Impact of Mergers and Acquisitions on Shareholders' Wealth in Short-Run : An Event Study Approach

Globalization and liberalization have led firms from emerging markets like India to become more aggressive and opt for mergers and acquisitions (M&A) to fight the competitive battle. The present study attempts to evaluate the impact of mergers and acquisitions on the returns in the short run using detailed event study methodology. The notable finding of the research is that a market starts reacting prior to the announcement. The moment the announcement information becomes public, investors start reacting and the stock price jumps high, providing positive abnormal returns (ARs) to the investors. However, post-announcement, a strong correction in the market price of the acquiring company takes place and positive ARs do not sustain.The findings of the study have the following implications for the investors:1. ‘Earlier he sells more he gains' and ‘issuance of stock for M&A is not good news'. 2. An investor can also earn substantial returns if the shares of the acquiring company are purchased two days prior to the announcement day and sold two days after the announcement day. 3. The announcement of cross-border acquisitions provides much higher returns than that for domestic. In addition, the cumulative abnormal returns (CARs) in the case of cross-border acquisitions are permanent, while in the case of domestic acquisitions they are temporary.4. The announcement of complete acquisitions of the target firm as a wholly-owned subsidiary provides much higher returns than that for partial/majority control acquisitions. In addition, the CARs in the case of complete acquisitions are permanent, while in the case of partial/majority control acquisitions they are temporary. 5. The announcement of acquisitions financed with cash payment provides substantial returns. This research draws the attention of managers to consider cross-border as well as domestic acquisitions as an option to strengthen their competitiveness. They should think of cash as a mode of payment to finance mergers as issuance of shares is bad news. The management may acquire the target firm as a subsidiary and may absorb it with its own operations later on