Abnormal Returns to Mergers and Acquisitions in Ten Asian Stock Markets
Ma, Jianyu, Pagan, Jose A., Chu, Yun, International Journal of Business
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 low-benefit 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).
The relative lack of extensive study of M&A in developing markets may be due to two reasons. First, unlike in developed markets, there is a lack of comprehensive databases on M&A transactions in emerging markets. Second, there are relatively small economies of scale and scope in emerging markets. Thus, there is a relatively small number of M&A transactions in emerging markets. However, the process of global economic integration and the excellent economic performance of some Asian emerging economies over the last few decades have caught the attention of both investors and academicians (Wright et al., 2005).
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. The analysis is based on a sample of 1,477 M&A deals in these ten emerging Asian markets over six years (2000-2005). Our findings show that the emerging Asian stock markets have positive reactions to announcement of M&A deals. On average, shareholders of bidding firms gain 0. …