THE EFFECT OF MERGERS AND ACQUISITIONS ON SHARE PRICES

Abstract

The impact of mergers and acquisitions on shareholders' returns has received much attention recently. The results of many studies show that target firms earn large abnormal returns whereas bidders earn only zero abnormal returns as a result of mergers. However, as bidders are the ones who initiate the merger, they should be earning a larger return instead. As proposed by Synergy Hypothesis and Hubris Hypothesis, this is because of the large premium bidders pay to targets which results in a transfer of wealth from the bidders to the targets. The purpose of this study is to examine the impact of mergers and acquisitions on target and bidding firms that are listed on the Stock Exchange of Singapore (SES). Abnormal stock returns of these firms are examined for the entire merger process, namely: ( 1) at the announcement of the merger bid, (2) the period between the announcement date and the completion date, (3) at the completion of merger and (4) during the post-outcome period. The result of this study shows that target firms, on average, earn large positive returns whereas bidding firms only earn small positive abnormal returns. This indicates that targets generally perform better than bidders in a merger which is consistent with the Synergy Hypothesis and Hubris Hypothesis.