategic growth. In this study, we investigate abnormal returns to shareholders of bidder firms around the day of M&A announcement for ten emerging Asian markets: China, India, Hong Kong, Indonesia, Malaysia, the Philippines, Singapore, South Korea, Taiwan, and Thailand. Using a sample of 1,477 M&A deals in the ten emerging Asian markets, we find that the stock markets have expected positive cumulative abnormal returns in three different event windows: a two-day (0, 1) window, a three-day (-1, +1) window, and a five-day (-2, +2) window. Valuation effects of information leakage about M&A deals are statistically significant. The findings suggest that as investors reap the financial benefits associated with M&A deals, external growth through M&A activity may be highly recommended to managers.

JEL classification: G14, G15, G34

Keywords: Mergers and acquisitions; Asian emerging markets; Market efficiency; Abnormal returns.

I. INTRODUCTION

The volume of mergers and acquisitions (M&A) has greatly expanded over the past quarter century, particularly in developed markets. Once a U.S. business phenomenon, M&A deals are now commonly used by corporations throughout the world to pursue their goals and objectives related to strategic growth (Gaughan, 2005). Given the relatively recent increase in the number of M&A deals occurring in emerging markets, studies in these markets are relatively few and contrast with the extensive array of M&A studies in the U.S. and other developed countries.

All U.S. industries have been impacted by M&A deals, with most large firms in the U.S. economy being to some extent products of past M&A (Mueller, 1997). At the same time, academics have developed a series of theories and hypotheses to explain and predict the M&A phenomenon. These theories and hypotheses cover many issues related to M&A, from motives, attitudes, and approaches to the consequences of the transactions, from short-term to long-term performance, and from corporate governance to joint ventures and strategic alliances, which are alternatives to M&A deals. These ideas, derived from theoretical and/or empirical studies based on U.S. data, have been shown to be valid in explaining M&A deals in continental European markets (Tichy, 2001).

Compared to M&A deals in the U.S. and other developed countries, M&A deals in Asian emerging economies are different in two important ways. First, the U.S. has a well-developed legal system to protect the interests of shareholders and the welfare of consumers that differs from many emerging economies that suffer from a poor legal environment as well as weak enforcement of existing laws (La Porta et al., 1999). Second, cultural and governance differences between developing and developed markets lead to differences in the organizational structure of firms (Denis and McConnell, 2003; Kwok and Tadesse, 2006). Given these differences, it is necessary to re-examine the validity of the theories and hypotheses with specific reference to developing markets in Asia.

Some of the theories used to explain the M&A phenomena in developed economies may not be appropriate when trying to explain M&A activities in developing markets. For example, the "free cash flow" theory posits that managers of firms with unused borrowing power and large free cash flows are more likely to undertake lowbenefit mergers. In developed economies, the "free cash flow" theory is often used to explain why diversification generates lower total gains (Jensen, 1986). However, preliminary evidence from diversification studies in developing markets indicates that diversification might generate higher total gains (Khanna and Palepu, 1997, 2000a, 2000b). …