The Effects of the Cross-Correlation of Stock Returns on Post Merger Stock Performance

33 Pages Posted: 14 Jul 2006

See all articles by Antonios Antoniou

Antonios Antoniou

Wealth Associates

Philippe Arbour

Lloyds TSB Corporate Markets

Huainan Zhao

Loughborough University - School of Business and Economics

Date Written: September 2006

Abstract

In this paper, we examine the effects of the cross-correlation of stock returns on the long-run post merger stock performance of UK acquiring firms over the period 1985-2001. We show that, in general, the widely documented anomaly of long-run underperformance following mergers is not due to various stylised merger effects but rather due to the cross-correlation of stock returns, which compromises the 'independence of observations' assumption, thus yielding overstated test statistics. We test, in particular, the method of payment, diversification, book-to-market, and size effects in mergers. We find that these documented long-run effects simply disappear after accounting for the cross-sectional dependence of sample returns. Our results highlight the importance of controlling for the cross-correlation of stock returns in long-run post merger event studies.

Keywords: Mergers and Acquisitions, Cross-Correlation of Stock Returns, Abnormal Returns, Market Efficiency, Method of Payment

JEL Classification: G14, G34, M41, M43

Suggested Citation

Antoniou, Antonios and Arbour, Philippe and Zhao, Huainan, The Effects of the Cross-Correlation of Stock Returns on Post Merger Stock Performance (September 2006). EFMA 2004 Basel Meetings Paper; Cass Business School Research Paper. Available at SSRN: https://ssrn.com/abstract=493882 or http://dx.doi.org/10.2139/ssrn.493882

Antonios Antoniou

Wealth Associates ( email )

Alpine House,
Honeypot Lane
London, NW9 9RX
United Kingdom

Philippe Arbour

Lloyds TSB Corporate Markets ( email )

London
United Kingdom

Huainan Zhao (Contact Author)

Loughborough University - School of Business and Economics ( email )

Epinal Way
Leics LE11 3TU
Leicestershire
United Kingdom

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