Academic journal article IUP Journal of Applied Finance

Mergers and Value Creation: Evidence from the Indian Context [Dagger]

Academic journal article IUP Journal of Applied Finance

Mergers and Value Creation: Evidence from the Indian Context [Dagger]

Article excerpt

(ProQuest: ... denotes formulae omitted.)

Introduction

In this globalized economy, domestic as well as multinational firms want to galvanize significant benefits from a combination of businesses or through restructuring. Mergers and acquisitions are adopted as a part of their corporate strategy as it creates synergies; it could be operating or financial synergy or both which can be achieved in terms of economies of scale or scope, reducing the cost of capital, lowering the transaction cost, and tax considerations. Mergers and acquisitions have been extensively used around the corporate world for exploiting the advantageous position in terms of strategic realignment, technological change, increase in the purchasing power of consumer and booming stock market and regulatory changes. Though mergers were initiated way back in 1980, they have dramatically transformed and redefined the business landscape. In order to penetrate the universal competitiveness and explore opportunities, firms are choosing inorganic strategies such as mergers and acquisitions, joint ventures and strategic alliances. The paper seeks to generate the abnormal returns of the Indian acquiring companies during pre, post and around the announcement period. This is to figure out whether the acquiring companies generate wealth to the shareholder in the shortrun event window period.

Literature Review

Major mergers and acquisitions are preceded by the announcement of the event on the stock market. The short-run stock performance is widely viewed as the most reliable evidence of value creation because in an efficient capital market, stock prices quickly adjust to new information and incorporate any changes in value that the mergers are expected to bring. A large number of studies have focused on short-term returns generated to the shareholders surrounding the announcement period of the event. These studies essentially follow event study methodology. Event study analysis has been widely accepted as a research tool in finance, business and economics. Changes in market value can be analyzed using the event study analysis, which examines the impact of a single event (or series of events) on firm's value. The average abnormal returns across stocks that are exposed to the same event of interest are calculated to identify whether the event has caused the stocks to deviate significantly from a relationship suggested by a benchmark model. Event study methodology may be interpreted as analyzing the market's reaction to events or as an empirical investigation of the relationship between stock returns and economic informational events such as the announcements of mergers and acquisitions. Event study is the most popular methodology adopted by researchers. Zollo and Degenhard (2007) reviewed 87 research papers on acquisition performance from top management and finance journals between 1970 and 2006, and found that 41% used the short-term event study method, while 16% used the long-term event study method. Since the 1970s, these studies have arguably dominated the field. Some of the studies in literature concluded that there is a positive return to the acquiring firm using event study methodology in the short run (Dodd and Ruback, 1977; Bradley et al., 1983 and 1988; Malatesta, 1983; Jarrell and Poulsen, 1989; and Smith and Kim, 1994). There is also significant literature on studies that are empirically proving substantial return to the shareholders of acquiring firm using event study methodology for a long period of time. Langetieg (1978), Loughran and Vijh (1997), and Rau and Vermaelen (1998) further highlighted that target firms also gained in the process of acquisitions. Healy et al. (1992) and DeLong (2001) throw light on the fact that acquisitions not only generated positive returns but also led to negative returns to the shareholders of the firm. Halpern (1973) and Mulherin and Boon (2000) show that acquisition impacts the performance of both target and acquiring firms. …

Search by... Author
Show... All Results Primary Sources Peer-reviewed

Oops!

An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.