Post-merger returns in frontier markets, or how we learned to stop worrying and love the acquirers
Abstract
This study presents the results from a comprehensive out-of-sample test of long-run returns following mergers and acquisitions (M&As). Using a unique sample from 23 frontier markets of almost 800 transactions conducted during the years 1992 to 2016, we implement both cross-sectional tests and time-series examinations based on a calendar-time portfolio approach. Contrary to evidence from developed markets, the M&As in these frontier markets do not lead to abnormal underperformance of acquirers, regardless of whether they paid for the acquisition with cash or stock. The results are robust to many considerations, including subsample and subperiod analysis, alternative formation periods, different portfolio construction approaches.
Keyword : mergers, acquisitions, long-run returns, long-term underperformance, frontier equity markets, behavioral finance, corporate finance
How to Cite
Zaremba, A., Szyszka, A., Płotnicki, M., & Grobelny, P. (2018). Post-merger returns in frontier markets, or how we learned to stop worrying and love the acquirers. Journal of Business Economics and Management, 19(1), 96-109. https://doi.org/10.3846/16111699.2017.1399162
This work is licensed under a Creative Commons Attribution 4.0 International License.
References
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Andre, P.; Kooli, M.; L’Her, J. 2004. The long-run performance of mergers and acquisitions: evidence from the Canadian stock market, Journal of Financial Management 33(4): 27–43.
Bouwman, C.; Fuller, K.; Nain, A. 2009. Market valuation and acquisition quality: empirical evidence, Review of Financial Studies 22(2): 633–679. https://doi.org/10.1093/rfs/hhm073
Casestudyinc. 2008. Daimler, Chrysler and the failed merger [online], [cited 10 October 2017]. Available from Internet: http://www.casestudyinc.com/daimler-chrysler-and-the-failed-merger
Dube, S.; Glascock, J. L. 2006. Effects of the method of payment and the mode of acquisition on performance and risk metrics, International Journal of Managerial Finance 2(3): 176–195. https://doi.org/10.1108/17439130610676466
Dutta, S.; Jog, V. 2009. The long-term performance of acquiring firms: a re-examination of an anomaly, Journal of Banking & Finance 33(8): 1400–1412. https://doi.org/10.1016/j.jbankfin.2009.02.004
Fama, E. F. 1998. Market efficiency, long-term returns, and behavioral finance, Journal of Financial Economics 49(3): 283–306. https://doi.org/10.1016/S0304-405X(98)00026-9
Fama, E. F.; French, K. R. 2015. A five-factor asset pricing model, Journal of Financial Economics 116(1): 1–22. https://doi.org/10.1016/j.jfineco.2014.10.010
Fama, E. F.; MacBeth, J. D. 1973. Risk, return and equilibrium: empirical tests, Journal of Political Economy 81(3): 607–636. https://doi.org/10.1086/260061
Franks, J.; Harris, R.; Titman, S. 1991. The postmerger share-price performance of acquiring firms, Journal of Financial Economics 29(1): 81–96. https://doi.org/10.1016/0304-405X(91)90014-B
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Gallagher, P. 1998. Daimler Chrysler to ring Wall Street bell [online], [cited 10 October 2017]. Available from Internet: http://expressindia.indianexpress.com/fe/daily/19981117/32155024.html
Gibbons, M. R.; Ross, S. A.; Shanken, J. 1989. A test of the efficiency of a given portfolio, Econometrica 57(5): 1121–1152. https://doi.org/10.2307/1913625
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Harvey, C. R.; Liu, Y.; Zhu, H. 2016. … and the cross-section of expected returns, Review of Financial Studies 29(1): 5–68. https://doi.org/10.1093/rfs/hhv059
Isidore, C. 2007. Daimler pays to dump Chrysler [online], [cited 10 October 2017]. Available from Internet: http://money.cnn.com/2007/05/14/news/companies/chrysler_sale/?postversion=2007051408
Jensen, M.; Ruback, R. 1983. The market for corporate control: the scientific evidence, Journal of Financial Economics 11(1–4): 17–31. https://doi.org/10.1016/0304-405X(83)90004-1
Lau, B.; Proimos, A. 2010. The underperformance of equity‐financed bidders, International Journal of Managerial Finance 6(1): 4–23. https://doi.org/10.1108/17439131011015760
Limmack, R. J. 1991. Corporate mergers and shareholder wealth effects: 1977–1986. Accounting and Business Research 21: 239–251. https://doi.org/10.1080/00014788.1991.9729838
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Loughran, T.; Vijh, A. 1997. Do long-term shareholders benefit from corporate acquisitions?, Journal of Finance 52(5): 1765–1790. https://doi.org/10.1111/j.1540-6261.1997.tb02741.x
Martin, L. R. 2016. M&A: The one thing you need to get right. Harvard Business Review [online], [cited 10 October 2017]. Available from Internet: https://hbr.org/2016/06/ma-the-one-thing-you-need-to-get-right
McLean, D. R.; Pontiff, J. 2016. Does academic research destroy stock return predictability?, Journal of Finance 71(1): 5–32. https://doi.org/10.1111/jofi.12365
Mitchell, M. L.; Stafford, E. 2000. Managerial decisions and long-term stock price performance, Journal of Business 75(3): 287–329. https://doi.org/10.1086/209645
Moeller, S. B.; Schlingemann, F. P.; Stulz, R. M. 2005. Wealth destruction on a massive scale? A study of acquiring-firms returns in the recent merger wave, Journal of Finance 60(2): 757–782. https://doi.org/10.1111/j.1540-6261.2005.00745.x
Mueller, D. C. 1969. A theory of conglomerate mergers, Quarterly Journal of Economics 83(4): 643–659. https://doi.org/10.2307/1885454
Newey, W. K.; West, K. D. 1987. A simple positive-definite heteroskedasticity and autocorrelation consistent covariance matrix, Econometrica 55(3): 703–708. https://doi.org/10.2307/1913610
Rhodes-Kropf, M.; Viswanathan, S. 2004. Market valuation and merger waves, Journal of Finance 59(6): 2685–2718. https://doi.org/10.1111/j.1540-6261.2004.00713.x
Roll, R. 1986. The hubris hypothesis of corporate takeovers, Journal of Business 59(2): 197–216. https://doi.org/10.1086/296325
Savor, P. G.; Lu, Q. 2009. Do stock mergers create value for acquirers? Journal Of Finance 64(3): 1061–1097. https://doi.org/10.1111/j.1540-6261.2009.01459.x
Shleifer, A.; Vishny, R. W. 1989. Managerial entrenchment: the case of manager-specific investments, Journal of Financial Economics 25(1): 123–139. https://doi.org/10.1016/0304-405X(89)90099-8
Shleifer, A.; Vishny, R. W. 2003. Stock market driven acquisitions, Journal of Financial Economics 70(3): 295–489. https://doi.org/10.1016/S0304-405X(03)00211-3
Sudarsanam, S.; Mahate, A. A. 2006. Are friendly acquisitions too bad for shareholders and managers? Long-term value creation and top management turnover in hostile and friendly acquirers, British Journal of Management 17(51): 7–30. https://doi.org/10.1111/j.1467-8551.2006.00476.x
Willenbrock, S. 2011. Diversification return, portfolio rebalancing, and the commodity return puzzle, Financial Analyst Journal 67(4): 42–49. https://doi.org/10.2469/faj.v67.n4.1
Zaremba, A.; Grobelny, P. 2016. Merger imbalance and returns in international equity markets, Investment Analysts Journal 46(2): 117–131. https://doi.org/10.2139/ssrn.2820587
Zaremba, A.; Płotnicki, M. 2016. Mergers and acquisitions: Evidence on post-announcement performance from CEE stock markets, Journal of Business Economics and Management 17(2): 251–266. https://doi.org/10.3846/16111699.2015.1104384
Andrade, G.; Mitchell, M.; Stafford, E. 2001. New evidence and perspectives on mergers, Journal of Economics Perspectives 15(2): 103–120. https://doi.org/10.1257/jep.15.2.103
Andre, P.; Kooli, M.; L’Her, J. 2004. The long-run performance of mergers and acquisitions: evidence from the Canadian stock market, Journal of Financial Management 33(4): 27–43.
Bouwman, C.; Fuller, K.; Nain, A. 2009. Market valuation and acquisition quality: empirical evidence, Review of Financial Studies 22(2): 633–679. https://doi.org/10.1093/rfs/hhm073
Casestudyinc. 2008. Daimler, Chrysler and the failed merger [online], [cited 10 October 2017]. Available from Internet: http://www.casestudyinc.com/daimler-chrysler-and-the-failed-merger
Dube, S.; Glascock, J. L. 2006. Effects of the method of payment and the mode of acquisition on performance and risk metrics, International Journal of Managerial Finance 2(3): 176–195. https://doi.org/10.1108/17439130610676466
Dutta, S.; Jog, V. 2009. The long-term performance of acquiring firms: a re-examination of an anomaly, Journal of Banking & Finance 33(8): 1400–1412. https://doi.org/10.1016/j.jbankfin.2009.02.004
Fama, E. F. 1998. Market efficiency, long-term returns, and behavioral finance, Journal of Financial Economics 49(3): 283–306. https://doi.org/10.1016/S0304-405X(98)00026-9
Fama, E. F.; French, K. R. 2015. A five-factor asset pricing model, Journal of Financial Economics 116(1): 1–22. https://doi.org/10.1016/j.jfineco.2014.10.010
Fama, E. F.; MacBeth, J. D. 1973. Risk, return and equilibrium: empirical tests, Journal of Political Economy 81(3): 607–636. https://doi.org/10.1086/260061
Franks, J.; Harris, R.; Titman, S. 1991. The postmerger share-price performance of acquiring firms, Journal of Financial Economics 29(1): 81–96. https://doi.org/10.1016/0304-405X(91)90014-B
Friedman, J. N. 2006. Stock market driven acquisitions: theory and evidence [online], [cited 10 October 2017]. Available from Internet: http://www.cirje.e.u-tokyo.ac.jp/research/workshops/macro/documents/JFriedman.pdf
Gallagher, P. 1998. Daimler Chrysler to ring Wall Street bell [online], [cited 10 October 2017]. Available from Internet: http://expressindia.indianexpress.com/fe/daily/19981117/32155024.html
Gibbons, M. R.; Ross, S. A.; Shanken, J. 1989. A test of the efficiency of a given portfolio, Econometrica 57(5): 1121–1152. https://doi.org/10.2307/1913625
Harvey, C. R. 2017. The scientific outlook in financial economics. Presidential speech [online], [cited 10 October 2017]. Available from Internet: https://ssrn.com/abstract=2895842
Harvey, C. R.; Liu, Y.; Zhu, H. 2016. … and the cross-section of expected returns, Review of Financial Studies 29(1): 5–68. https://doi.org/10.1093/rfs/hhv059
Isidore, C. 2007. Daimler pays to dump Chrysler [online], [cited 10 October 2017]. Available from Internet: http://money.cnn.com/2007/05/14/news/companies/chrysler_sale/?postversion=2007051408
Jensen, M.; Ruback, R. 1983. The market for corporate control: the scientific evidence, Journal of Financial Economics 11(1–4): 17–31. https://doi.org/10.1016/0304-405X(83)90004-1
Lau, B.; Proimos, A. 2010. The underperformance of equity‐financed bidders, International Journal of Managerial Finance 6(1): 4–23. https://doi.org/10.1108/17439131011015760
Limmack, R. J. 1991. Corporate mergers and shareholder wealth effects: 1977–1986. Accounting and Business Research 21: 239–251. https://doi.org/10.1080/00014788.1991.9729838
Lin, H.-C.; Chou, T.-K.; Cheng, J.-C. 2011. Does market misvaluation drive post-acquisition underperformance in stock deals? International Review of Economics & Finance 20(4): 690–706. https://doi.org/10.1016/j.iref.2010.12.005
Loughran, T.; Vijh, A. 1997. Do long-term shareholders benefit from corporate acquisitions?, Journal of Finance 52(5): 1765–1790. https://doi.org/10.1111/j.1540-6261.1997.tb02741.x
Martin, L. R. 2016. M&A: The one thing you need to get right. Harvard Business Review [online], [cited 10 October 2017]. Available from Internet: https://hbr.org/2016/06/ma-the-one-thing-you-need-to-get-right
McLean, D. R.; Pontiff, J. 2016. Does academic research destroy stock return predictability?, Journal of Finance 71(1): 5–32. https://doi.org/10.1111/jofi.12365
Mitchell, M. L.; Stafford, E. 2000. Managerial decisions and long-term stock price performance, Journal of Business 75(3): 287–329. https://doi.org/10.1086/209645
Moeller, S. B.; Schlingemann, F. P.; Stulz, R. M. 2005. Wealth destruction on a massive scale? A study of acquiring-firms returns in the recent merger wave, Journal of Finance 60(2): 757–782. https://doi.org/10.1111/j.1540-6261.2005.00745.x
Mueller, D. C. 1969. A theory of conglomerate mergers, Quarterly Journal of Economics 83(4): 643–659. https://doi.org/10.2307/1885454
Newey, W. K.; West, K. D. 1987. A simple positive-definite heteroskedasticity and autocorrelation consistent covariance matrix, Econometrica 55(3): 703–708. https://doi.org/10.2307/1913610
Rhodes-Kropf, M.; Viswanathan, S. 2004. Market valuation and merger waves, Journal of Finance 59(6): 2685–2718. https://doi.org/10.1111/j.1540-6261.2004.00713.x
Roll, R. 1986. The hubris hypothesis of corporate takeovers, Journal of Business 59(2): 197–216. https://doi.org/10.1086/296325
Savor, P. G.; Lu, Q. 2009. Do stock mergers create value for acquirers? Journal Of Finance 64(3): 1061–1097. https://doi.org/10.1111/j.1540-6261.2009.01459.x
Shleifer, A.; Vishny, R. W. 1989. Managerial entrenchment: the case of manager-specific investments, Journal of Financial Economics 25(1): 123–139. https://doi.org/10.1016/0304-405X(89)90099-8
Shleifer, A.; Vishny, R. W. 2003. Stock market driven acquisitions, Journal of Financial Economics 70(3): 295–489. https://doi.org/10.1016/S0304-405X(03)00211-3
Sudarsanam, S.; Mahate, A. A. 2006. Are friendly acquisitions too bad for shareholders and managers? Long-term value creation and top management turnover in hostile and friendly acquirers, British Journal of Management 17(51): 7–30. https://doi.org/10.1111/j.1467-8551.2006.00476.x
Willenbrock, S. 2011. Diversification return, portfolio rebalancing, and the commodity return puzzle, Financial Analyst Journal 67(4): 42–49. https://doi.org/10.2469/faj.v67.n4.1
Zaremba, A.; Grobelny, P. 2016. Merger imbalance and returns in international equity markets, Investment Analysts Journal 46(2): 117–131. https://doi.org/10.2139/ssrn.2820587
Zaremba, A.; Płotnicki, M. 2016. Mergers and acquisitions: Evidence on post-announcement performance from CEE stock markets, Journal of Business Economics and Management 17(2): 251–266. https://doi.org/10.3846/16111699.2015.1104384