The Long-Run Performance of Mergers and Acquisitions: Evidence from the Canadian Stock Market

Article excerpt

We study the long-term performance of 267 Canadian mergers and acquisitions that take place between 1980 and 2000, using different calendar-time approaches with and without overlapping cases. Our results suggest that Canadian acquirers significantly underperform over the three-year post-event period. Further analysis shows that our results are consistent with the extrapolation and the method-of-payment hypotheses, that is, glamour acquirers and equity financed deals underperform. We also find that cross-border deals perform poorly in the long run.


The international wave of mergers and acquisitions (M&As) of the last decade has been exceptional, despite the recent slowdown. In the US alone, the years 1999 and 2000 each saw more than 9,000 transactions worth more than US$1 trillion (Mergerstat Review).

Canada has been no stranger to this trend. In 2000, a record-breaking year, Crosbie & Co. reported close to 1,300 transactions for a total value of almost 235 billion dollars. Nevertheless, there is a growing concern among financial economists over the prices that are being paid for M&As and how these major transactions may impact future corporate performance.

Significant accounting and finance research resources have focused on understanding the value creation process related to these transactions, as well as to the factors that drive it. Recently, numerous long-term event studies question the ability of stock markets to fully and rapidly interpret the consequences of major transactions such as mergers and acquisitions when they are announced. These studies document negative abnormal returns over the three to five years following the transactions that overwhelm the positive abnormal returns documented over short-term windows, making the net wealth effect negative (Andrade, Mitchell, and Stafford, 2001).

In this article, we undertake an out-of-sample investigation of the post-M&A performance using Canadian data. We include in our sample the M&A wave of the late 1990s, the most significant ever, both in terms of numbers and value. We also examine potential determinants of post-acquisition abnormal performance to understand better the sources of value creation or destruction arising from Canadian M&As. This article is one of the few studies available that examine Canadian acquisitions.

Further, we make a number of methodological choices. Time frameworks (event-time or calendar-time), abnormal return metrics, benchmarks, and weighting procedures vary across long-term post-acquisition studies, making comparisons difficult (Bruner, 2002; Agrawal and Jaffe, 2000) and the measurement of long-term abnormal performance complex (Mitchell and Stafford, 2000).

Several recent studies address methodological concerns with tests of long-term abnormal returns, which are inevitably joint tests of stock market efficiency and a model of market equilibrium. Although there is no consensus over the method that dominates, we prefer a calendar-time portfolio approach to deal with the cross-sectional dependence problem inherent in M&A studies since M&As occur in waves and within a wave, cluster by industry (Andrade et al., 2001). Further, to mitigate the low power of the calendar-time portfolio approach to detect abnormal performance because it averages over months of high and low M&A activity, we use a WLS procedure rather than an OLS procedure.

Our main findings are as follows. First, we find that in most cases, Canadian acquirers significantly underperform over the post-event period. Second, our results support the extrapolation and the method-of-payment hypotheses. We also find that cross-border deals perform poorly in the long run.

The paper proceeds as follows. Section I discusses previous literature. Section II discusses data and method used to estimate the average long-run abnormal performance of Canadian acquirers. …