Technical Efficiency and Stock Market Reaction to Horizontal Mergers

This study examines the relationship between stock market reaction to horizontal merger announcements and technical efficiency levels of the participating firms. The analysis is based on data pertaining to eighty mergers between firms in the U.S. manufacturing industry during the 1990s. We employ Data Envelopment Analysis (DEA) to measure technical efficiency, which capture the firms. competence to produce the maximum output given certain productive resources. Abnormal returns related to the merger announcements provide the investor.s re-evaluation on the future performance of the participating firms. In order to avoid the problem of nonnormality, heteroskedasticity in the regression analysis, bootstrap method is employed for estimations and inferences. We found that there is a significant relationship between technical efficiency and market response. The market apparently welcomes the merger as an arrangement to improve resource utilizations.