Long-Run Post Merger Stock Performance of UK Acquiring Firms: A Stochastic Dominance Perspective

30 Pages Posted: 23 Feb 2006

See all articles by Abhay Abhyankar

Abhay Abhyankar

University of Exeter Business School, University of Exeter

Keng-Yu Ho

National Taiwan University

Huainan Zhao

Loughborough University - School of Business and Economics

Abstract

We study, using the idea of stochastic dominance, the long-run post merger stock performance of UK acquiring firms. We compare performance by using the entire distribution of returns rather than only the mean as in traditional event studies. Our main results are as follows: First, we find that, in general, acquiring firms do not significantly underperform in three years after merger since we observe no evidence of first- or second-order stochastic dominance relation between acquirer and benchmark portfolios. Second, we find that acquirers paying excessively large premiums are stochastically dominated by their benchmark portfolio implying that overpayment is a possible reason for post merger underperformance. We find, in consistent with previous studies, cash financed mergers outperform stock financed ones. Finally, we do not observe any evidence that glamour acquirers underperform value ones as no stochastic dominance relations between the two. In general, our results underline the importance of examining long-run post merger stock performance from alternative perspectives.

Keywords: Stochastic Dominance, Mergers and Acquisitions, Corporate Takeovers, Abnormal Returns, Market Efficiency

JEL Classification: D81, G11, G14, G34

Suggested Citation

Abhyankar, Abhay and Ho, Keng-Yu and Zhao, Huainan, Long-Run Post Merger Stock Performance of UK Acquiring Firms: A Stochastic Dominance Perspective. Applied Financial Economics, Vol. 15, pp. 679-690, 2005; Cass Business School Research Paper. Available at SSRN: https://ssrn.com/abstract=883605

Abhay Abhyankar

University of Exeter Business School, University of Exeter ( email )

Streatham Court
Exeter, EX4 4PU
United Kingdom

Keng-Yu Ho

National Taiwan University ( email )

1, Sec. 4, Roosevelt Road
Taipei, 106
Taiwan

Huainan Zhao (Contact Author)

Loughborough University - School of Business and Economics ( email )

Epinal Way
Leics LE11 3TU
Leicestershire
United Kingdom

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