Stock Market Reaction to Acquisition Announcements using an

Event Study Approach

Isfandiyar Shaheen
Department of Economics
ECO490

Submitted May 5, 2006, in partial completion of

the requirements for departmental honors.

Expected date of graduation: May 13, 2006.

Abstract
This paper uses an event study methodology to empirically examine stock market
reaction to acquisition announcements. The results indicate that target firms experience
significant positive abnormal returns surrounding an acquisition announcement. In case
of hostile transactions, the abnormal returns are maximized one after event day as
opposed to event day for target firms. Acquiring firms experience negative abnormal
returns on announcement day for stock financed acquisitions. We observed abnormal
returns on event day (Day 0) and the following day (Day 1). Based on this observation a
linear regression model is developed to use publicly available information in predicting
abnormal returns.
1. Introduction

Mergers and acquisitions represent a prevalent strategy in expanding distribution

channels, or entering new markets across most industries. A popular belief is that mergers

and acquisitions strengthen businesses by making their operations more synergetic.

Announcements of mergers and acquisitions immediately impact a target company’s

stock price, as induced reaction in the stock market cause investors to revise expectations

about the company’s future profitability (Panayides and Gong, 2002). According to the

Efficient Markets Hypothesis, “prices reflect all publicly available information on an

underlying asset” (Fama, 1970). Event studies are frequently used to test market

efficiency (Brown and Warner, 1980). An event study is a statistical method used to

gauge the impact of a corporate event, such as stock splits, earnings announcements and

acquisition announcements. The Synergy Trap Hypothesis posits that immediately before

and after an acquisition announcement, the acquiring firm’s stock price is negatively

affected and the target firm’s stock price is positively affected.

This paper utilizes an event study methodology to empirically test the Synergy

Trap Hypothesis using daily stock returns; its objective is to establish relationships

between abnormal returns, method of financing, deal premium and nature of bid.

Abnormal returns are defined as the difference between actual and predicted returns

surrounding a corporate event. Cumulative abnormal returns are the sum of abnormal

returns in a given time period. Brown and Warner (1980), Davidson, Dutia and Cheng

(1989) Mitchell, Pulvino and Stafford (2002) each utilize a similar event study approach

to examine stock market reactions to acquisition announcements. This paper extends the

1
literature by considering acquisition announcements between pairs of publicly traded

companies, and proposing a model for predicting abnormal returns.

Section 2 presents a series of literature concerning plausible explanations for

observed stock market reactions to acquisition announcements. Section 3 defines the

research objectives and describes the sample selection methodology. Section 4 provides

an analysis of results revealed by our data set and also compares acquisitions with

different specifications. Section 5 proposes a linear regression model, which may be used

as a predictor of abnormal returns. Section 6 presents the limitations of this study and

guidelines for future research. Section 7 outlines the conclusions of this research.

2. Fundamentals of stock price movements surrounding acquisition announcements

This section provides an overview of why companies merge, and of an existing trading

strategy called merger arbitrage. The trading patterns of merger arbitrageurs provide

valuable insights about fundamentals which affect stock prices surrounding acquisition

announcements.

2.1 Why Merge or Acquire?

To develop an understanding of stock market reaction to acquisition

announcements, it is essential to understand the rationale behind such transactions.

Buyers and sellers expect to benefit as a result of an acquisition. When companies are

acquired, the seller’s owners are usually attempting to diversify their portfolios or

2
increase liquidity. Sellers sell because buyers make sufficiently attractive offers

(Ravenscraft and Scherer, 1987). Why would an acquiring firm make such an attractive

offer? One plausible reason is differing opinions about the target firm’s future cash flow.

When companies are acquired, the seller’s owners are usually attempting to diversify

their portfolios or increase liquidity. Sellers sell because buyers make sufficiently

attractive offers (Ravenscraft and Scherer, 1987).

Economic analysis classifies acquisitions into two categories: disciplinary

takeovers and synergistic takeovers (Morck, Shleifer and Vishny, 1988).1 Disciplinary

takeovers are designed to replace managers who are not effectively maximizing

shareholder value as a result of non-value-maximizing practices. Synergistic takeovers

are motivated by possible benefits that would result from combining two firms. The

benefits include a possible increase in market share and even distribution channels, or

simply an elimination of overlapping functions. Morck, Shleifer and Vishny (1988)

conclude that disciplinary takeovers are likely to be hostile transactions, whereas

synergistic takeovers are likely to be friendly transactions. Hostile transactions are

acquisitions that go against the wishes of the target company’s management.

The predicted impact on the acquiring firm’s varies depending on the method of

financing. Acquirer’s stock price in cash financed mergers is expected to remain

unaffected due to acquisition announcement. Managers use cash as a means of financing

if they believe their company’s stock is fairly valued. Similarly, they will chose equity

1
Mergers and acquisitions are also classified as horizontal, vertical mergers or conglomerates. A horizontal
merger is one which takes place between two companies with similar product lines, and a vertical merger
is one which takes place between two companies is different industries.

3
financing if they believe their company’s stock is undervalued, therefore acquirer’s stock

price in stock financed transactions is likely to experience negative abnormal returns.

Preliminary evidence shows that acquiring firm’s do not experience significant abnormal

returns around the announcement date. Market participants receive no signal on

acquisition announcement day regarding the acquiring firm. In case of target firms,

information regarding deal premium is available on announcement day, these issues are

discussed in detail in Section 2.4. We next verify that acquisition announcements trigger

significant trading activity that leads to shifts in the demand for the securities of

participating firms (Morck, Shleifer and Vishny, 1988).

2.2 The Impact of Merger Announcements on Stock Trading Volumes

We verify that merger announcements are events which frequently cause investors

to revise their estimates of the future profitability of participating firms. The

methodology adopted shows that there is a spike in volume of shares traded due to an

acquisition announcement. The trading volume of a security j is given as Vol j and total

volume of shares traded for a particular security on day t is given by Vol jt . The sample

total volume, STVol , is given as equation (3) and defined as the sum of volumes across

80 securities (40 target firms and 40 acquiring firms), on day t.2

(3) STVol = ! Vol jt , where t= [-50,12]

t=[-50,12] is the time period 50 days before event day and 12 days after event day. Our
variable of interest is the percentage change in STVol, which is given as equation (4).
2
Sample selection is specified in Section 3.2.2.

4
(4) #STVol =
!Vol " !Voljt jt "1

!Vol jt "1

Figure 3 shows the percentage change in Sample Total Volume in this sample of 80
securities for a [-50,10] day time window.

Figure 3: Percentage Change in Sample Total Volume for a [-50,10] day window

200.00%

150.00%

100.00%
STV

50.00%

0.00%
-8

-5

-2

7
10
0

1
-5

-4

-4

-4

-3

-3

-3

-2

-2

-2

-2

-1

-1

-1

-50.00%
Da y

STV

A significant spike in volume is found to occur on day 0 across this sample of 80

firms. Based on this sample it is reasonable to assume that merger announcements cause

significant trading activity. The analysis which follows deals primarily with an

investment strategy called merger arbitrage. By analyzing such trading activities, we can

gain insight into why target firm’s stock prices are positively affected by merger

announcements.

5
2.3 The Trading Behavior of Merger Arbitrageurs

Merger arbitrage, also known as risk arbitrage, requires active trading surrounding

an acquisition announcement. Following an acquisition announcement, the target

company’s stock typically trades at a discount to the price offered by the acquiring firm.

The difference between the acquiring firm’s offer price and the target firm’s current price

is known as the arbitrage spread.3 As the merger approaches its completion date, this

spread diminishes (Mitchell, Pulvino and Stafford, 2002), because market participants

adjust their expectations by buying the target firm’s stock till the target’s stock price

reaches equilibrium. In this case, equilibrium price can be understood as the price offered

by the acquiring firm for each share of the target firm’s stock on announcement date.

Thus, if the merger is successful an arbitrageur can captures the arbitrage spread by

purchasing the target firm’s stock - while it is still trading at a discount compared to the

price offered the acquiring firm- and liquidate those shares once the merger

consummates. However, if a merger fails, then the target firm’s stock price often falls

dramatically (Davidson, Dutia and Cheng, 1989). Merger arbitrageurs are rewarded for

bearing the risk of an acquisition transaction not materializing. Acquiring firms may

finance their transaction using cash, cash with some equity or only equity. The trading

strategies for merger arbitrageurs vary depending on the acquirer’s financing method.

This research focuses on two broad categories:4

1. Merger arbitrage strategies appropriate for cash only transactions

2. Merger arbitrage strategies pertaining to fixed-exchange ratio offers in stock

financed transactions.

3
Krishnaiyer, Dhrubo, Associate, Citigroup Corporate and Investment Bank, Personal Communication
4
Acquisitions may also be debt financed, cash and stock financed or stock financed with a floating
exchange ratio offer

6
2.4 Trading Strategies in Cash Financed Acquisitions

A generic description of a possible trading strategy for cash financed transactions

is characterized as follows. Investors purchase shares of target firm’s stock on the

acquisition announcement date if they are trading at a discount compared with the

acquiring firm’s offer and hold the target firm’s stocks until the merger is completed. At

this time investors receive the arbitrage spread (defined earlier) and the transaction is

over. A review of the literature reveals that target firms in cash financed transactions

experience greater positive abnormal returns on announcement day as opposed to stock

financed acquisitions (Andrade, Mitchell and Stafford, 2002; Asquithe, Kim, 1982). The

fundamental reason is that cash financed transactions usually consummate quicker than

stock financed transactions. Also, stock financed transactions are often large transactions

between two major corporations who require approval from several regulatory bodies

before the acquisition materializes. For example, Exelon Corporation has to receive

approval from 9 regulatory commissions before their acquisition of Public Service

Enterprise Group is completed.5 The longer period the acquisition takes to consummate,

the greater is the uncertainty about whether it will consummate. The fact that cash

financed transactions consummate quicker as opposed to stock financed ones provides a

plausible explanation why cash financed acquisitions experience greater abnormal returns

on announcement day. Section 2.4.1 tests the hypothesis that the average consummation

period of cash financed mergers is less than stock financed mergers.

5
Hoffman, Andy, Financial Analyst, Exelon Generation, Personal Communication

7
2.4.1 Average Consummation Period for Cash and Stock Financed Transactions

To test the hypothesis that cash financed transactions take a longer period of time

to consummate, a sample of all acquisition announcements between 2 publicly traded

companies which are tracked against the NASDAQ Composite Index or NYSE Index

post-January 1, 1997 with an announced total value in excess of $300 million is

considered. In this sample there are a total of 467 announcements, of which 163 were

cash financed transactions with a mean consummation period of 84 days and a standard

deviation of 47 days. Furthermore, the distribution for the consummation period was

approximately normally distributed; the histogram plot of that distribution is presented in

Appendix A. There were a total of 404 transactions which used some form of equity as a

method of financing.6 The mean consummation period for these transactions was 163

days with a standard deviation of 108 days. The consummation period for stock financed

acquisitions also exhibits an approximately normal distribution. A t-test of the hypothesis

results in a value of 2.82, indicating that the mean consummation period of cash financed

transactions is less than the mean consummation period of stock financed transactions at

a α=0.05, where α is the significance level.

As noted in the previous section, shorter expected consummation periods result in

higher abnormal returns. Therefore, we expect larger positive abnormal returns for target

firms stock prices in cash financed acquisitions included in our sample. An investor’s

decisions are usually based on several factors, and a longer consummation period is likely

6
We are nit distinguishing between transactions where preferred stock, as opposed to common stock was
used as a financing method.

8
to scare away potential investors, for whom a dollar today is worth more than a dollar

tomorrow. The hypothesis of greater abnormal returns of target firms in cash financed

transactions is tested extensively in Section 4.2.

2.5 Trading Strategies in Stock Financed Transactions

Trading strategies in stock financed transactions depend on the type of stock offer. There

are three types of offers: 1) Fixed-exchange ratio offers; 2) Floating-exchange ratio

offers; 3) Collar offers.7 Under a fixed-exchange offer the acquirer agrees to exchange a

fixed number of the target’s shares for its own shares. A floating-exchange offer specifies

the value of the acquirer’s stock to be exchanged for a target firm’s stock, therefore the

number of target’s stocks to be exchanged varies depending on the target firm’s share

price on acquisition completion date. A collar offer is a contract between acquirers and

targets which determines how the maximum or minimum number of target’s stocks that

will be exchanged with the acquirer’s stocks on completion date.8

For a fixed-exchange ratio stock merger, merger arbitrageurs simultaneously short

sell a fixed number of acquirer shares for every target share purchased (Mitchell, Pulvino

and Stafford, 2002). The short position in the acquirer’s shares is closed when the shares

owned in the target firm are exchanged for acquirer shares (Mitchell, Pulvino and

Stafford, 2002). This type of trading activity may cause a spike in volume around an

acquisition announcement similar to that observed in our sample of 80 securities (see

7
Biswas, Shubhomoy, Analyst, Lehman Brothers, Equity Derivatives Group. Personal Communication
8
Collar offers and floating-exchange offers are well beyond the scope of this paper and will not be
elaborated any further.

9
Figure 3). Investors may view acquisition announcements as signals that the target’s

stock is undervalued, which results in an increase in demand of the target’s stock,

resulting in positive abnormal returns around an acquisition announcement. As

mentioned earlier, a cash financed merger is also understood as a signal that the

acquirer’s stock is fairly priced, whereas a stock financed, fixed-exchange ratio offer is

understood as a signal that the acquirer’s stock is overvalued. Thus, it is reasonable to

expect no abnormal returns for the acquiring firm in cash financed acquisitions and

negative abnormal returns in stock financed acquisitions. Tests of hypotheses are

discussed in Section 5.

3. Research and Data Selection Methodology

This section outlines the research objectives and model specifications. The event study

model used tests the null hypothesis of no abnormal returns for target and acquiring firms

around an acquisition announcement.

3.1 Research Objectives

When an acquisition is announced, a considerable amount of information is

revealed about the potential transaction,9 and this information can be used to assess the

stock market reaction to an acquisition announcement. We focus on three primary

research objectives:

1. Determine whether abnormal returns of target firms are significantly different

from abnormal returns of acquiring firms;

9
This information is readily available on the Bloomberg terminal on announcement day.

10
 2. Compare abnormal returns experienced by target versus acquiring firms in
cash financed versus stock financed acquisitions;

3. Establish a relationship between abnormal returns, method of financing,

nature of bid and the size of deal premium.

To address objectives (2) and (3), comparisons between acquiring and target firms

are presented separately. For example, to determine whether abnormal returns are

affected by the nature of the bid, a comparison between hostile targets and friendly

targets will be considered, followed by a comparison between hostile acquirers and

friendly acquirers. This method is employed as past studies indicate that abnormal returns

between target and acquiring firms are considerably different. Furthermore, we have

already established the fundamentals behind why target firms experience relatively

greater abnormal returns as opposed to target firms, thus it is logical to treat them as

separate populations.

3.2 Research Methodology

This section describes the event study approach developed by Brown and Warner

(1985). The primary concerns which arise when using daily data when using an event

study approach are also discussed in detail. Specifications of the Ordinary Least Squares

(OLS) market model, which is a commonly used event study approach, are also specified.

3.2.1 The Event-Study Approach

The event study methodology has been found to be consistent and valid when

attempting to quantify any corporate event (Wooldridge and Snow, 1990). Capital

11
markets views corporate events such as stock splits, earnings announcements and merger

announcements as signals describing management’s future expectations. We have

established in Section 2 that a merger announcement drastically increases the volume of

shares traded on a given day. According to Halpern (1983), the first public announcement

is the most appropriate event date to gauge an event’s impact. Abnormal returns set in

slightly before the actual event date, which is usually caused by leaks in information or

even market anticipation (Keown and Pinkerton, 1981). Despite concerns of possible

insider trading activity, as long as the market does not fully anticipate an event, abnormal

activity will be observable as a result of that event. The next section outlines the

specifications of an event study approach used while examining the impact of acquisition

announcements.

3.2.2 Sample Selection and Data Description

All data has been gathered using a Bloomberg Terminal and Yahoo! Finance. The

Bloomberg Terminal has no data on acquisition announcements prior to January 1, 1997.

As a result, only merger announcements after this date between two publicly traded

companies are considered. Historical prices were not available on Yahoo! Finance for

tickers10 that are not active on one of the major indices, so only merger announcements

where the target’s ticker is still tracked against one of the indices are considered. The

total number of available merger announcements is 467. Of these, 40 announcements

were randomly chosen. 40 announcements imply the sample consists of 80 securities,

which is large enough to test the null hypothesis of no abnormal returns for target and

10
A ticker is a symbol used by market indices in identifying a security. For example the ticket for Exelon
Corporation is EXC.

12
acquiring firms. Of the 40 announcement in our sample, 10 were hostile takeovers and

30 were friendly mergers, 19 announcements were cash financed, 9 used some form of

equity along with cash, and 13 were financed entirely by equity.

3.2.3 The OLS Market Model

To test for the existence of abnormal returns, a benchmark for normal returns in

required. A parameter estimation period as suggested by Brown and Warner (1985) is

used to calculate a stock’s Beta value. The Beta value is the slope coefficient obtained by

regressing the index’s returns to the stock’s returns, and is also a measure of the stock’s

volatility as compared with the market (Panayides and Gong, 2002). According to

Panayides and Gong (2002), an 11 day event window fully captures the effects of an

event of interest. The window begins 5 days prior to the event date and ends 5 days after.

According to Brown and Warner (1985) and Dyckman, Philbrick and Stephan (1984), a

parameter estimation period of 120 days is adequate since daily returns data for the 120

days prior to the event date are sufficient in formulating a benchmark for normal returns.

Additionally, care has been taken to ensure that, during the parameter estimation period,

no other corporate event, such as a stock split or an earnings announcement, is taking

place which may cause abnormal returns.11 Figure 4 provides a graphical depiction of the

event study approach, where the event window is [-5,5] days and the estimation window

is [-120,-5] days.

11
This was achieved by analyzing press releases of individual firms and observing that no significant
abnormal returns were experienced by individual firms in the parameter estimation period.

13
Figure 4: Illustration of the Event Study Approach

Parameter
Estimation Event Post Event
Period Period Period

In the first step, a regression is estimated using the returns on a given stock j and

^ ^
the returns of a stock market index m. The slope coefficient, ! i , is the Beta value and ! i

is the y-intercept. Assuming a constant Beta12 value for a given stock j, we calculate the

estimated return of stock j in the event window period as follows.

^ ^
(5) E it = " i + ! i Rmt

^ ^
where E it is the expected return at time t, ! i and ! i are parameters of the regression

^
equation. ! i is the stock’s Beta value and Rmt is the daily return on a stock market index

m at time t. The abnormal return is defined as the difference between the actual return on

a stock i and its expected return, E it . Therefore, the abnormal return of a stock i at time t

is given as equation (6).

12
Beta’s in the parameter estimation period and post event period were constant for all securities in this
sample. The OLS market model was employed in the post event period, i.e. [5,120] day time window and a
constant Beta value was observed for all securities in the parameter estimation period and post event
period.

14
 (6) ARit = Rit ! E it

Once we have obtained the estimated equation, the actual return of a stock i at

time t is calculated using equation (7).

^ ^
(7) Rit = " i + # i Rmt + eit

! ^ ^
Since E it = " i + ! i Rmt , equation (7) simplifies to Rit = E mt + eit , which implies that

abnormal return of stock i at time t is simply given as equation (8).

!

(8) ARit = eit

! The cumulative abnormal return for security i is the sum of abnormal returns in a given

time period [t0,t1].13

t1 t1

(9) CARi (t 0 ,t1 ) = " ARit = "#it

t= t 0 t= t 0

!
The sample average abnormal return at time t, AR t , is the arithmetic mean of n stocks

13
It is important to note that that the estimated stock price is determined using the Parameter Estimation
Period only, which is from 120 days to 5 days before the event. A common error which results in these
types of studies is to regress the returns of the market to that of the stock for the entire period, including the
event date, and then calculating the error terms as abnormal returns. This method results in an
underestimation of abnormal returns.

15
 1 n
(10) ARt = ! ARit
n i =1

The sample average cumulative abnormal average return of CAR from event time t0 to t1,

is the sum of AR t from t0 to t1.

t1
(11) CAR (t 0 , t1 ) = ! AR t
t =t0

To test the null hypothesis of no impact of a merger announcement on stock price,

the statistical significance of CAR (t 0 , t1 ) and AR t is calculated according to Brown and

Warner (1980) and Panayides and Gong (2002). The test statistic is simply the ratio of

^
day t average abnormal returns to its estimated standard deviation, S ( AR t ) , where

^
(12) t ( ARt ) = ARt / S ( ARt )

^
(13) t (CAR ) = CAR (t 0 , t1 ) /[ S ( ARt ) * (t1 ! t 0 ) ]

^ t = !6

S ( ARt ) = ( 1 t = "6
2
Where " ( AR ! AR )
t = !119
/ 114
and AR = ! AR
114 t = "119

The standard deviation is estimated from the time series of average abnormal returns

in the parameter estimation period. Time-series of average abnormal returns or portfolio

excess returns takes into account cross-sectional dependence in the security-specific

excess returns (Brown and Warner, 1980). However, the test statistic ignores any time-

16
series dependence in abnormal returns. Brown and Warner (1980) and later Panayides

and Gong (2002) have shown that benefits from autocorrelation adjustment appear to be

limited. Accordingly, no auto-correlation adjustments are made in this model. Several

issues that can potentially arise with daily data used in this study are discussed in the

following section. An illustration of how this model works is presented in Appendix A.

3.3 Issues Concerning Daily Data

Brown and Warner (1985) outlined several issues that should be taken into

consideration when choosing an event study model. These will be discussed very briefly,

followed by a brief description of excess return measures that may be used in an event

study to calculate abnormal returns. Based on the findings of Brown and Warner (1985)

an appropriate “Excess Return Measure” will be adopted.

To develop an appreciation of abnormal returns, a benchmark for measuring

normal performance is required. Brown and Warner (1980) originally used monthly data,

and described several techniques to calculate abnormal activity using an event study

approach.14 Their subsequent work involved the use of daily data, where they describe

problems pertaining to daily data. Brown and Warner (1985) note that daily data may

exhibit stock returns that are not normally distributed, and this raises the possibility of

daily returns exhibiting serial dependence. However, they conclude that methodologies

14
Brown and Warner (1980) used the Center of Research in Security Prices database to construct 250
samples, containing 50 securities. For each security they generated a hypothetical event month, where
events were assumed to occur with equal probability each month. It is important to note that their work was
a simulation where abnormal activity was induced, and did not actually occur.

17
based on the OLS market model are “well specified under a variety of conditions,”

including the use of daily price data (Brown and Warner, 1985). Several other authors

(Panayides and Gong, 2002; Davidson, Dutia and Cheng, 1989) have verified that the

OLS market model is well specified and provides the most accurate measure of abnormal

performance.

4. Analysis of Results

This section is divided into three parts. The first part involves applying the model to all

target firms and acquiring firms to compare abnormal returns of firms in two categories.

The second part compares abnormal returns of target firms with varying deal

specifications. The third part compares abnormal returns of acquiring firms with different

deal specifications.

4.1 Target Firms

There are 40 target firms in this sample. The average abnormal returns for each

target firm for the [-5, 5] day window, can be found in Appendix B. Abnormal returns for

each security are represented by their ticker symbols. The results for this sample’s

abnormal returns and associated tests of significance are summarized in Appendix C. The

evidence supporting the existence of abnormal returns surrounding the event day in this

sample of target firms is overwhelming. Average abnormal returns and cumulative

average abnormal returns around the event window are statistically significant.

18
Furthermore, the cumulative abnormal returns for the entire parameter estimation are

insignificant indicating that no major corporate event took place in the estimation period,

and that our initial Beta value estimates are accurate.

Target firms in this sample did not experience any abnormal performance during

the parameter estimation period, but when the acquisition announcement was made,

significant positive abnormal returns. Our data also indicates that abnormal returns are

maximized on the day of announcement and remain significant for one day following the

announcement. Two days after the announcement, no abnormal returns observed.

Abnormal returns are not statistically significant in the parameter estimation

period and post event period. However, on the event date abnormal returns are

statistically significant. On the announcement date, the average abnormal return for target

firms is 6.35 percent, and on day 1 it is 4.79 percent. Both these values are statistically

significant (p<0.0001). Also cumulative average abnormal returns are statistically

significant during the event window. Therefore, we conclude that target firms experience

positive, significant abnormal returns for a 3 day period around an acquisition

announcement. The following section provides an in-depth analysis of target firm

abnormal returns based on method of financing and nature of bid.

19
4.2 Method of Financing: Abnormal Returns of Target Firms in Cash versus Stock
Financed Transactions

Acquirers can be classified in to two categories: financial buyers and strategic

buyers.15 Strategic buyers are those whose motivations for acquiring another firm are

potential synergies that would result from combining two firms. Our sample of 40

acquisition announcements has 13 stock financed, 9 cash and stock financed and 19 cash

financed transactions. Financial buyers are private equity funds who typically purchase

undervalued companies and later sell them for a profit once they are fairly valued.16

4.2.1 Target Firms Abnormal Returns in Cash Financed Acquisitions

A review of event study literature reveals that target firms in a cash financed acquisition

experience greater abnormal returns than in stock financed acquisitions (Travlos and

Waegelein, 1992; Myers and Majluf, 1987; Wansley, Lane and Yang, 1983). Most

researches suggest that the method of payment provides a valuable signal to the market

(Wansley, Lane and Yang, 1983). Target firms are expected to experience positive

abnormal returns. Preliminary evidence indicates that all target firms experienced

abnormal returns as a result of the acquisition announcement, but acquiring firms did not.

These results have been summarized in Table 1.

In our sample of 40 acquisition announcements, 19 transactions were cash

financed. As expected, the abnormal returns of target firms in cash financed transactions

are positive and significant (p<0.0001) on day 0 and day 1. Average abnormal return on

15
Singhal, Amit, Analyst, Morgan Stanley, Mergers and Acquisitions Group, Personal Communication
16
Biswas, Shubhomoy, Analyst, Lehman Brothers, Equity Derivatives Group. Personal Communication

20
day 0 is 6.54 percent, and on day 1 it is 4.57 percent. Average abnormal returns on day 0

are slightly greater than the average abnormal returns of all target firms on day 0.

Cumulative average abnormal returns for the parameter estimation period and post event

period are not significant. However, cumulative average abnormal returns in the event

period, i.e. in a [-5,5] day window, are positive and significant.

4.2.2 Target Firm Abnormal Returns in Transactions Employing Some Form of Equity

The sample of 40 acquiring firms consists of twenty one transactions in which

some form of equity is used as a financing method. Nine transactions were cash and stock

financed and twelve transactions were stock financed. Whenever a transaction uses any

form of equity as a financing method, investors can expect the consummation period of

such transactions to be longer than purely cash financed transactions (See Section 2.4.1).

Since investors expect greater uncertainty about merger consummation in stock financed

mergers, we would still expect positive abnormal returns for target firms, but they are

likely to be lesser than the abnormal returns of target firms in cash financed transactions.

For the sample of 21 acquisition announcements which used some form of equity

as a financing method, the average abnormal return on day 0 is 6.12 percent and on day 1

it is 4.98 percent and these are statistically significant (p<0.0001). Cumulative average

abnormal returns are not significant in the estimation period and post event period.

Although these abnormal returns are slightly less than those observed in cash financed

transactions, we do not have enough evidence to conclude that target firms in cash

financed acquisitions experience abnormal returns greater than target firms in stock

21
financed transactions. At this stage it is becoming increasingly clear that target firms

experience abnormal returns irrespective of deal specifications. Thus, a simple trading

strategy which involves simply buying a given target firm’s stocks on day 0 and

liquidating them on day 3 could prove to be very profitable.

4.3 Target Firm Abnormal Returns in Hostile Transactions

A hostile transaction is defined as one which goes against the management’s will.

These transactions involve a bid from the acquiring firm which is considerably greater

than a bid in a friendly transaction (Acquithe and Kim, 1982). Shareholders invariably

opt for the maximum value they can expect to receive in an acquisition. Therefore, it is

reasonable to expect that abnormal returns will be greater for target firms in hostile

transactions than friendly transactions because in hostile transactions the target firm is

likely to trade at a greater discount on acquisition announcement day than in a friendly

transaction. A review of the literature reveals varying results regarding this hypothesis.

Jensen and Ruback (1983) argue that returns to the target’s share holders are greater in

hostile transactions because a hostile transaction is one in which the price offered by the

acquirer is significantly greater than the existing market price of the target firm.17 Travlos

(1987) proposes an explanation for this hypothesis. He argues that since hostile takeovers

are usually cash transactions, and the difference in earlier findings between hostile and

friendly transactions is because researchers failed to control for the method of payment.

In our sample of 40 firms, there are 10 hostile transactions, of which only 3 are cash

17
Market price is determined by market capitalization, which is the total number of shares outstanding
multiplied by the shares’ market price.

22
financed. This may be a limitation of the data set, but for now we will not control for the

method of payment variable.

We notice that in hostile transactions abnormal returns are greater on day 1 as

opposed to day 0 (See Table 1). On day 0 the average abnormal return is 5.96 percent and

on day 1 the abnormal return is 8.8 percent; both these figures are statistically significant

(p<0.0001). Also, cumulative average abnormal returns are insignificant in the estimation

and post event periods. Thus, it is reasonable to conclude that the nature of bid has an

impact on abnormal returns; this result has also been verified by Wansley, Lane and

Yang (1983). We also noticed a significant difference in abnormal returns with respect to

method of payment. The only limitation is that this is a much smaller sample size, 10

hostile acquisition announcements as opposed to 30 friendly acquisition announcements.

The following section provides an analysis of abnormal returns experienced by target

firms in friendly transactions.

4.4 Target Firm Abnormal Returns in Friendly Transactions

A friendly transaction is one for which the target firm’s management and

shareholders are in agreement that the transaction is desirable. Management’s agreement

indicates that the target firm views the transaction to be beneficial for them. This implies

that both parties are equally keen on the acquisition consummating. Therefore, the size of

the announced total value of a friendly offer is not likely to be significantly greater than

the company’s actual worth, where the announced total value is the total amount an

acquiring firm is willing to pay. If this is true, then market participants will revise their

23
expectation accordingly, and an increase in the target’s share price will not be as large as

in hostile transactions.

The abnormal returns on day 0 and day 1 for friendly offers are 6.47 percent and

3.45 percent respectively, and are also statistically significant (See Table 1). Again,

cumulative average abnormal returns are not significant in the estimation and post event

periods. Comparing these abnormal returns to those experienced by target firms in hostile

transactions (See Table 1) we can reasonably conclude that the nature of the bid is a

determinant of abnormal returns. The most striking observation is that abnormal returns

on day 1 for hostile transactions are significantly greater than abnormal returns on day 1

for friendly transactions. Our results provide compelling evidence that abnormal returns

are significantly greater in hostile transactions than friendly transactions for target firms.

Our analysis shows that abnormal returns are statistically significant for target

firms around an acquisition announcement. The method of financing does not have a

significant impact on abnormal returns. Considering the sample of 40 target firms,

abnormal returns were maximized on the announcement day; a similar pattern was

observed for both cash financed transactions and stock financed transactions. The greatest

abnormal returns for hostile transactions were on day 1, i.e. one day after the acquisition

announcement. The next section provides an in-depth analysis of acquiring firm’s stock

price movements surrounding an acquisition announcement. These results are

summarized in Table 1.

24
Table 1: Target Firm Average Abnormal Returns and Cumulative Average Abnormal
Returns with Different Deal Specifications

Sample Average Cumulative Average

Abnormal Returns Abnormal Returns
Sample CAR CAR CAR
Day0 Day1 Day2
Size [-119,-6] [-5,5] [6,12]
6.3% 4.7% 0.47% -0.0013 0.121 0.0016
Target Firms 40
(17.32) (13.07) (1.24) (-0.35) (4.14) (0.44)
Target Firms in
6.59% 4.57% -0.53% -0.00074 0.1304 0.0031
Cash Financed 19
(7.38) (5.12) (-0.6) (0.082) (8.28) (0.89)
Acquisitions
Target Firms in
6.12% 4.98% -0.38% -0.00834 0.1139 0.00356
Stock Financed 21
(7.22) (5.88) (-0.454) (-0.1034) (9.15) (0.56)
Transactions
Target Firms
5.96% 8.8% -0.83% 0.000045 0.0972 0.089
involved in Hostile 10
(4.84) (7.15) (-0.67) (0.084) (2.45) (1.05)
Transactions
Target Firms
involved in 6.47% 3.45% -0.33% 0.00876 0.129 0.0098
30
Friendly (8.44) (4.49) (-0.428) (0.324) (5.07) (0.678)
Transactions
** T-values are reported in parentheses. AAR on Day 0 and Day 1 are statistically significant (p<0.0001)

4.5 Acquiring Firms

There are 40 acquiring firms. Average abnormal returns for acquiring firms in a 10 day

period [-5,5] can be found in Appendix B. The results for average abnormal returns and

associated tests of significance for acquiring firms are given in Appendix C. The

cumulative average abnormal returns for the entire sample of 40 firms were insignificant

in the parameter estimation period and post event period. Abnormal returns were

significant only on the event day. However, cumulative average abnormal returns were

negative in the event window for all acquiring firms and these results were statistically

significant.

25
4.6 Acquiring Firms Abnormal Returns in Cash Financed Transactions

An acquiring firm will chose cash as the method of financing, when managers

believe that their firm’s shares are fairly valued. If they believe that their company’s

stock is over valued, then financing a transaction using their company’s equity allows

managers to conduct a transaction in which they end up paying less than the announced

total amount18, by using their already over valued shares as a method of payment. In this

scenario market participants will eventually realize the acquiring firm’s true value, and

will adjust their expectations accordingly. By the time this process takes place an

acquiring firm would have already signed the contract regarding exchange of stock with

the target firm. This case is most obvious in fixed-exchange stock transactions as opposed

to floating-exchange transactions or collar transactions.

As indicated in Appendix C, the abnormal returns in cash financed transactions

for acquiring firms are -0.7 percent and -0.82 percent on day 0 and day 1 respectively.

Cumulative average abnormal returns in the event window, [-5,5] days, are not

statistically significant, therefore it is reasonable to conclude that acquiring firms

experience no abnormal performance in cash financed transactions in the period

surrounding an acquisition announcement.

18
The announced total amount for a purely stock financed fixed-exchange transaction would be the number
of shares committed to financing the transaction multiplied by the current market price. In the scenario
described, this market price is greater than the acquiring firm’s fair value. Thus, managers will end up
paying a lesser amount than the announced total value.

26
4.7 Acquiring Firms Abnormal Returns in transactions employing some form of Equity

The sample of 40 acquiring firms includes 21 transactions where some form of

equity was used to finance the acquisition. Average abnormal returns on Day 0 are

negative and significant, but on Day 1 they are insignificant. Cumulative average

abnormal returns in the event window were negative and statistically significant (See

Figure C-8 in Appendix C). Furthermore, cumulative average abnormal returns were

insignificant in the estimation and post event periods. These results indicate that when

some form of equity is used as a financing method, market participants treat it as a signal

that the acquiring firm’s stock is over valued. They accordingly adjust their expectations,

resulting in a negative impact on the acquiring firm’s stock price.

4.8 Acquiring Firms Abnormal Returns in Hostile versus Friendly Transactions

An acquiring firm may initiate a hostile transaction if it values a given target firm

at a price higher than the target firm’s existing market price. The acquirer will make a

hostile bid only if it feels that potential synergies outweigh the premium which the

acquirer is currently willing to pay (Travlos, 1987). Market participants, however, may

view a hostile bid as a desperate attempt on the acquirer’s part to buy a target firm to

improve the acquirer’s business outlook. This sends a negative signal to participants, who

may speculate that the acquirer’s stock is over valued (Wanseley, Lane and Yang, 1983),

based on that it is reasonable to expect negative abnormal returns for acquiring firms

involved in hostile transactions.

27
 As summarized in Table 2, the average abnormal returns on day 0 and day 1 are -

0.37 percent and -2.05 percent, although only average abnormal returns on Day 1 are

significant. Thus, we notice that acquiring firms experience negative abnormal returns in

hostile transactions immediately after the acquisition announcement, but not on the

announcement date. Cumulative average abnormal returns in the event window are

statistically significant and negative (p<0.005). Cumulative average abnormal returns

were greater than those observed in friendly transactions. It remains unclear why

acquiring firms in hostile transactions experience negative abnormal returns on Day 1 and

not on Day 0. We have already observed that abnormal returns for target firms were

maximized on Day 1 and not Day 0. One possible explanation is that hostile transactions

are less likely to consummate than friendly transactions, because there is a greater risk

profile associated with them.

The sample of 30 acquiring firms involved in friendly transactions experienced no

abnormal returns in the period surrounding the acquisition announcement. As proposed

by our preliminary hypothesis, no abnormal returns are observed for acquiring firms

engaged in friendly transactions, cumulative average abnormal returns are also

insignificant in the event window. Average abnormal returns and cumulative average

abnormal returns for acquiring firms are summarized in Table 2.

28
Table 2: Acquiring Firm Average Abnormal Returns and Cumulative Average Abnormal
Returns with Different Deal Specifications

Sample Average Cumulative Average

Abnormal Returns Abnormal Returns
Sample
Day0 Day1 Day2 CAR[-119,-6] CAR[-5,5] CAR[6,12]
Size
-0.95% -0.44% -0.48% 0.0025 -0.0289 -0.0061
Acquiring Firms 40
(-2.59) (-1.18) (-1.31) (0.070) (-2.42) (0.76)
Acquiring Firms in
-0.7% -1.2% -0.42% -0.000021 -0.0216 0.0012
Cash Financed 19
(-1.04) (-2.33) (-1.15) (0.00032) (-1.89) (0.16)
Acquisitions
Acquiring Firms in -0.77%
-1.09% -0.04% -0.0000834 -0.03 0.000256
Stock Financed 21 (-
(-1.94) (-0.06) (-0.0001034) (-2.65) (0.026)
Transactions 0.981)
Acquiring Firms
-0.37% -2.05 -0.75% 0.0000007 -0.064 0.0124
involved in Hostile 10
(-0.611) (-3.42) (-1.25) (0.0012) (-3.37) (-1.034)
Transactions
Acquiring Firms
-0.33%
involved in -0.25% -0.58% 0.00000048 0.0209 0.0032
30 (-
Friendly (-0.418) (-0.98) (0.000074) (1.1) (-0.266)
0.558)
Transactions
** Associated t-values are reported in parentheses. P-values can be calculated using statistical tables

5. A proposed model for predicting abnormal performance

As summarized in Table 1 and 2 abnormal returns for target firms are significant on Day

0 or Day 1. In some instances abnormal performance is also observed on Day -1, which

may result from leakages in information. This section describes a model for predicting

abnormal performance. The model uses information about the pending acquisition

transaction which is made available on announcement date. The dependent variable in

this model is cumulative abnormal return in a [0,1] day time window. Cumulative

abnormal return for a security j, CAR j [0,1] , is defined as the sum of abnormal returns

observed on Day 0 and Day 1. Equation (12) illustrates.

(12) CAR j [0,1] = AR j 0 + AR j1

29
The Bloomberg terminal provides substantial information regarding deal specification on

the announcement day, which will serve as independent variables in this linear regression

model. We have already established that acquiring firms and target firms are separate

populations, the model will be applied to target firms and acquiring firms separately.

1. Deal Premium: The total value paid by the acquirer in excess of a target firm’s
pre-announcement date market capitalization. Our preliminary hypothesis
predicts a positive relationship between the absolute value of CAR j [0,1] and Deal
Premium.19 Data for this variable has been obtained from the Bloomberg terminal;
both the market capitalization and deal premium were publicly available on the
announcement day. In the proposed model we will consider the natural log of this
variable.20 Using natural logs makes it easier to interpret regression results, since
CAR j is the sum of two percentages, and is therefore a percentage as well.

2. Nature of Bid: The dependent variables, nature of bid can be either hostile or
friendly. Our linear regression model will make use of dummy variables when
accounting for its impact on CAR j [0,1] , using 1 for hostile transactions and 0 for
friendly transactions.

3. Method of Financing: The dependent variable, method of financing, uses a

value of 1 for cash only transactions and a value of 0 for transactions employing
some form of equity.

This model intends to isolate the impact of each variable. The proposed linear

regression model is given in (13) as Specification I:

(13) CAR j [0,1] = " 0 + !1 ( NATURE OF BID) + ! 2 ( METHOD OF FINANCING )

+ β3(DEAL PREMIUM) + β4(METHOD OF FINANCING *

NATURE OF BID) + εj

19
A negative deal premium is defined as deal discount.
20
For deal discounts, (i.e. negative deal premiums) natural log of the inverse of the absolute value is
considered. For example, a deal premium of -2 is calculated as ln(1/2).

30
A robust regression was carried out to account for heteroscedasticity consistent standard

errors. Results for target firms and acquiring firms are reported in Table 3 and Table 5

respectively.

Table 3: OLS Regression Estimation Results for Target Firms

Explanatory Variables: Coefficients t-statistics P-value

Nature of Bid -0.037 -0.62 0.537
Method of Financing -0.034 -0.78 0.442
Nature of Bid x Method of Financing 0.14 1.97 0.048
Ln(Deal Premium) 0.053 3.49 0.001
Constant -0.028 -0.49 0.625
Number of observations 40
F-statistic (joint significance) 4.25
Prob > F 0.0066
R-squared 0.2785

Two variables are significant at α=0.05, Nature of Bid x Method of Financing and Deal

Premium. Our results indicate that hostile transactions which are cash financed are

significant determinants of abnormal returns for target firms. Also, we observe that the

size of deal premium is positively correlated with the size of abnormal returns. Results

also indicate that there is a 5.3% increase in deal premium corresponds to a percentage

increase in cumulative abnormal returns in a [0,1] day window for target firms. Minimal

multi co-linearity was observed in this regression; the results are shown in Table 4.

Table 4: Multi Co-linearity Matrix of Independent Variables

Deal Premium Nature of Bid Method of Financing

Deal Premium 1
Nature of Bid 0.1713 1
Method of Financing -0.086 -0.2366 1

31
Table 5: OLS Regression Estimation Results for Acquiring Firms

Explanatory Variables: Coefficients t-statistics P-value

Nature of Bid -0.003 -0.13 0.895
Method of Financing -0.0084 -0.78 0.442
Nature of Bid x Method of Financing -0.04 -0.83 0.414
Ln(Deal Premium) -0.00415 0.97 0.001
Constant 0.0072 0.57 0.571
Number of observations 40
F-statistic (joint significance) 0.57
Prob > F 0.0.6868
R-squared 0.1161

Our results indicate that none of the explanatory variables are significant, and that

acquiring firms do not experience significant abnormal returns. In the case of target

firms, deal premium indicates that a major market participant is valuing a given target

firm at a price higher than the current market price. In case of the acquiring firm, no new

information is revealed which can directly contribute to an increase share price. Also, a

target firm is likely to get acquired by any other acquirer, whereas it is less likely that the

acquirer announcing the acquisition will successfully purchase that particular target firm.

Therefore, based on our results we can conclude that an acquisition announcement causes

a revision of expectations by market participants about the target firms, but not

necessarily about the acquiring firms.

6. Limitations of this Study and Recommendations for further Research

Numerous studies (Asquithe and Kim, 1982; Mitchell, Pulvino and Stafford, 2002) have

established that target firm’s share price experience positive abnormal returns because of

an acquisition announcement, and acquiring firms’ share price remains unaffected. Even

32
though acquiring firms share experience no abnormal returns, there is a considerable

spike in volume. Further research on this issue can be conducted for stock financed

transactions with varying share- exchange agreements. For example Market participants

are likely to respond differently to floating exchange-ratio offers as compared with fixed-

exchange ratio offers (Mitchell, Pulvino and Stafford, 2002). Similarly, collar offers may

provide further insights in gauging the relationship between acquisition announcement

and share-exchange specifications.

As is the case with most event studies, it is difficult to use larger samples because

a security’s abnormal returns have to be calculated individually. Using larger samples,

however, can allow us more robust tests of hypotheses. Another approach would be to

use a different event study models to test the same hypothesis. For example instead of

using the market index, an industries’ index may be used. Finally, further research can be

conducted by using a sample of similar size, but performing more extensive analysis and

controlling for several variables when analyzing the impact of a single variable. For

example, to gauge the impact of hostile transactions on acquiring firms more fully, we

should control for method of financing variables.

7. Conclusion

This study had three primary objectives. First, we sought to determine whether abnormal

returns of target firms are significantly different from abnormal returns of acquiring

firms. Second, we compared abnormal returns experienced by target versus acquiring

33
firms in cash financed versus stock financed acquisitions. Third, we examined a potential

relationship between abnormal returns and nature of bid. This research’s major result is

the linear regression model proposed in Section 5. The proposed model works very well

in predicting abnormal performance, but can be further improved by adding more

explanatory variables.

The research found, as hypothesized, that abnormal returns of target firms are

significantly different from acquiring firms. In the sample of 40 acquisitions

announcements, target firms experienced positive abnormal returns irrespective of deal

specifications. Acquiring firms experienced negative, significant abnormal returns in

stock financed transactions on event day. Acquiring firms in hostile transactions

experienced negative, significant abnormal returns on Day 1 as opposed to event day, and

acquiring firms in friendly transactions experienced no abnormal returns. By analyzing

publicly available information, this research has analyzed the stock market reaction to

acquisition announcements and identified the deal premium as an important determinant

of abnormal returns.

34
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36
 Appendix A

Figure A-1: Histogram Plots for Consummation Periods of Cash and Stock Financed
Acquisitions

Cash Financed Transactions Equity Financed Transactions

.008
.01
.008

.006
.006
Density

Density
.004
.004

.002
.002
0

0
0 50 100 150 200 250 0 200 400 600 800
ConsummationPeriod ConsummationPeriod1

Figure A-2: An Illustration of the OLS Market Model used in Calculating Abnormal
Returns

The shaded area represents cumulative abnormal returns.

37
Appendix B

Figure B-1: Target Firms Exhibiting Positive Abnormal Returns Surrounding Event Day
Target Firm Abnormal Returns [-5,5] day time window Target Firm Abnormal Returns [-5,5] day time window

0.25 0.3

0.2 0.25

0.2
0.15

0.15
AR(%)

AR(%)
0.1
0.1
0.05
0.05

0
0
-5 -4 -3 -2 -1 0 1 2 3 4 5
-5 -4 -3 -2 -1 0 1 2 3 4 5
-0.05 -0.05
Da y Da y

azrAR footAR nfbAR scAR ivilAR kriAR icbsAR jillAR lexrAR msbkAR

Target Firms Abnormal Returns for [-5,5] day time window Target Firm Abnormal Returns in a [-5,5] day time window

0.25 0.25

0.2 0.2

0.15 0.15
AR(%)

AR(%)

0.1 0.1

0.05 0.05

0 0
-5 -4 -3 -2 -1 0 1 2 3 4 5 -5 -4 -3 -2 -1 0 1 2 3 4 5

-0.05 -0.05
Da y Da y

adrxAR psegAR adexAR xltcAR jmdtAR prvdAR gdtAR nwecAR cscAR atsn1AR

Target Firm Abnormal Returns for [-5,5] day time window Target Firm Abnormal Returns in a [-5,5] day time window

0.25
0.3 0.2

0.25 0.15

0.1
0.2
0.05
AR(%)

AR(%)

0.15 0
-5 -4 -3 -2 -1 0 1 2 3 4 5
0.1 -0.05

-0.1
0.05
-0.15
0
-0.2
-5 -4 -3 -2 -1 0 1 2 3 4 5
-0.05 -0.25
Da y Da y

idnxAR remAR atsnAR sfaAR pumpAR gdt1AR mygAR cdrAR mrxAR shuAR

Target Firm Abnormal Returns in a [-5,5] day time window

Target Firm Abnormal Returns in a [-5,5] day time window

0.3
0.25

0.25
0.2
0.2

0.15 0.15
AR(%)
AR(%)

0.1 0.1

0.05
0.05
0
-5 -4 -3 -2 -1 0 1 2 3 4 5
0
-0.05
-5 -4 -3 -2 -1 0 1 2 3 4 5

-0.05 -0.1
Day Day

wsbAR ariAR antAR absAR pixrAR bsxAR museAR coaAR

38
Figure B-2: Acquiring Firms Abnormal Returns Surrounding Event Day
Acquiring Firm Abnormal Returns for [-5,5] day time window Acquiring Firms Abnormal Returns in a [5,5] day time window

0.25 0.25

0.2 0.2

0.15 0.15

0.1 0.1
AR(%)

AR(%)
0.05 0.05

0 0
-5 -4 -3 -2 -1 0 1 2 3 4 5 -5 -4 -3 -2 -1 0 1 2 3 4 5
-0.05 -0.05

-0.1 -0.1
Da y Da y

ahAR geAR mniAR sovAR tlbAR stxAR impqAR pnkAR fcbpAR cofAR

Acquiring Firms Abnormal Returns in a [-5,5] day time window Acquiring Firms Abnormal Returns in a [-5,5] day time window

0.25 0.25

0.2 0.2

0.15 0.15

0.1 0.1
AR(%)

AR(%)
0.05 0.05

0 0
-5 -4 -3 -2 -1 0 1 2 3 4 5 -5 -4 -3 -2 -1 0 1 2 3 4 5
-0.05 -0.05

-0.1 -0.1
Da y Da y

muacAR bbtAR wpiAR excAR klacAR ge1AR gdAR cohAR wisAR helxAR

Acquiring Firms Abnormal Returns in a [-5,5] day time window Acquiring Firms Abnormal Returns in a [-5,5] day time window

0.25 0.25

0.2 0.2

0.15 0.15

0.1 0.1
AR(%)

AR(%)

0.05 0.05

0 0
-5 -4 -3 -2 -1 0 1 2 3 4 5 -5 -4 -3 -2 -1 0 1 2 3 4 5
-0.05 -0.05

-0.1 -0.1
Da y Da y

svuAR disAR abtAR emrAR cscoAR jnjAR ertAR ibmAR lAR jnj1AR

Acquiring Firms Abnormal Returns in a [-5,5] day time window Acquiring Firms Abnormal Returns in a [-5,5] day time window

0.25 0.25

0.2 0.2

0.15 0.15

0.1 0.1
AR(%)
AR(%)

0.05 0.05

0 0
-5 -4 -3 -2 -1 0 1 2 3 4 5 -5 -4 -3 -2 -1 0 1 2 3 4 5
-0.05 -0.05

-0.1 -0.1

-0.15 -0.15
Day Day

lizAR bkhAR caAR thoAR belfAR bsxAR whrAR eqyAR mntAR psaAR

39
 Appendix C

Figure C-1: Average Abnormal Returns for the Sample of 40 Target Firms

Day AR(%) t(AR) Average Abnormal Returns

10 0.22% 0.6
-9 0.76% 2.07 7.00%
-8 0.06% 0.17
-7 -0.42% -1.15 6.00%
-6 0.28% 0.77
5.00%
-5 0.05% 0.15
-4 0.33% 0.91 4.00%
-3 -0.14% -0.37
AR(%)

3.00%
-2 0.15% 0.42
-1 0.70% 1.9 2.00%
0 6.35% 17.33
1 4.79% 13.07 1.00%
2 -0.45% -1.24
0.00%
3 0.39% 1.06 10 -9 -8 -7 -6 -5 -4 -3 -2 -1 0 1 2 3 4 5 6 7 8 9
4 -0.03% -0.09 -1.00%
5 0.04% 0.11 Day
6 -0.14% -0.38
7 -0.22% -0.6 AR(%)
8 -0.43% -1.16
9 0.48% 1.31
Cumulative Abnormal Average Returns for Target Firms

Cumulative Abnormal Returns

0.14

0.12

0.1

0.08

0.06
CAR

0.04

0.02

0
1
9
-119
-111
-103
-95
-87
-79
-71
-63
-55
-47
-39
-31
-23
-15
-7

-0.02

-0.04
Day

CAR

40
Figure C-2: Target Firm Average Abnormal Returns in Cash Financed Transactions

Day AR(%) t(AR) Average Abnormal Returns

-10 0.56% 0.63
-9 0.74% 0.83 7.00%
-8 0.59% 0.67
-7 -0.09% -0.10 6.00%
-6 0.74% 0.83 5.00%
-5 -0.34% -0.38
-4 0.39% 0.44 4.00%
-3 -0.34% -0.38
3.00%

AR(%)
-2 0.33% 0.37
-1 1.33% 1.49 2.00%
0 6.59% 7.38
1.00%
1 4.57% 5.12
2 -0.53% -0.60 0.00%
3 1.58% 1.77

10
-1.00%
-8

-6

-4

-2
0

4 -0.22% -0.25
-1

5 -0.32% -0.36 -2.00%

6 -0.27% -0.30 Day
7 -0.38% -0.42
8 -0.91% -1.02 AR(%)
9 -0.20% -0.23
10 0.25% 0.28

Target Firm Cumulative Average Abnormal Returns in Cash Transactions

Cumulative Abnormal Returns

0.16

0.14
0.12

0.1

0.08

0.06
CAR

0.04

0.02

0
-0.02
2

8
4

-4
18

12

06

00

-9

-8

-8

-7

-7

-6

-5

-5

-4

-4

-3

-2

-2

-1

-1
-1

-1

-1

-1

-0.04

-0.06
Da y

CAR

Figure C-3: Target Firm Average Abnormal Returns in Stock Financed Transactions

Day AR(%) t(AR)

41
-10 -0.09% -0.10361
-9 0.77% 0.910797 Average Abnormal Returns
-8 -0.42% -0.49814
-7 -0.72% -0.85434 7.00%
-6 -0.13% -0.15869
-5 0.41% 0.480075 6.00%
-4 0.28% 0.333445 5.00%
-3 0.05% 0.060445
-2 -0.01% -0.01122 4.00%
-1 0.12% 0.140627
3.00%

AR(%)
0 6.12% 7.229016
1 4.98% 5.88143 2.00%
2 -0.38% -0.45453
3 -0.69% -0.81149 1.00%
4 0.14% 0.163418 0.00%
5 0.37% 0.436244

10
-1.00%
-8

-6

-4

-2
-10

6 -0.03% -0.03285
7 -0.08% -0.0931 -2.00%
8 0.02% 0.019706
Day
9 1.10% 1.300695
10 1.16% 1.374686
AR(%)

Target Firm Cumulative Average Abnormal Returns in Stock Financed Transactions

Cumulative Abnormal Returns

0.16

0.14

0.12

0.1

0.08
CAR

0.06

0.04

0.02

0
-9

-3

-0.02
3

9
17

11

05

5
-9

-9

-8

-8

-7

-6

-6

-5

-5

-4

-3

-3

-2

-2

-1
-1

-1

-1

-0.04
Da y

42
Figure C-4: Target Firm Average Abnormal Returns for Hostile Transactions

Day AR(%) t(AR) Average Abnormal Returns

-10 0.03% 0.023426
-9 0.59% 0.479797
8.50%
-8 -0.61% -0.49904
-7 -1.09% -0.88859
6.50%
-6 -0.09% -0.06955
-5 -0.19% -0.15462
-4 -0.40% -0.32586 4.50%
-3 -1.14% -0.92937

AR(%)
-2 0.16% 0.127825 2.50%
-1 -1.18% -0.95748
0 5.96% 4.843802 0.50%
1 8.80% 7.152197
2 -0.83% -0.67641

10
-8

-6

-4

-2
-1.50% 0
-1
3 -1.80% -1.46153
4 0.25% 0.20622
-3.50%
5 0.10% 0.07727
6 0.18% 0.148956 Day

7 -0.36% -0.29387
AR(%)
8 -0.29% -0.23979
9 2.70% 2.193256
10 2.08% 1.689571
Target Firm Cumulative Average Abnormal Returns in Hostile Transactions

Cumulative Abnormal Returns

0.16

0.14

0.12

0.1

0.08
CAR

0.06

0.04

0.02

-0.02
-4

8
18

12

06

00

0
-9

-8

-8

-7

-7

-6

-5

-5

-4

-4

-3

-2

-2

-1

-1
-1

-1

-1

-1

-0.04
Da y

CAR

43
Figure C-5: Target Firm Average Abnormal Returns for Friendly Transactions

Day AR(%) t(AR) Average Abnormal Returns

-10 0.28% 0.370774
-9 0.81% 1.058395
7.00%
-8 0.29% 0.372738
-7 -0.20% -0.26023 6.00%
-6 0.41% 0.52878
-5 0.13% 0.175537 5.00%
-4 0.58% 0.755276 4.00%
-3 0.20% 0.261154

AR(%)
-2 0.15% 0.199146 3.00%
-1 1.32% 1.720806
2.00%
0 6.47% 8.441379
1 3.45% 4.49917 1.00%
2 -0.33% -0.42883
3 1.12% 1.459144 0.00%
4 -0.13% -0.16893

10
-8

-6

-4

-2
0

-1.00%
-1

5 0.02% 0.03003
Day
6 -0.25% -0.32442
7 -0.17% -0.22546 AR(%)
8 -0.47% -0.61117
9 -0.26% -0.33612
10 0.28% 0.366817

Target Firm Cumulative Average Abnormal Returns in Friendly Transactions

Cumulative Abnormal Returns

0.14

0.12

0.1

0.08

0.06
CAR

0.04

0.02

-0.02
2

8
4

-4
18

12

06

00

-9

-8

-8

-7

-7

-6

-5

-5

-4

-4

-3

-2

-2

-1

-1
-1

-1

-1

-1

-0.04

-0.06
Da y

44
Figure C-6: Average Abnormal Returns for the Sample of 40 Acquiring Firms

Day AR(%) t(AR) Average Abnormal Returns

-10 -0.20% -0.55696
-9 0.05% 0.134156 7.00%
-8 -0.21% -0.56267
-7 0.24% 0.667394 6.00%
-6 0.08% 0.220335 5.00%
-5 -0.32% -0.86127
-4 0.08% 0.220131 4.00%
-3 -0.02% -0.05133

AR(%)
-2 -0.17% -0.47351 3.00%
-1 -0.28% -0.75524
2.00%
0 -0.95% -2.59134
1 -0.44% -1.18775 1.00%
2 -0.48% -1.3141
3 0.20% 0.537012 0.00%
4 -0.44% -1.19715

10
-8

-6

-4

-2
-10

-1.00%
5 -0.08% -0.2168
6 -0.23% -0.62524 Day
7 -0.20% -0.5317
AR(%)
8 -0.17% -0.45867
9 0.12% 0.324196
10 -0.15% -0.39615
Acquiring Firms Cumulative Average Abnormal Returns

Cumulative Abnormal Returns

0.14
0.12
0.1
0.08
0.06
CAR

0.04
0.02
0
1
9
-119
-111
-103
-95
-87
-79
-71
-63
-55
-47
-39
-31
-23
-15
-7

-0.02
-0.04
-0.06
Day

CAR

45
Figure C-7: Acquiring Firm Average Abnormal Returns for Cash Transactions

Average Abnormal Returns

Day AR(%) t(AR)
-10 0.37% 1.014396
7.00%
-9 -0.10% -0.27479
-8 -0.27% -0.74926 6.00%
-7 -0.27% -0.75003 5.00%
-6 0.24% 0.66267
-5 0.20% 0.543338 4.00%

-4 -0.59% -1.65195 3.00%

AR(%)
-3 -0.29% -0.81795
2.00%
-2 0.63% 1.744371
-1 0.21% 0.592471 1.00%
0 -0.70% -1.94382 0.00%
1 -0.82% -2.33391

10
-1.00%

-8

-6

-4

-2
0
-1
2 -0.42% -1.15589
3 -0.26% -0.7329 -2.00%
4 0.25% 0.705675 Day
5 0.02% 0.042301
AR(%)
6 0.32% 0.888434
7 0.07% 0.206151
8 0.01% 0.014307
9 -0.03% -0.08584
10 -0.25% -0.68445
Acquiring Firm Cumulative Average Abnormal Returns in Cash Transactions

Cumulative Abnormal Returns

0.14

0.12

0.1

0.08

0.06
CAR

0.04

0.02

0
-9

-3

9
17

11

05

-0.02
-9

-9

-8

-8

-7

-6

-6

-5

-5

-4

-3

-3

-2

-2

-1
-1

-1

-1

-0.04
Da y

46
Figure C-8: Acquiring Firm Average Abnormal Returns for Stock Transactions

Day AR(%) t(AR)

-10 -0.21% 0.626707 Average Abnormal Returns
-9 0.45% 0.561695
-8 -0.34% -0.48902 7.00%
-7 0.22% 0.234565
-6 0.01% 0.122259 6.00%
-5 0.23% 0.280042 5.00%
-4 -0.04% -0.10428
-3 0.02% -0.0342 4.00%
-2 0.30% 0.364627
3.00%
-1 -0.70% -0.91037 AR(%)
0 -1.09% -1.94273 2.00%
1 -0.04% -0.06285
1.00%
2 -0.77% -0.9817
3 -0.45% -0.55584 0.00%
4 -0.60% -0.652

10
-1.00%
-8

-6

-4

-2
-10

5 0.09% 0.097343
6 -0.76% -1.0809 -2.00%
7 -0.66% -0.73482 Day
8 -0.18% -0.47493
9 -0.53% -0.65159 AR(%)
10 -0.28% -0.43428
Acquiring Firm Cumulative Average Abnormal Returns in Stock Transactions

Cumulative Abnormal Returns

0.14

0.09

0.04
CAR

-0.01
4
8

-8

-2

10
16

10

04

-9

-9

-8

-8

-7

-6

-6

-5

-5

-4

-3

-3

-2

-2

-1
-1

-1

-1

-0.06

-0.11
Da y

CAR

47
Figure C-9: Acquiring Firm Average Abnormal Returns for Hostile Transactions

Day AR(%) t(AR) Average Abnormal Returns

-10 0.93% 1.552245
-9 0.18% 0.292676
7.00%
-8 0.49% 0.825516
-7 -0.78% -1.29647 6.00%
-6 0.56% 0.92805 5.00%
-5 0.09% 0.158252 4.00%
-4 -0.34% -0.56564
-3 -0.21% -0.35085 3.00%

AR(%)
-2 0.30% 0.497481 2.00%
-1 -0.01% -0.00937 1.00%
0 -0.37% -0.61109
1 -2.05% -3.42774 0.00%
2 -0.75% -1.25403 -1.00%

10
-8

-6

-4

-2
-10

3 -1.37% -2.28252 -2.00%

4 0.33% 0.544746
-3.00%
5 -0.27% -0.45221
6 -0.26% -0.43474 Day
7 -0.28% -0.46985
AR(%)
8 -0.19% -0.32188
9 -0.76% -1.26262
10 0.25% 0.421381
Acquiring Firm Cumulative Average Abnormal Returns in Hostile Transactions

Cumuative Abnormal Returns

0.13

0.08
CAR

0.03
1
9
-119
-111
-103
-95
-87
-79
-71
-63
-55
-47
-39
-31
-23
-15
-7

-0.02

-0.07
Day

CAR

48
Figure C-10: Acquiring Firm Average Abnormal Returns for Friendly Transactions

Day AR(%) t(AR) Average Abnormal Returns

-10 0.22% 0.370953
-9 -0.33% -0.55995
7.00%
-8 -0.10% -0.16835
-7 -0.02% -0.02689 6.00%
-6 0.14% 0.238228
-5 0.08% 0.128781 5.00%
-4 -0.31% -0.52131 4.00%
-3 0.18% 0.300903

AR(%)
-2 -0.12% -0.21083 3.00%
-1 -0.23% -0.38868
2.00%
0 -0.25% -0.41819
1 -0.58% -0.98443 1.00%
2 -0.33% -0.55853
3 -0.19% -0.31502 0.00%
4 0.15% 0.260049

10
-8

-6

-4

-2
0

-1.00%
-1

5 -0.49% -0.83765
6 -0.02% -0.03229 Day

7 -0.21% -0.35841
AR(%)
8 -0.20% -0.33108
9 0.03% 0.047726
10 0.07% 0.125683
Acquiring Firm Cumulative Average Abnormal Returns in Friendly Transactions

Cumulative Abnormal Returns

0.1

0.05
CAR

0
1
9
-119
-111
-103
-95
-87
-79
-71
-63
-55
-47
-39
-31
-23
-15
-7

-0.05

-0.1
Day

CAR

49