An Analysis of Merger Induced Non-Stationarity in Market Model Parameters of Acquiring Firms

Abstract

This paper formulates a modification of the market model methodology that allows direct testing for the impact of mergers on market model parameters, while simultaneously estimating acquiring firm abnormal stockholder returns. A large sample of merger events is stratified in three ways: conglomerate versus non conglomerate, stock versus cash transactions, and by merger activity level. Results of prior studies are examined for sensitivity to a failure to appropriately incorporate the impact of merger on market model parameters. Results indicate that negative drift in post announcement returns for acquiring firms is partly the result of parameter shifts.