The Information Implication of Merger and Acquisition Announcements: Evidence from the U.S. And China

19th International Trade and Finance Association International Conference (Second Best Student Paper Award)

29 Pages Posted: 9 May 2010 Last revised: 6 Jun 2010

See all articles by Hao Liang

Hao Liang

Singapore Management University - Lee Kong Chian School of Business; European Corporate Governance Institute (ECGI)

Date Written: July 14, 2009

Abstract

This study examines the impact of merger and acquisition (M&A) announcements made by U.S. companies listed on New York Stock Exchange (NYSE) and Chinese companies listed on Shanghai and Shenzhen stock exchanges on acquiring frms' stock returns. The event study methodology is employed to ascertain whether abnormal returns exist surrounding the announcement day (day 0). The study covers a period from August 2006 to February 2008 with a sample size of 164 events. It is found that the announcement effect is not significant over the event period (day -10 to day 10) for the U.S. companies but significant for Chinese companies during the 10-day period before the announcement day. A breakdown by exchanges for Chinese stocks shows that the announcement effect only exist for companies listed on Shenzhen stock exchange over the 10-day event window before the announcement. However, there are instantaneous abnormal returns on a few single days prior to and after the announcement, especially about one week before day 0. A further look at the change of the capital market line indicates the welfare of creditors of the firm may be encroached by shareholders and managers after the announcement in the U.S. but not in China. However, for Chinese firms, M&As may destroy firm value in total. The evidence shows that due to different forms of market efficiencies, investors in the U.S. who trade on the information regarding an acquiring company's impending M&A cannot earn abnormal returns on average, while those in China can profit from it before the information is officially released; however, the incentive effects associated with debt are different in the two countries.

Keywords: merger and acquisition announcement, event study methodology, abnormal returns, efficient market hypothesis, agency problem

JEL Classification: G14, G32, G34

Suggested Citation

Liang, Hao, The Information Implication of Merger and Acquisition Announcements: Evidence from the U.S. And China (July 14, 2009). 19th International Trade and Finance Association International Conference (Second Best Student Paper Award), Available at SSRN: https://ssrn.com/abstract=1601227 or http://dx.doi.org/10.2139/ssrn.1601227

Hao Liang (Contact Author)

Singapore Management University - Lee Kong Chian School of Business ( email )

469 Bukit Timah Road
Singapore 912409
Singapore

HOME PAGE: http://business.smu.edu.sg/faculty/profile/130396/LIANG-Hao

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

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