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Impact of mergers and acquisitions on returns to shareholders of acquiring firms: Indian economy in perspective.

Abstract

The paper examines the returns to shareholders of acquiring companies in India during the period 2003-08 and abnormal returns due to the announcement of mergers and acquisitions (M&A) and return on equity funds five years before and after M&A have been examined. The study also performs a disaggregated analysis for sub-samples based on the status of target firm acquired whether it remains as a wholly owned subsidiary (WOS) or gets absorbed with the operations of acquiring firm and investigates the effect of method of financing (cash or stock) employed in the acquisition and the type of the target firm (listed or unlisted) acquired on the stock returns of the acquiring companies' shareholders.

The results indicate that M&A generate statistically significant abnormal returns on the announcement as well as higher post M&A returns for shareholders of the acquiring firms. The M&A financed with cash, experience higher returns than the acquisitions financed with stock. Another notable finding is that acquirers acquiring listed firms experience positive abnormal returns) contrary to the pattern observed in developed countries.

Key Word: Mergers, Acquisitions, Event study, Abnormal return, Indian economy

JEL Classification--G14, G34, O16, O53

Introduction

Mergers and acquisitions have long been a popular element of corporate strategy; equally important is they represent an important alternative for strategic expansion through inorganic growth. This research study investigates the abnormal returns (short-term m nature) to the shareholders of acquiring firms on the announcement of acquisitions of 100 per cent stake (complete acquisition) of the target firm. The returns of the sample related to 398 complete acquisitions have also been analyzed for sub-samples disaggregated on the basis of the status of target firm whether it is acquired as a wholly owned subsidiary (WOS) or to be absorbed with the operations of acquiring firm. Furthermore, the possible impact of different means of payment (cash, stock) on the acquirers' return has also been examined in the paper. Whether the type of target firm (listed, unlisted) acquired has an important impact on acquirers' return has also been studied. The impact of method of payment and type of the target firm has also been analyzed for all the sub-samples. The present study makes a unique contribution by investigating the impact of acquisitions of independent firms only.

Prelude

There is a significant body of literature analyzing the success of mergers and acquisitions activity. The purpose of this paper is predominantly assessed from the shareholders of the acquiring companies. Accordingly, the review of extant research work is primarily focused on studies measuring the implications of mergers and acquisitions on acquirer shareholders' wealth from the point of view of method of financing employed in mergers and acquisitions and type of target firm (listed/unlisted) merged. Performance of acquiring firms has been extensively studied empirically in finance as well as in strategy literature. Ravenscraft and Scherer (1) analyze 6000 US mergers between 1950 and 1977. The study reveals the absence of announcement return as well as post-merger profit. The study documents divesture of nearly one-third of all acquisitions during the 1960s and 1970s. They conclude that diversifying acquisitions promote managerial "empire building" rather than efficiency. Subeniotis, Tampakoudis, Kroustalis, and Poulios (2) use event study is to assess the wealth effects arising to acquiring and acquired companies' shareholders during 2005 in the U.S. stock market. They document the acquirer shareholders earn very low abnormal return on the announcement.

Most empirical studies agree that the method of payment plays an important role in explaining acquiring firms' stock return. The stock market accords differing reaction to the announcement of acquisitions on the basis of mode of financing being used. Carleton, Guilkey, Harris and Stewart (3); Amihud, Lev, and Travlos (4); Martin (5); Ghosh and Ruland (6); and Zhang (7) study different factors that influence an acquirer's decision regarding mode of payment to be used in financing acquisitions. They contend that the possibility of stock financing increases with the acquiring company's shares being overvalued in the market. The overvalued stock means shares of the acquiring company are trading at a premium to the book value of its assets. In contrast, an acquisition financed with cash conveys the confidence of an acquirer in accurately assessing the value of a target firm. Stock markets, in general, consider cash offers as good news which leads to positive valuation of share prices of both the target and the acquiring firms (Loughran and Vijh (8); Emery and Switzer (9); Martynova and Renneboog (10)).

It has been well documented in the literature that acquiring companies' shareholders earn normal returns on the announcement of cash offers while the returns in stock offers are negative (Brown and Ryngaert (11); Smith and Kim (12); Loughran and Vijh (8); Blackburn, Dark and Hansont (13); Faccio and Masulis (14); Kummer and Hoffmeister (15); Travlos (16); Wansley, Lane and Yang (17); Asquith, Bruner and Mullins (18); Trifts (19); Sullivan, Jensen and Hudson (20); Lyrodi, Lazaridis and Subeniotis (21); and Yook (22)). Empirical evidence for higher return for acquisitions financed with cash over stock is reported by various studies (Andrade, Mitchell, and Stafford (23); Moeller, Schlingeman and Stulz (24); Antoniou, Petmezas and Zhao (25); Draper and Paudyal (26); Ming, Hirshleifer, Richardson and Siew (27); Savor (28); Hodgkinson and Partington (29)). Many hypotheses have been put forward to explain the economic/financial rationale why the share prices are influenced by the choice of the payment method:

Following the Investment opportunity hypothesis and the risk sharing hypothesis that stock transactions are no longer observed as a negative signal by the market participants, our research focuses on another important issue that affects the acquiring companies and attempts to examine the effect of the status of target firm as being publicly listed or unlisted. Extant literature in this context reveals that the acquirers of unlisted firms make valuable acquisitions. The positive results are not observed in the case of acquirers of publicly listed target firms (Firth (36), Jensen and Ruback (37); Jarrell, Brickley and Netter (38); Franks and Harris (39); Hansen and Lott (40); Chang (41); Andrade, et al. (23); Ang and Kohers (42); Fuller, Netter, and Stegemoller (43); Conn, Cosh, Guest and Hughes (44); Faccio, McConnell, and Stolin (45); Draper and Paudyal; Alexandridis, Petmezas and Travlos (46); Travlos (16)). The two major reasons for this phenomenon suggested are:

* that agency problems are more likely for acquirers of listed firms but do not apply to acquirers of privately-held and unlisted target firms and

* lack of liquidity of unlisted firms reduce their bargaining power which, in turn, inhibits them from gaining premiums from the acquirers. However, in marked contrast, more agency problems are observed in the case of unlisted target firms in India primarily due to their weak governance norms and minority public shareholding.

In the Indian context, Beena (47) has investigated the impact on the stock prices of the acquiring companies, whereas Mann and Kohli (48) have investigated the impact on both acquirers as well as target firms. They report the positive market reaction to stock offers not only for the target companies but for the acquiring companies. Thus, it is that both issues, method of payment used for financing acquisition and the type of target firm acquired affects the shareholders returns of the acquiring companies.
EXHIBIT
ASYMMETRIC INFORMATION : INVESTMENT OPPORTUNITY : RISK
SHARING-HYPOTHESIS

ASYMMETRIC INFORMATION HYPOTHESIS (also known as the information
content hypothesis) states that an offer to pay in shares for an
acquisition will be seen by market participants as a signal that
the stocks are overvalued (Myers and Majluf (30)). A stock offer
enables an acquirer to share the risk of not realizing the expected
future growth opportunities with the target firm in the
post-acquisition period. Hansen (31) supports asymmetric
information hypothesis with a different point of view. He argues
that when an acquirer is not able to assess the true value of the
assets of the target firm, it will finance such an acquisition with
stock. He proposes that the stock financing has a contingent
pricing effect and enables the acquirer to share the risk of
overvaluation of the target firm with that of the target firm
shareholders in the post-acquisition period. Stock offers convey a
negative signal to the market that the acquirer is not-confident
about the valuation of the target company and wants to share the
risk of overvaluation with the target company shareholders in the
post-acquisition period. According to the free cash flow hypothesis
acquisitions being paid for in cash reduce the agency costs and
conveys positive signal to market (Jensen (32); Masse, Hanrahan and
Kushner (33)).

Asymmetric information hypothesis concludes that stock transactions
lead to negative abnormal returns around the announcement date.
Free cash flow hypothesis propose that cash transactions result in
positive abnormal returns.

Contrary to the above hypotheses examined by (Myers and Majluf
(30); Jensen (32)), Martins argues that stock transactions are no
longer observed as a negative signal by the market participants and
the Investment opportunity hypothesis and the risk sharing
hypothesis.

INVESTMENT OPPORTUNITY HYPOTHESIS proposes that firms with
excellent future investment opportunities should not pay in cash
for acquisitions. Cash transactions often have to be financed with
new debt. Cash flows, however, should not be used for debt service
payments since this reduces the amount of discretionary cash flows
available in the future (Jung, Kim and Stulz (34); Martin (5)).

RISK SHARING HYPOTHESIS proposes that it could be beneficial to pay
in stock especially in high-risk transactions, because in this
case, the target firm will have an incentive to make a success of
the takeover transaction (Rappaport and Sirower (35); Martin (5)).
Martin examines this hypothesis and observes that the acquirer is
more likely to use stock to finance an acquisition when the
acquirer's growth opportunities are higher.


The aim of the present paper is to examine the short-term abnormal returns to the shareholders of acquiring companies with focus on acquisitions during period January 2003-December 2008. The paper also focuses on the influence of methods of payment used for financing acquisition and the type of the target firm acquired on acquirer's share price. The objectives of the paper are as follows:

* To examine the abnormal returns to the shareholders of acquirer firms acquiring 100 per cent stake of target firms;

* To examine the abnormal return for disaggregated sample on the basis of status of target firm whether it remains as a wholly owned subsidiary or completely absorbed with the operations of the acquiring firm;

* To understand the impact of method of payment employed in financing acquisitions for the entire sample as well as its sub-samples;

* To understand the influence of acquiring public-listed firms and unlisted target firms for entire sample as well as sub-samples;

* To investigate the post-merger and acquisition performance of the acquiring firms.

Data Collection and Methodology Used

Abnormal returns to shareholders around the announcements have been examined by event study methodology. Ratio analysis and paired samples-t test has been used to analyze post-merger and acquisition performance of the acquiring firms. This study is based on complete acquisitions which were announced during the period January 2003 to December 2008 by Indian corporates listed on the Bombay Stock Exchange. Thompson SDC Platinum database for mergers and acquisitions have been used for the data. The announcement dates have been verified from the archives of corporate announcements maintained on the website of Bombay Stock Exchange. The acquisitions that fulfill the following criteria are selected for the study:

* Public limited companies listed on Bombay Stock Exchange.

* Mergers and acquisitions announced between January 2003 and December 2008.

* Acquisitions of minor and controlling stakes have been excluded from the sample.

* Mergers and acquisitions in the financial sector are excluded from the sample. This is because of the different nature of assets and liabilities of financial firms and the different financial reporting of these companies.

* The shares of acquiring company must have been traded for at least 185 days during the estimation window of 255 days.

* There is no announcement of issuance of new shares by way of domestic or international offering in the form of Public Offer, follow up of public offer Preferential Issue, Foreign Currency Convertible Bonds (FCCB), American Depository Receipts (ADR) and Global Depository Receipts (GDR), announcement of another merger or acquisition during the event window.

* There is no announcement of capital investment in a new project, credit rating, financial results during the event window.

* To avoid possible information contamination or the confounding effect, the firms that undertake any significant event such as announcements of bonus shares, dividends or ex-dates on any type of dividend (cash/ stock dividend), within twenty days prior and after the acquisition are excluded from the sample.

* The firms must have daily price information available on the Bombay Stock Exchange or Capitaline database. The firms having non-synchronous trading have been eliminated from the sample.

These filters reduce the dataset to 398 acquisitions announcements. Table 1 contains the details of selection of final sample of mergers for the study.

Tables 2A, 2B and 2C reveals the characteristics of the final sample used in the study. The final sample consists of acquisitions of hundred per cent ownership of 296 companies as a wholly-owned subsidiary and 102 companies to be totally absorbed with the operations of the acquiring firms. The 305 acquisitions are financed with cash and 81 acquisitions are financed with stocks of the acquiring firm. A combination of cash and stock has been used to finance 12 acquisitions. The sample includes acquisitions of 353 private and unlisted firms and 42 listed firms.

* Event Methodology

Event study methodology in the finance literature has become a standard in evaluating the stock price reaction to a specific event (McWilliams and Siegel (49)). The event study methodology is used to examine short-term stock price reaction to the announcements of acquisitions. The following steps comprise the mechanics of event study:

* Event definition and date of announcement

The first step in the event study methodology is to define the event as the date on which the acquisition is first announced to the public. Day 0 is defined as the day the announcement first appears in any newspaper. For this purpose of the study, the announcement day has been defined as the day when the Stock Exchange is informed about the board approval of the merger and acquisition deal. These dates are verified (manually) from the archives of corporate announcements of Stock Exchange.

* Estimation period

The estimation period is defined as the period prior to the occurrence of the event. It is imperative for the estimation window and event window not to overlap. This ensures that estimates of the normal return model are not influenced by the event -related returns. Estimation window of 255 (-290, -36) days has been considered in the study.

* Event window period

The event period surrounds the date of the announcement of acquisition during which the stock market response to the announcement is investigated. In order to account for early share price reactions (induced by the anticipation of stock market of an upcoming announcement before and potentially slow information processing after the event) the cumulative abnormal returns over alternate windows are considered. Fama, Fisher, Jensen, and Roll (50) suggest that event date may be uncertain. Therefore, it is desired to consider abnormal return which might appear before and after the defined date. This interval is known as event window. The abnormal returns over varying windows, namely, (-20,-2), (-1, +1), (-1,0), (-2, +2), (-5, +5) (-10, +10), (-20, +20), (+2, +20) have been observed to capture the leakage effect. The dates are verified (manually) from the archives of corporate announcements of Bombay Stock Exchange (BSE) to ascertain the clean period data. It has been checked (manually) that there is no contamination of information and confounding event during the event window.

* Definition of abnormal return (AR)

Stock returns move in response to several firm or market-specific factors. The key issue in event studies is what portion of the price movement is actually caused by the event of interest. In other words, it is required to extract the impact of the one particular event on stock returns. This leads to the concept of abnormal returns. The abnormal return is the differences between the actual return and the expected return on a particular day.

Abnormal return of the jth stock ([AR.sub.jt]) is obtained by subtracting the normal or expected returns in absence of the event E([R.sub.jt]), from the actual return in the event period, ([R.sub.jt]) as per Equation 1.

[AR.sub.jt] = [R.sub.jt] - E([R.sub.jt]) (1)

The market model approach relates the return of a security to the return of the market portfolio as per the Market Model Equation 2.

[R.sub.jt] = [[alpha].sub.j] + [[beta].sub.j] [R.sub.mt] + [[epsilon].sub.jt], where t=-290, ..., -36 (2)

where [[alpha].sub.j] is a constant term for the jth stock, [[beta].sub.j] is the market beta of the jth stock, [R.sub.mt] is the market returns, and [[epsilon].sub.jt] is an error term.

The parameters of the model are estimated by using the time-series data from the estimation period that precedes each individual announcement. The parameters estimated from the market model are then used in the calculation of abnormal returns for each day in the event window. The estimated parameters are then matched with the actual returns in the event period. The dally excess return i.e., abnormal return of firm ] for the day t ([AR.sub.jt] is estimated from actual returns during the event period and the estimated coefficients from the estimation period as per Equation 3.

[MATHEMATICAL EXPRESSION NOT REPRODUCIBLE IN ASCII] (3)

The average abnormal return ([AAR.sub.t]) for each day in the event window is calculated as per Equation 4.

[AAR.sub.t] = 1/N [N.summation over (j=1)] [R.sub.jt] (4)

where N is the number of firms.

* Definition of cumulative abnormal return (CAR)

The cumulative abnormal return for a given security is simply the sum of daily abnormal returns over the event window. Over an interval of two or more trading days beginning with day [T.sub.1] and ending with day [T.sub.2]. the cumulative average abnormal return (CAAR) is calculated as per Equation 5.

[MATHEMATICAL EXPRESSION NOT REPRODUCIBLE IN ASCII] (5)

* Definition of precision-weighted cumulative abnormal returns (PWCAR)

The study also reports precision--weighted cumulative average abnormal return (PWCAAR). The precision- weighted average is constructed using the relative weights of each stock. The precision-weighted return weight each stock in inverse proportion to its standard deviation. The precision-weighted CAAR (as a weighted average of the original CARs) preserves the sample interpretation of CAAR (Cowan (51)). The precision weighted cumulative average abnormal return (PWCAAR) is a better measure than CAAR and average standardized cumulative abnormal return. The precision-weighted cumulative average is calculated as specified in

Equation 6:

[MATHEMATICAL EXPRESSION NOT REPRODUCIBLE IN ASCII] (6)

[D.sub.j] is the number of non-missing trading day returns in the D-day interval through used to estimate the parameter of the firm j. [R.sub.mt] is the return on the market index on day t, is the mean market return over estimation period.

* Hypotheses for announcement effects

The null hypotheses being tested are:

H1: The average abnormal return to the shareholders of acquiring company on the announcement of acquisition is zero.

H2: The cumulative average abnormal return to the shareholders of acquiring company for the event window period around the announcements of acquisition is zero.

* Statistical significance of event Returns

There are numerous tests for evaluating the statistical significance of abnormal returns. Several studies have developed tests to control for specific problems that occur with event studies. Each of them test the null hypothesis that abnormal returns are zero, but they differ in the necessary assumptions about the statistical properties of (abnormal) returns.. The parametric tests implicitly assume that the residuals follow normal distribution. When the assumption of normality of abnormal returns is violated, parametric tests are not well specified. In addition to parametric statistics, event studies typically use a non-parametric test. A nonparametric test is normally used in conjunction with parametric test in event study to verify that the results are not driven by outliers. Non-parametric statistics do not require as stringent assumptions about return distributions as parametric tests. In order to obtain robust results, a wide variety of statistical tests have been applied. We use the following four widely used parametric and three non -parametric test statistics commonly used in event studies to test for the significance of average abnormal returns and cumulative abnormal returns over the event period:

* Parametric tests

* Crude dependence adjustment test (CDA t) (Brown and Wamer (52))

* Cross-sectional standard deviation test (CSS t) (Brown and Warner (53))

* Patell's (54) test (Patell Z)

* Standardized cross-sectional test (SCS Z) (Boehmer, Musumeci and Paulsen (55))

* Non-parametric tests

* Generalized Sign test (G Sign Z)(Cowan (56))

* RankTest (Rank Z) (Corrado (57))

* Jackknife test (Jacknife Z) (Giaccotto and Sfiridis (58))

* Crude dependence adjustment test (CDA)

The test incorporates the sample time-series standard deviation. Brown and Warner (52) describe the test as featuring a "crude dependence adjustment." That is, the test compensates for potential dependence of returns across security-events by estimating the standard deviation using the time series of sample mean returns from the estimation period. Crude dependence adjustment test uses a single variance estimate for the entire sample. Therefore, the time series standard test does not take account of the unequal return variances across securities. This test avoids the potential problem of cross-sectional correlation of security return. To account for the dependence across firms' average residuals, in event time, Brown and Warner suggest that the standard deviation of average residuals should be estimated from the time series of the average abnormal returns over the estimation period. The estimated variance of [AAR.sub.t] is

[[sigma].sup.2.sub.AAR] = [[[-36.summation over (t=-290)][([AAR.sub.t] - [bar.AAR]).sup.2]]/254] (7)

where the market model parameters are estimated over the estimation period of 255 days and

[bar.AAR] = [[[-36.summation over (t=-290)][AAR.sub.t]/255]

The test statistics for day t in event time is

t = [AAR.sub.t]/[[??].sub.AAR] (8)

The test statistics for [CAAR.sub.T1,T2] is

t = [[CAAR.sub.t]/[([T.sub.2] - [T.sub.1] + 1) 1/2 [[sigma].sub.AAR]]] (9)

* Cross-sectional standard deviation test (CSS)

This test uses a daily cross-sectional standard deviation instead of sample time series standard deviation. The test statistics for the day t in event time is

[MATHEMATICAL EXPRESSION NOT REPRODUCIBLE IN ASCII] (10)

where

[MATHEMATICAL EXPRESSION NOT REPRODUCIBLE IN ASCII]

The test statistics for [CAAR.sub.T1,T2] is

[MATHEMATICAL EXPRESSION NOT REPRODUCIBLE IN ASCII] (11)

The estimated variance of [CAAR.sub.T1,T2] is

[MATHEMATICAL EXPRESSION NOT REPRODUCIBLE IN ASCII]

* Patell's test

Patell proposes a test statistic where the event period abnormal returns are standardized by the standard deviation of the estimation period abnormal returns. The Patell Z test is an example of a standardized abnormal return approach, which estimates a separate standard error for each security event and assumes cross-sectional independence. This standardization reduces the effect of stocks with large returns standard deviation on the test. Patell test statistic assumes cross-sectional independence in abnormal retums; it also assumes that there is no event-induced change in the variance of event-period abnormal returns. The standardized abnormal return (SAR) for each security is calculated as per Equation 12.

[MATHEMATICAL EXPRESSION NOT REPRODUCIBLE IN ASCII] (12)

where

[MATHEMATICAL EXPRESSION NOT REPRODUCIBLE IN ASCII]

Under the null hypothesis, each [SAR.sub.jt] follows a Student's t distribution with [D.sub.j]-2 degrees of freedom. Total standardized abnormal return (TSAR) across the sample is

[TSAR.sub.jt] = [N.summation over (j=1)] [SAR.sub.jt] (13)

The expected value of TSAR is zero. The variance of [TSAR.sub.t] is

[Q.sub.t] = [N.summation over (j=1)] [[[D.sub.j] - 2]/[[D.sub.j] - 4]] (14)

The test statistic for the null hypothesis that is

[MATHEMATICAL EXPRESSION NOT REPRODUCIBLE IN ASCII] (15)

where

[MATHEMATICAL EXPRESSION NOT REPRODUCIBLE IN ASCII]

and

[MATHEMATICAL EXPRESSION NOT REPRODUCIBLE IN ASCII]

under cross-sectional independece of the [Z.sup.j.sub.T1,T2] and other assumptions the [Z.sub.T1,T2], follows the standard normal distribution under the null hypothesis.

The Patell test statistics for cumulative abnormal return for event window is not adjusted for serial dependence. Mikkelson and Partch (59) corrected the Patell test (54) for the possible serial correlation of abnormal returns of each security within the window. The serial correlation occurs as all the abnormal returns are functions of the same market model intercept and slope estimators.

Corrected test statistic for the null hypothesis that CAAR =0 is;

[MATHEMATICAL EXPRESSION NOT REPRODUCIBLE IN ASCII] (16)

where

[MATHEMATICAL EXPRESSION NOT REPRODUCIBLE IN ASCII]

where L is the length of the event period in trading days, L=[T.sub.2]-[T.sub.1]+1. [D.sub.j] is the number of non-missing trading day returns in the D-day interval through used to estimate the parameter of the firm j.

* Standardized cross-sectional test (SCS)

The "standardized cross-sectional test" developed by Boehmer et al. incorporates the information from both estimation and the event period. The event period abnormal returns are first standardized by estimation period standard deviation. The cross-sectional technique is then applied to the standardized abnormal returns. The test is same as Patell test except there is a final adjustment in the place of analytical variance of the total standardized abnormal return.

For day t in the event period, the test statistic is given in Equation 17;

[MATHEMATICAL EXPRESSION NOT REPRODUCIBLE IN ASCII] (17)

where

[MATHEMATICAL EXPRESSION NOT REPRODUCIBLE IN ASCII]

Define the standardized cumulative abnormal return for stock j as in Equation 18;

[MATHEMATICAL EXPRESSION NOT REPRODUCIBLE IN ASCII] (18)

Then the standardized cross-sectional test for the null hypothesis that CAAR=0 is

[MATHEMATICAL EXPRESSION NOT REPRODUCIBLE IN ASCII] (19)

where

[MATHEMATICAL EXPRESSION NOT REPRODUCIBLE IN ASCII]

* Generalized Sign test (GSign Z)

The sign test (Cowan, 1992) is a simple binomial test to ascertain whether the frequency of positive abnormal residuals equals 50 per cent or not. The generalized sign test is a refined version of this test by allowing the null hypothesis having positive abnormal residuals to be different from 0.5. The generalized sign test adjusts for the fraction of positive abnormal returns in the estimation period instead of assuming 0.5. The generalized sign test compares the proportion of positive abnormal returns around an event to the proportion from a period unaffected by the event.

In this way, the generalized sign test takes account of a possible asymmetric return distribution under the null hypothesis. The generalized sign test does not require symmetry of the cross-sectional abnormal return distribution. The generalized sign test becomes relatively more powerful as the length of the event window increases. The generalized sign test is correctly specified when the variance of the stock return increases during the event window.

The generalized sign test examines whether the number of stocks with positive cumulative abnormal returns in the event window exceeds the number expected in the absence of abnormal performance or not. The number expected is based on the proportion of positive abnormal returns in the 255-day estimation period as calculated in Equation 20,

[??] = 1/n [n.summation over (j=1)] 1/255 [255.summation over (t=1)] [S.sub.jt] (20)

where

[MATHEMATICAL EXPRESSION NOT REPRODUCIBLE IN ASCII]

The following statistic has an approximate unit normal distribution with parameter:

[MATHEMATICAL EXPRESSION NOT REPRODUCIBLE IN ASCII] (21)

where w is the number of stocks in the event window for which the cumulative abnormal return is positive.

The null and alternative hypotheses of interest are:

* The null hypothesis for generalized sign test is that proportion of positive returns in the event window is the same as proportion of positive returns in the estimation period.

* The alternative hypothesis, for any level of abnormal performance, is that the proportion of positive returns in the event window is different from proportion of positive returns in the estimation period.

* Rank Test

The rank test (Corrado) procedure considers the combined estimation period and event period as a single set of returns, and assigns a rank based on return to each daily for each firm. The rank statistic has been denoted as [T.sub.R]. For day zero, the test statistic is specified in Equation 22:

[Z.sub.rank] = [(1/2 [N.summation over (j=1)][k.sub.j0]) -[??]]/[s.sub.k] (22)

where [k.sub.j0] is the rank of security-event j's day zero abnormal return in security-event j's combined 255-day estimation period and 19-day event period (in the case of (+2,+20) time series, k is the expected rank defined below, and [s.sub.k] is the time-series standard deviation of the sample mean abnormal return ranks.

Each security-event's non-missing returns have been ranked with the lowest rank being one. [E.sub.j] represents the number of non-missing returns of security j in the event period; if there is no missing return, [E.sub.j] = E = post -pre + 1 and D= length of estimation window. The mean rank across the combined estimation and event period is

[??] = [[D + E + 1]/2]

The rank test statistic for the null hypothesis relating to the event window ([T.sub.1], [T.sub.2]) is given in Equation 23;

[MATHEMATICAL EXPRESSION NOT REPRODUCIBLE IN ASCII]

where

[MATHEMATICAL EXPRESSION NOT REPRODUCIBLE IN ASCII], is the average rank across the n securities and [sub.T2-T1+1] days of the event window and [[bar.K].sub.t] = (1/n) [n.summation over (j=1)][K.sub.jt] is the average rank across n securities on day t of the D+E day combined estimation and event period.

* Jackknife Test

The Jackknife test by Giaccotto and Sfiridis58 computes the standardized abnormal return for each stock j, computed using the event period sample standard deviation. The standardized abnormal return for day t is

[MATHEMATICAL EXPRESSION NOT REPRODUCIBLE IN ASCII] (24)

where

[MATHEMATICAL EXPRESSION NOT REPRODUCIBLE IN ASCII]

and AARj is the average abnormal return of stock j during the event period of E=T[??] - T[??] + 1 days. If there is an event-induced variance on day t, then [MATHEMATICAL EXPRESSION NOT REPRODUCIBLE IN ASCII] is a biased estimator of and [??] is a biased statistic. Giaccotto and S firidis propose reducing the bias by jackknifing the values.

The First step of the jackknife is to sequentially delete one abnormal return [AR.sub.jt] from [MATHEMATICAL EXPRESSION NOT REPRODUCIBLE IN ASCII] and re-compute, using the new value in turn to re-compute using Equation 24. This latter value is named as and pseudo--values are formed using [[??].sub.(-d)] in the next step as;

[[theta].sub.(-d)] = ([E.sub.j])[??] - ([E.sub.j] - 1)[[theta].sub.(-d)] (25)

The jackknife estimator for stock j on day t is the mean of the pseudo-values,

[[theta].sub.jt] = 1/[E.sub.j] [[T.sub.e].summation over (t=[T.sub.b])][theta](-S) (26)

To gain efficiency, the estimates are averaged across the sample of stocks as in Equation 27.

[[bar.[theta]].sub.t] = 1/N [N.summation over (j=1)] [[theta].sub.jt] (27)

Finally, the jackknife test statistic for the sample of stock on day t is

[t.sub.jackknife] = [[[bar.[theta]].sub.t]/[[S.sub.jackknife,t]/[square root of N]] (28)

where

[S.sub.jackknife,t] = [[[1/[N-1]] [N.summation over (i=1)][([[theta].sub.jt] - [[bar.[theta]].sub.t]).sup.2]].sup.1/2]

To test the significance of the cumulative average abnormal return over the window from day [T.sub.1] through day [T.sub.2] define

[MATHEMATICAL EXPRESSION NOT REPRODUCIBLE IN ASCII] (29)

Sequentially delete one abnormal return [AR.sub.jt] from equation [MATHEMATICAL EXPRESSION NOT REPRODUCIBLE IN ASCII] and re-compute, using the new value in turn to re-compute using Equation 29. Name this latter value as

[MATHEMATICAL EXPRESSION NOT REPRODUCIBLE IN ASCII] (30)

The jackknife estimator for stock j in window ([T.sub.1], [T.sub.2]) is the mean of the pseudo-values,

[MATHEMATICAL EXPRESSION NOT REPRODUCIBLE IN ASCII] (31)

The estimates are averaged across the sample of stocks:

[MATHEMATICAL EXPRESSION NOT REPRODUCIBLE IN ASCII] (32)

The jackknife test statistic for CAAR for the sample of stocks in window ([T.sub.1], [T.sub.2]) is

[MATHEMATICAL EXPRESSION NOT REPRODUCIBLE IN ASCII] (33)

where

[MATHEMATICAL EXPRESSION NOT REPRODUCIBLE IN ASCII]

The distribution of [t.sub.jackknife] under the null hypothesis is approximately normal with mean zero and unit variance.

Methodology Used for Post-Merger and Acquisition Performance

To investigate the post-merger and acquisition performance, return on equity funds (ROE) have been calculated five years before and after the merger and acquisition (M&A). Paired samples-T test have been carried out to compare the performance before and after M&A. Paired samples t-test has been conducted to assess the difference in post-M&A performance and pre-M&A performance. The paired samples t-test compares the mean of two variables from the same group. It determines whether the difference between the means of the two variables is significantly different from zero. In this paper, the two variables are mean ratio of the acquired firm before and after the merger and acquisition. The paired samples t-test thus determines whether there is significant change in the variable 'before and after' merger and acquisition. The null hypothesis for the test is that the mean level for the post-merger and acquisition period is not significantly different from the mean from pre-merger and acquisition period. A positive t-value indicates a higher mean value for post-merger and acquisition period.

The performance of only those firms have been analysed whose data is available before and after M&A. The data of 305 firms was available for one year before and after M&A from database of Center for Monitoring Indian Economy (CMIE) Prowess. The data of 285 firms could be obtained for two year before and after M&A, 259 firms for three year before and after M&A, 214 firms for four year before and after M&A and 124 firms for five year before and after M&A. Extreme values have been excluded from the data to deal with the influence of outliers. After analyzing data for outliers, the values beyond three standard deviations have been dropped from the analysis.

Research Findings

Average abnormal returns on the announcement day and cumulative average abnormal returns (CAARs) for varying event windows have been analyzed for the entire sample as well as sub-samples segregated on the basis of status of the target firm (WOS, absorbed with the operations of the acquiring firm). The results have been analyzed to assess the impact of mode of payment (cash, stock) employed in financing the acquisition and type of target firm (listed, unlisted) acquired for entire sample as well as sub-samples.

* Event Study Results for the Entire Sample

Table 3 shows results for the event study. The Table reports the abnormal returns to the shareholders of acquiring company on the announcement day and multi-period event windows. Average abnormal return(AAR), cumulative average abnormal return(CAAR), precision weighted average abnormal return (PWAAR), and median abnormal return (MAR), proportion of positive and negative average abnormal return along with the seven tests of statistical significance for average abnormal return are contained in this Table.

Panel A of Table 3 reveals that there are average abnormal returns of more than one per cent on the announcement day, the respective figures are AA_R (1.16), PWAAR (1.14). Average abnormal returns are statistically significant at 1 per cent level. However, the median abnormal returns are 0.80 per cent on the announcement day. The proportion of stocks having positive returns is more than 60 per cent on the announcement day. The proportion of stocks having positive return is statistically significant at 1 per cent (different from the proportion during estimation period).

Panel B of Table 3 contains the cumulative average abnormal return, precision weighted CAAR, median cumulative abnormal return, proportion of positive and negative average abnormal return and the test of significance for average abnormal return over several multi-period event windows for sample of all acquisitions. Relevant data contained in the Table shows that acquirers experience (statistically significant at 1 per cent) cumulative average abnormal returns of 1.55 per cent, 1.70 per cent and 1.97 per cent during two days (-1, 0), three days (-1, +1), and eleven days (-5, +5) respectively.

The shareholders of acquiring firms experience cumulative average abnormal returns of 2.35 per cent during five days (-2, +2) and pre- event window of 19 days (-20, -2). But acquisitions reduce wealth significantly during post-event window of 19 days (+2, +20). The negative abnormal returns are 3.12 per cent (statistically significant at 1 per cent) for the post-event window (+2, +20).

Figure 1 depicts the trend of average abnormal return of the entire sample for (-20, +20) including both pre-event window and post-event window. Figure 2 exhibits the trend of cumulative average abnormal returns of the entire sample for (-20, +20) including both pre-event window and post-event window. There is positive average abnormal return on the announcement day; However, It is clear from the graph of cumulative average abnormal returns (in Figure 2) that acquisitions enhance wealth over (-20, +20) days period.

[FIGURE 1 OMITTED]

[FIGURE 2 OMITTED]

* Event Study Results : Status of Target

Data contained in Table 4 shows the return on announcement day as well as for multi-days event window for the sub-sample disaggregated on the basis of status of the target firm acquired (WOS, absorbed with the operations of acquirer). It is evident from the Panel A of Table 4 that when the target firm is acquired as a wholly owned subsidiary, shareholders (inasmuch as more than 60 per cent stocks) experience higher positive abnormal return; the returns are statistically significant at 1 per cent. The proportion of positive return is different (statistically significant at 1 per cent) from the proportion of positive return during estimation period. Similarly, when the target firm acquired is to be absorbed with the operations of the acquirer, also experience positive returns (statistically significant at 5 per cent) on the announcement day only.

Relevant data contained in the Table 4 also shows that shareholders of acquirer firm earn almost three and a half per cent (statistically significant at 1 per cent) cumulative average returns during pre-event window of 19 days (-20, -2) for the acquisitions of the target firm as a WOS. PWCAAR are 2.66 percent and median cumulative abnormal returns are 1.67 during the pre-event window.

The notable finding for this sub- sample is that the acquirer earns almost three percent CAAR (statistically significant at 1 per cent) for a longer event window of 41 days (-20, +20). The positive and robust returns during the 41 days pre-event and post-event windows has important managerial implications as the effects of these announcements appear to be a good indicator of longer-term success. In contrast to the above results, the abnormal returns are negative when the acquirer absorbs the target with its own operations. However, shareholders of the acquirer firm earn more than one per cent cumulative average abnormal returns (statistically significant at 5 per cent level) during smaller event windows (-1, 0), (-1, +1) and (-2, +2) when target firm is absorbed with the acquirer.

Figure 3 presents the average abnormal return for event windows (-20, +20) of the two sub-samples. Figure 4 shows the cumulative average abnormal return for event windows (-20, +20) on the basis of the status of the target. Figure 4 exhibits that acquirer experiences positive return for the acquisitions of the target as a wholly owned subsidiary for entire long event-window (-20, +20). The managerial implication is that finance managers are suggested to acquire the target firm as WOS instead of combining operations of acquired firm with its own.

[FIGURE 3 OMITTED]

[FIGURE 4 OMITTED]

* Event Study Results : Method of Payment

Table 5 presents the details of abnormal returns based on mode of payment (cash, stock) employed in financing acquisitions. Analysis indicates that returns for acquisitions financed with cash are higher than the acquisitions financed with stock on the announcement day. The average abnormal return for the deals employing cash payment is 1.14 percent whereas it is only 0.74 per cent in the case of acquisitions financed with stock. Median abnormal return for cash financed acquisitions is also more than the acquisitions financed with stocks on the announcement day. Moreover, the average abnormal returns for acquisitions using cash payment are statistically significant at 1 per cent. The returns are statistically significant at 5 per cent on the announcement day for acquisitions using stock payment as revealed in Panel B of the Table 5.

Data contained in Panel A of Table 5 shows that acquisitions financed with cash experience positive cumulative average abnormal returns of almost three percent during the pre-event window (-20, -2). The proportion of the positive abnormal returns is also more than the proportion of positive returns during estimation period (statistically significant at 1 per cent) as per the generalized sign test The results also indicate that acquirers using cash as a method of payment earn positive abnormal returns (statistically significant at 1 per cent) over the multi-days event windows of 3 days (-1,0), 5 days (-2, +2) and 11 days (-5, +5).

In marked contrast, the Panel B of tile Table 5 shows that acquirers, when finance with stock, experience negative abnormal returns for pre-event window (-20, -2). The proportion of negative abnormal return is also higher (but statistically not significant). However, the acquirers earn more than one per cent returns (statistically significant at 5 per cent) during 2 days event window (-1,0). As far as the post-window is concerned both the sub-samples experience negative average abnormal returns but the loss is less in the case of stock financed acquisitions. These results have important managerial implication that cash emerges as a preferred mode of payment in financing acquisitions.

[FIGURE 5 OMITTED]

[FIGURE 6 OMITTED]

Figure 5 shows the average abnormal returns based on of mode of payment employed in financing the acquisitions during pre-event and post-event window of (-20, +20) days. Cumulative average abnormal returns for the sample are depicted in Figure 6. The graph portrays that the acquirers employing cash as a mode of payment experience higher CAAR than CAAR from the acquisitions using stock as a method of financing. One noticeable trend is that CAAR from stock financed acquisitions is negative almost for the whole period (-20, +20) except a small window of 5 days (-2, +2).

* Event Study Results : Type of Target Firm Acquired (Listed or Unlisted)

Table 6 contains the returns to acquirers of listed and unlisted target firms. Analysis of relevant data contained in the Table shows that acquirers acquiring listed target firms experience impressive cumulative abnormal returns, the respective figures are AAR (3.11 per cent and PWCAAR 3.83 per cent) during 19 days pre-event window (-20, -2). During 2 days event window (-1, 0) the acquirers acquiring listed target firms experience CAAR of almost two per cent. During 5 days event window (-2, +2) CAAR is more than three per cent (statistically significant at 1 per cent).

The acquirers acquiring unlisted target firms also earn positive average abnormal returns of more than two per cent (significant at 1 per cent) during the pre-event window as shown in Panel B. The shareholders realize more than two per cent positive abnormal returns during the event window (-5, +5). However, acquirers acquiring listed as well as unlisted target firms experience (statistically significant at 1 per cent) negative returns during post-event window (+2, +20), but the loss is higher in the case of acquirers acquiring listed target firms.

Figure 7 depicts the average abnormal return during pre-event and post-event window of (-20, +20) days based on the type of target firm acquired. The graph of cumulative average abnormal returns is exhibited in Figure 8. The graph portrays that the acquirers acquiring listed target companies experience higher CAAR. One notable trend is that the CAAR of acquire acquiring unlisted target companies is positive during the longer event window (-20, +20).

[FIGURE 7 OMITTED]

[FIGURE 8 OMITTED]

Post-Merger and Acquisition Performance

The next crucial research question is "Post-merger and acquisition performance of acquiring firm is greater than the performance of the acquiring firm in pre-merger and acquisition period?" A sufficiently long period is required to analyze and understand the impact of a merger and acquisition since efficiency improves over a long time horizon. Hence, financial performance of Indian acquirers for ten-year period--five years prior to and subsequent to the merger and acquisition has been analyzed. Year 0, i.e., the year of merger and acquisition has been excluded from the analysis as its inclusion may cause distortions due to change in financial reporting caused due to adjustments in accounting. In order to provide a holistic view of the long-term profitability and performance of mergers and acquisition, various accounting measures have been investigated in the study. To investigate post-M&A financial performance, return on equity fund (ROE) for sample companies over a period of five years before (t-5, t-4, t-3, t-2, t-1) and five years after (t+1, t+2, t+3, t+4, t+5) the merger and acquisition event have been calculated. ROE indicates the return for the equity owners. ROE is calculated as;

Return on Equity (ROE) = Profit after taxes--preference dividend/ Average equity fund

Equity fund = pasid-up equity capital + reserves and surplues + retained profit--accumulated losses.

The rate has been computed based on average equity funds; the average is based on their respective values at the beginning and end of the year. The change in financial performance attributable to M&A is the comparison of the return on equity funds 5 years post-and pre M&A.

The null hypothesis for the test is that the mean level for the post-merger and acquisition period is not significantly different from the mean from pre-merger and acquisition period. A positive t-value indicates a higher mean value for post-merger and acquisition period.

Table 7 presents ROE of Indian acquirers for ten year period; five years before and five years after the event. The Table contains the return on equity fund (ROE) of acquiring firms pre-and post M&A.

Table 8 documents paired samples t-test results for ROE before and after M&A. T-test shows acquirers generated significantly higher ROE after M&A. Paired samples t-test have been conducted for one year before and after (t-1, t+1) M&A, two years mean before and after M&A (t-2, t+2), three years mean before and after M&A (t-3, t+3), four years mean before and after M&A (t-4, t+4) and five years mean before and after M&A (t-5, t+5). The acquiring firms experienced improvement in return on equity funds post-mergers and acquisition. The relevant data in Table 8 shows that shareholders of acquiring firms earn 4.6 per cent significantly (p=0 <0.001) higher returns 5 years post-M&A. The pair (t-4, t+4) shows that the post M&A period generate 3.7 per cent significant (p=0<0.001) high return in comparison to pre-M&A period. The post-M&A performance have also exhibited improvement in comparison to pre-M&A performance for three years average, two years average and one year paired-sample as evident in the Table 8.

Conclusions

The paper examines the returns to shareholders of acquiring companies on the announcement and post M&A in India during the period 2003-08. The study finds evidence that the shareholders of acquirer Indian corporates, engaging in acquisitions, experience positive abnormal return of more than one percent (statistically significant at 5 per cent) on the announcement day. The abnormal returns are also positive during the pre- event window as well as multi- days event window of 2 days (-1,0), 3 days (-1, +1), 5 days (-2, +2) and 11 days (-5, +5) for the entire sample; moreover, they are statistically significant at 1 per cent. The cumulative average abnormal returns are also positive for longer event windows of 21 days (-10, +10) days and 41 days (-40, +40) days; however, they are statistically not significant. The findings suggest that acquisitions result in wealth destruction for shareholders during post -event window of 19 days (+2, +20). The losses are significantly negative at 1 per cent for the whole sample.

Notable finding of disaggregated analysis of subsamples is that when target remains as a wholly owned subsidiary (WOS), the acquirer earns almost three percent CAAR (statistically significant at 1 per cent for a even longer event window of 41 days (-20, +20). In the marked contrast, the acquirer shareholders lose almost five per cent (CAAR statistically significant at 1 per cent) when the target firm is absorbed with the operations of acquiring firm.

The acquirers employing cash as a method of payment enjoy higher and statistically significant returns for multi day event window around the announcement. The returns are also positive for longer event window of 41 days, (but statistically not significant) when the acquisition is financed with cash. The acquisitions financed with stock also experience positive but statistically insignificant returns for 2 days, 3 days and 5 days event window. However, the returns are negative for longer event window of 11 days, 21 days and 41 days for stock financed acquisitions. Moreover, the negative abnormal returns are higher during the post- event window for the acquisitions employing cash as a method of financing. The acquisitions financed with cash experience higher returns than those financed with stock which could be a signal in support of 'asymmetric information hypothesis and free cash flow hypothesis'.

It has been observed that acquirers targeting listed firms yielded higher returns than those targeting unlisted firms. This may be due to friendly negotiations and lack of competition in market for corporate control in India. It seems that friendly acquisitions override agency problems in the case of listed target firms in India. Shareholders perceive synergistic gains in the case of acquisitions of listed target firms and stock prices react positively in such case. The shareholders of acquiring firms earn 4.6 per cent significantly higher returns 5 years post-M&A. The post-M&A performance has also exhibited improvement in comparison to pre-M&A performance for, three years average, two years average and one year paired-sample.

From academic point of view, the present study has demonstrated use of the seven major significance tests to check the robustness of average abnormal returns and cumulative average abnormal returns. The use of six main test-statistics in addition to a standard test-statistic for assessing significance levels of average abnormal return and cumulative average abnormal return has proved to be useful, since these test-statistics take into account effects due to event-induced variance and offers therefore an alternative evaluation of significance.

Implications for Policy

The returns around the announcement represent investors' expectation of Merger and Acquisition benefits whereas post-Merger and Acquisition financial performance represent actual economic benefits generated by M&A. The study indicates that mergers and acquisitions appear to have financially beneficial to shareholders of acquiring firms around the announcements as well as in the long-run. These findings have two important implications for Indian acquiring firm managers, who may view the initial increase in stock price around announcement dates as signal for a positive shareholder response. The findings presented here bring attention of the managers considering stock versus cash as a mode of payment to finance mergers. Second, implication for management is keeping in view the revealing finding of the substantial return when the target firm is acquired as a WOS. The management may acquire the target firm as a WOS and may absorb it with its own operations later on. (Rani, Yadav and Jain (60)) also observe this implication during a survey. The study renews confidence in the Indian managers to adopt mergers and acquisitions as effective strategy for corporate growth.

Academically it would be interesting to investigate the impact of mode of payment separately on target firms to be absorbed or remains wholly-owned subsidiary in post M&A period. Future research may be conducted to observe effect of the announcement of merger and acquisition on trading volume for acquiring firm as well target firm.

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The authors own full responsibility for the contents of the paper.
TABLE 1

SAMPLE SELECTION FOR ACQUISITIONS

Total number of announcements                                  5504

Less acquisitions excluded:
Rumours, and news of acquisitions withdrawn
  subsequently                                                 2125
Minor acquisitions                                             1829
Acquisition of stake above 51 percent but less than
  100 per cent                                                  249
Acquisitions of stake by promoters, inter-se transfer and
  among associate companies and preferential allotments          58
Increase in stake and re-announcements for open offers           52
Acquisition by financial companies                              157
Acquisitions by unlisted companies and investor groups           76
Acquisitions of business, assets, divisions and brands           71
Trading data not available                                      156
Confounding events                                              173
More than one type of acquisition in one announcements           43
Multiple acquisitions in one announcement                        42
Formation of subsidiary, restructuring and reorganisation        45
Date could not be verified                                       30
Selected in sample (5504-5106)                                  398

Source: Thompson SDC, Platinum Data Base for Mergers and
Acquisitions.

TABLE 2

A. SAMPLE STATISTICS DISAGGREGATED ON
THE BASIS OF STATUS OF TARGET FIRM

Characteristic                                        No.

Acquisitions of target finn as a wholly owned
  subsidiary                                           296
Acquisitions of target firm to be absorbed totally
  with its operations                                  102

Total sample                                           398

B. SAMPLE STATISTICS DISAGGREGATED                     ON
THE BASIS OF METHOD OF PAYMENT

Acquisitions financed with cash                        305
Acquisitions financed with stocks                       81
Acquisitions financed with combination of stocks
  and cash                                              12

Total sample                                           398

C. SAMPLE STATISTICS DISAGGREGATED                     ON
THE BASIS OF TYPE OF TARGET FIRM

Acquisitions of unlisted and private target firms      353
Acquisitions of listed target firms                     42
Government and public sector target fines                3

Total sample                                           398

TABLE 3

ABNORMAL RETURNS TO TIC SHAREHOLDERS OF ACQUIRING FIRMS (FOR ENTIRE
SAMPLE) ON THE ANNOUNCEMENT DAY AND DURING MULTI-DAYS EVENT WINDOWS:
2003-2008

                   Abnormal return

                      Precision
Event                 weighted             Positive:
window      Average    average    Median   Negative

Panel A: Abnormal Returns on Announcement Day

No. of Observations (N = 398)

AD           1.16%      1.14%     0.80%     242:156

Panel B: Cumulative Abnormal Returns During Varied Multi-days event
windows

(-20,-2)     2.37%      2.00%      1.32%    212:186
(-1,0)       1.55%      1.38%      0.83%    248:150
(-1,+1)      1.70%      1.55%      1.08%    237:161
(-2,+2)      2.35%      2.04%      1.41%    241:157
(-5,+5)      1.97%      1.83%      0.91%    212:186
(-10,+10)    0.95%      1.06%      0.00%    199:199
(-20,+20)    0.96%      1.36%     -1.01%    189:209
(+2,+20)    -3.12%     -2.19%     -3.24%    144:253

                         Parametric tests

Event
window        CDA t       CSSt       PateIIZ      SCSZ

Panel A: Abnormal Returns on Announcement Day

No. of Observations (N = 398)

AD          7.173 **    5.798 **    8.519 **    5.878 **

Panel B: Cumulative Abnormal Returns During Varied Multi-days event
windows

(-20,-2)     3.363 **    3.020 **    3.286 **    2.869 **
(-1,0)       6.754 **    5.757 **    7.256 **    5.539 **
(-1,+1)      6.060 **    4.977 **    6.617 **    5.097 **
(-2,+2)      6.494 **    5.795 **    6.732 **    5.798 **
(-5,+5)      3.662 **    3.472 **    4.011 **    3.721 **
(-10,+10)    1.279       1.165       1.640       1.452
(-20,+20)    0.928       0.816       1.431       1.28
(+2,+20)    -4.418 **   -4.056 **   -3.655 **   -3.381 **

                 Non-parametric tests

Event                               ackknife
window       GSign Z     Rank Z         Z

Panel A: Abnormal Returns on Announcement Day

No. of Observations (N = 398)

AD           6.117 **    6.625 **    6.781 **

Panel B: Cumulative Abnormal Returns During Varied Multi-days event
windows

(-20,-2)     3.144 **    3.018 **    2.557 **
(-1,0)       6.769 **    5.822 **    5.992 **
(-1,+1)      5.661 **    5.377 **    5.317 **
(-2,+2)      6.064 **    5.251 **    5.818 **
(-5,+5)      3.144 **    2.885 **    2.928 **
(-10,+10)    1.836 *     0.6         0.351
(-20,+20)    0.829       1.062       0.011
(+2,+20)    -3.660 **   -3.594 **   -4.807 **

Notes: CAAR = Cumulative Average Abnormal Return PWCAAR = Precision
Weighted CAAR MCAR = Median Cumulative Abnormal Return
AD = Announcement day

* and ** Denotes significance at 5 per cent and 1 per cent,
respectively.

TABLE 4

ABNORMAL RETURNS TO THE SHAREHOLDERS OF ACQUIRING FIRMS BASED ON
STATUS OF TARGET FIRM (ACQUIRED AS WOS OR ABSORBED WITH ITS
OPERATIONS) ON THE ANNOUNCEMENT DAY AND DURING MULTI-DAYS EVENT
WINDOWS: 2003-2008

                  Abnormal return

                      Precision
Event                 weighted             Positive:
window      Average    average    Median   Negative

Panel A: Target Firm Acquired as a Wholly-Owned Subsidiary (N = 296)

Abnormal Returns on Announcement Day

AD           1.32%      1.21%     0.83%     185:111

Cumulative Abnormal Returns During Varied Multi-days Event Windows

(-20,-2)     3.39%      2.66%      1.67%    162:134
(-1,0)       1.69%      1.47%      0.93%    189:107
(-1,+1)      1.91%      1.68%      1.40%    182:114
(-2,+2)      2.55%      2.18%      1.47%    182:114
(-5,+5)      2.69%      2.39%      1.36%    166:130
(-10,+10)    2.07%      1.99%      0.52%    156:140
(-20,+20)    2.99%      2.93%      0.55%    149:147
(+2,+20)    -2.31%     -1.42%     -2.65%    115:180

Panel B: Target Firm is Absorbed with the Operations of Acquirer
(N = 102)

Abnormal Returns on Announcement Day

AD           0.70%      0.87%     0.47%      58:44

Cumulative Abnormal Returns During Varied Multi-days Event Windows

(-20,-2)    -0.56%     -0.57%     -0.76%     50:52
(-1,0)       1.12%      1.04%      0.48%     59:43
(-1,+1)      1.08%      1.04%      0.55%     55:47
(-2,+2)      1.78%      1.50%      1.29%     59:43
(-5,+5)     -0.12%     -0.33%     -1.27%     46:56
(-10,+10)   -2.30%     -2.54%     -2.88%     43:59
(-20,+20)   -4.93%     -4.73%     -4.92%     40:62
(+2,+20)    -5.45%     -5.19%     -6.27%     29:73

                         Parametric tests

Event
window        CDA t       CSSt       PateIIZ      SCSZ

Panel A: Target Firm Acquired as a Wholly-Owned Subsidiary (N = 296)

Abnormal Returns on Announcement Day

AD           7.417 **    5.978 **    8.340 **    5.709 **

Cumulative Abnormal Returns During Varied Multi-days Event Windows

(-20,-2)     4.372 **    3.779 **    4.062 **    3.456 **
(-1,0)       6.742 **    5.536 **    7.131 **    5.138 **
(-1,+1)      6.220 **    5.202 **    6.618 **    4.955 **
(-2,+2)      6.413 **    5.833 **    6.636 **    5.628 **
(-5,+5)      4.556 **    4.380 **    4.832 **    4.419 **
(-10,+10)    2.542 **    2.464 **    2.868 **    2.551 **
(-20,+20)    2.631 **    2.414 **    2.894 **    2.578 **
(+2,+20)    -2.989 **   -2.830 **   -2.208 *    -2.030 *

Panel B: Target Firm is Absorbed with the Operations of Acquirer
(N = 102)

Abnormal Returns on Announcement Day

AD           1.762 *      1.568     2.612 **     1.855 *

Cumulative Abnormal Returns During Varied Multi-days Event Windows

(-20,-2)    -0.323      -0.352      -0.428      -0.415
(-1,0)       1.982 *     2.008 *     2.185 *     2.093 *
(-1,+1)      1.557       1.351       1.797 *     1.529
(-2,+2)      1.995 *     1.875 *     1.993 *     1.811 *
(-5,+5)     -0.088      -0.09       -0.308      -0.307
(-10,+10)   -1.258      -1.146      -1.645 *    -1.474
(-20,+20)   -3.125 **   -2.989 **   -3.457 **   -3.290 **
(+2,+20)    -1.926 *    -1.760 *    -2.103 *    -1.985 *

                  Non-parametric tests

Event                               ackknife
window       GSign Z     Rank Z         Z

Panel A: Target Firm Acquired as a Wholly-Owned Subsidiary (N = 296)

Abnormal Returns on Announcement Day

AD           5.740 **    6.350 **    6.467 **

Cumulative Abnormal Returns During Varied Multi-days Event Windows

(-20,-2)     3.172 **    3.111 **    3.356 **
(-1,0)       6.323 **    5.566 **    5.596 **
(-1,+1)      5.506 **    5.319 **    5.261 **
(-2,+2)      5.506 **    5.124 **    5.654 **
(-5,+5)      3.639 **    3.431 **    3.682 **
(-10,+10)    2.472 **    1.320       1.618
(-20,+20)    1.655 *     1.634       1.719 *
(+2,+20)    -2.264 *    -2.825 **   -3.212 **

Panel B: Target Firm is Absorbed with the Operations of Acquirer
(N = 102)

Abnormal Returns on Announcement Day

AD           2.301 *     2.638 **    2.386 **

Cumulative Abnormal Returns During Varied Multi-days Event Windows

(-20,-2)     0.807       0.806      -0.65
(-1,0)       2.598 **    2.347 **    2.232 *
(-1,+1)      1.802 *     1.843 *     1.509
(-2,+2)      2.598 **    1.931 *     1.879 *
(-5,+5)      0.011      -0.062      -0.413
(-10,+10)   -0.586      -1.12       -1.643
(-20,+20)   -1.183      -0.702      -2.534 **
(+2,+20)    -3.372 **   -2.570 **   -3.984 **

Notes : AD = Announcement Day * and ** Denotes significance at 5 per
cent and 1 per cent, respectively.

TABLE 5

ABNORMAL RETURNS TO THE SHAREHOLDERS OF ACQUIRING FIRMS BASED ON
METHOD OF PAYMENT (CASH OR STOCK) ON THE ANNOUNCEMENT DAY AND DURING
MULTI-DAYS EVENT WINDOWS: 2003-2008

                  Abnormal return

                      Precision
Event                 weighted             Positive:
window      Average    average    Median   Negative

Panel A: Cash Payment (N = 305)

Abnormal Returns on Announcement Day

AD           1.14%      1.04%     0.82%     186:119

Cumulative Abnormal Returns During Varied Multi-days Event Windows

(-20,-2)     2.96%      2.48%      1.55%    166:139
(-1,0)       1.52%      1.27%      0.84%    192:113
(-1,+1)      1.80%      1.53%      1.12%    186:119
(-2,+2)      2.30%      1.93%      1.46%    189:116
(-5,+5)      2.27%      2.03%      1.40%    172:133
(-10,+10)    1.23%      1.28%      0.51%    161:144
(-20,+20)    1.25%      1.82%     -0.34%    147:158
(+2,+20)    -3.52%     -2.19%     -2.86%    110:194

Panel B: Stock Payment (N = 81)

Abnormal Returns on Announcement Day

AD           0.74%      1.04%     0.35%      46:35

Cumulative Abnormal Returns During Varied Multi-days Event Windows

(-20,-2)    -0.09%     -0.55%     -0.32%     40:41
(-1,0)       1.07%      1.20%      0.48%     47:34
(-1,+1)      0.83%      1.11%      0.09%     41:40
(-2,+2)      1.93%      1.94%      0.63%     43:38
(-5,+5)      0.25%      0.11%     -1.56%     35:46
(-10,+10)   -1.03%     -0.96%     -3.32%     32:49
(-20,+20)   -1.54%     -1.90%     -4.38%     36:45
(+2,+20)    -2.28%     -2.45%     -3.32%     29:52

                         Parametric tests

Event
window        CDA t       CSSt       PateIIZ      SCSZ

Panel A: Cash Payment (N = 305)

Abnormal Returns on Announcement Day

AD           6.509 **    5.365 **    7.116 **    5.238 **

Cumulative Abnormal Returns During Varied Multi-days Event Windows

(-20,-2)     3.773 **    3.230 **    3.884 **    3.431 **
(-1,0)       6.150 **    4.852 **    6.137 **    5.062 **
(-1,+1)      6.006 **    4.700 **    5.959 **    4.969 **
(-2,+2)      5.891 **    5.149 **    5.899 **    5.315 **
(-5,+5)      4.113 **    3.902 **    3.911 **    3.806 **
(-10,+10)    1.836 *     1.664 *     1.531       1.476
(-20,+20)    1.802 *     1.644       1.116       1.059
(+2,+20)    -3.359 **   -3.168 **   -4.628 **   -4.452 **

Panel B: Stock Payment (N = 81)

Abnormal Returns on Announcement Day

AD            1.828 *     1.431      2.825 **     1.835 *

Cumulative Abnormal Returns During Varied Multi-days Event Windows

(-20,-2)     -0.049      -0.044      -0.366      -0.353
(-1,0)        1.874 *     1.812 *     2.316 *     2.021 *
(-1,+1)       1.184       0.885       1.739 *     1.325
(-2,+2)       2.144 *     1.768 *     2.353 **    1.982 *
(-5,+5)       0.187       0.16        0.071       0.065
(-10,+10)    -0.559      -0.442      -0.587      -0.502
(-20,+20)    -0.598      -0.447      -0.795      -0.69
(+2,+20)     -1.300      -1.022      -1.496      -1.294

                  Non-parametric tests

Event                               ackknife
window       GSign Z     Rank Z         Z

Panel A: Cash Payment (N = 305)

Abnormal Returns on Announcement Day

AD          5.354 **     5.905 **    6.074 **

Cumulative Abnormal Returns During Varied Multi-days Event Windows

(-20,-2)     3.108 **    3.135 **    3.210 **
(-1,0)       6.097 **    5.434 **    5.340 **
(-1,+1)      5.408 **    5.357 **    5.102 **
(-2,+2)      5.752 **    5.070 **    5.322
(-5,+5)      3.798 **    3.379 **    3.312 **
(-10,+10)    2.533 **    0.905       0.731
(-20,+20)    0.924       1.15        0.651
(+2,+20)    -3.283 **   -3.575 **   -4.616 **

Panel B: Stock Payment (N = 81)

Abnormal Returns on Announcement Day

AD           2.137 *     2.654 **    2.016 *

Cumulative Abnormal Returns During Varied Multi-days Event Windows

(-20,-2)     0.796       0.467      -0.64
(-1,0)       2.360 **    2.073 *     1.878 *
(-1,+1)      1.02        1.379       0.996
(-2,+2)      1.466       1.679 *     1.788 *
(-5,+5)     -0.32       -0.311      -0.256
(-10,+10)   -0.99       -0.745      -0.805
(-20,+20)   -0.097      -0.166      -1.198
(+2,+20)    -1.660 *    -1.259      -1.664 *

Notes : AD = Announcement day * and ** Denotes significance at 5 per
cent and 1 per cent, respectively.

TABLE 6

ABNORMAL RETURNS TO THE S IIAREHOLDERS OF ACQUIRING FIRMS BASED ON
TYPE OF TARGET FIRM (LISTED OR UNLISTED) ON THE ANNOUNCEMENT DAY AND
DURING MULTI-DAYS EVENT WINDOWS: 2003-2008

                  Abnormal return

                      Precision
Event                 weighted             Positive:
window      Average    average    Median   Negative

Panel A: Listed Target Firms (N = 42)

Abnormal Returns on Announcement Day

AD           0.66%     0.55%       0.26%     21:21

Cumulative Abnormal Returns During Varied Multi-days Event Windows

(-20,-2)     3.11%     3.83%       1.44%     24.18
(-1,0)       1.95%     1.13%       0.86%     25.17
(-t,+1)      2.43%     1.79%       1.73%     27:15
(-2,+2)      3.06%     2.30%       1.94%     27:15
(-5,+5)      0.93%     0.85%       0.48%     23:19
(-10,+10)    0.16%     0.14%      -0.41%     19:23
(-20,+20)   -0.27%     0.97%      -0.84%     20:22
(+2,+20)    -5.81%    -4.66%      -5.88%     11:31

Panel B: Unlisted Target Firms (N = 353)

Abnormal Returns on Announcement Day

AD           1.23%     1.22%       0.82%    220:133

Cumulative Abnormal Returns During Varied Multi-days Event Windows

(-20,-2)     2.35%     1.86%       1.40%    187:166
(-1,0)       1.48%     1.42%       0.82%    222:131
(-1,+1)      1.59%     1.53%       1.04%    208:145
(-2,+2)      2.26%     2.03%       1.40%    213:140
(-5,+5)      2.10%     2.00%       0.93%    188:165
(-10,+10)    1.06%     1.24%       0.08%    179:174
(-20,+20)    1.11%     1.43%      -1.18%    167:186
(+2,+20)    -2.84%    -1.96%      -2.98%    131:221

                         Parametric tests

Event
window        CDA t       CSSt       PateIIZ      SCSZ

Panel A: Listed Target Firms (N = 42)

Abnormal Returns on Announcement Day

AD           1.152       1.094       1.268       1.024

Cumulative Abnormal Returns During Varied Multi-days Event Windows

(-20,-2)     1.246       1.452       1.908 *     1.669 *
(-1,0)       2.413 **    2.051 *     1.819 *     1.591
(-t,+1)      2.448 **    2.156 *     2.363 **    2.041 *
(-2,+2)      2.387 **    2.246 *     2.340 **    2.124 *
(-5,+5)      0.487       0.623       0.546       0.572
(-10,+10)    0.06        0.068       0.023       0.02
(-20,+20)    0.282       0.236      -0.074      -0.083
(+2,+20)    -2.377 **   -2.382 **   -2.327 **   -2.878 **

Panel B: Unlisted Target Firms (N = 353)

Abnormal Returns on Announcement Day

AD           7.038 **    5.721 **    8.587 **    5.814 **

Cumulative Abnormal Returns During Varied Multi-days Event Windows

(-20,-2)     3.094 **    2.768 **    2.898 **    2.529 **
(-1,0)       6.001 **    5.292 **    7.000 **    5.261 **
(-1,+1)      5.271 **    4.433 **    6.166 **    4.692 **
(-2,+2)      5.802 **    5.300 **    6.351 **    5.437 **
(-5,+5)      3.631 **    3.428 **    4.148 **    3.807 **
(-10,+10)    1.330       1.213       1.820 *     1.614
(-20,+20)    0.991       0.869       1.438       1.293
(+2,+20)    -3.742 **   -3.414 **    0.991       0.869 **

                  Non-parametric tests

Event                               Jackknife
window       GSign Z     Rank Z         Z

Panel A: Listed Target Firms (N = 42)

Abnormal Returns on Announcement Day

AD           0.649       1.289       1.136

Cumulative Abnormal Returns During Varied Multi-days Event Windows

(-20,-2)     1.580       1.791 *     1.289
(-1,0)       1.890 *     2.005 *     1.895 *
(-t,+1)      2.510 **    2.114 *     2.051 *
(-2,+2)      2.510 **    1.882 *     2.183 *
(-5,+5)      1.269       0.296       0.397
(-10,+10)    0.029      -0.844      -0.469
(-20,+20)    0.339       0.13       -0.24
(+2,+20)    -2.452 **   -2.441 **   -2.937 **

Panel B: Unlisted Target Firms (N = 353)

Abnormal Returns on Announcement Day

AD           6.316 **    6.672 **    6.773 **

Cumulative Abnormal Returns During Varied Multi-days Event Windows

(-20,-2)     2.838 **    2.723 **    2.328 **
(-1,0)       6.579 **    5.563 **    5.616 **
(-1,+1)      5.083 *     5.056 **    4.872
(-2,+2)      5.617 **    5.055 **    5.401 **
(-5,+5)      2.945 *     3.070 *     3.004 *
(-10,+10)    1.983 *     0.971       0.598
(-20,+20)    0.7         1.094       0.09
(+2,+20)    -3.104 **   -3.125 **   -4.187 **

Notes : AD = Announcement day * and ** Denotes significance at 5 per
cent and 1 per cent, respectively.

TABLE 7

MEAN VALUE OF RETURN ON EQUITY
FIVE YEARS BEFORE AND AFTER MERGER
AND ACQUISITION

                                          No. of
                                          sample
Year relative to M&A              ROE    companies

Before-merger and acquisition

Five years mean (t-5,t-1)        0.128      124
Four years mean (t-4,t- 1)       0.141      214
Three years mean (t-3,t- 1)      0.169      259
Two years mean (t-2,t- 1)        0.181      285
One year mean (t-1)              0.184      305

After-merger and acquisition

Five years mean (t+1, t+5)       0.174      124
Four years mean (t+1, t+4)       0.178      214
Three years mean (t+1, t+3)      0.177      259
Two years mean (t+1, t+2)        0.187      285
One year mean (t+1)              0.201      305

TABLE 8

PAIRED SAMPLE T -TEST OF RETURN ON EQUITY (ROE) BEFORE AND
AFTER MERGER ANDACQUISITION

Paired sample            Mean ROE     Mean ROE        Mean
(before, after)          after-M&A   before -M&A   difference

One year (t-1, t+1)        0.201        0.184        0.017
Two years (t-2, t+2)       0.187        0.181        0.006
Three years (t-3, t+3)     0.169        0.177        0.008
Four years (t-4, t+4)      0.178        0.141        0.037
Five years (t-5, t+5)      0.174        0.128        0.046

Paired sample                       Degree of
(before, after)           TValue     freedom    Significance

One year (t-1, t+1)      2.103 *       304         0.036
Two years (t-2, t+2)      0.722        284         0.471
Three years (t-3, t+3)    0.946        258         0.345
Four years (t-4, t+4)    4.21 **       213           0
Five years (t-5, t+5)    4.439 **      123           0

Notes: * and ** Denotes significance at 5 per cent and 1 per cent,
respectively.
COPYRIGHT 2012 Reprinted with permission from JFMA. Copyright reserved with JFMA.
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 2012 Gale, Cengage Learning. All rights reserved.

Article Details
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Author:Rani, Neelam; Yadav, Surendra S.; Jain, P.K.
Publication:Journal of Financial Management & Analysis
Geographic Code:9INDI
Date:Jan 1, 2012
Words:13218
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