[go: up one dir, main page]
IDEAS home Printed from https://ideas.repec.org/a/taf/apfiec/v15y2005i10p679-690.html
   My bibliography  Save this article

Long-run post-merger stock performance of UK acquiring firms: a stochastic dominance perspective

Author

Listed:
  • Abhay Abhyankar
  • Keng-Yu Ho
  • Huainan Zhao
Abstract
Using the idea of stochastic dominance, the long-run post-merger stock performance of UK acquiring firms is studied. Performance is compared by using the entire distribution of returns rather than only the mean as in traditional event studies. The main results are as follows: First, it is found that, in general, acquiring firms do not significantly underperform in three years after merger since no evidence of first- or second-order stochastic dominance relation between acquirer and benchmark portfolios is observed. Second, it is found that acquirers paying excessively large premiums are stochastically dominated by their benchmark portfolio implying that overpayment is a possible reason for post-merger underperformance. Consistent with previous studies, it is found that cash financed mergers outperform stock financed ones. Finally, no evidence is observed that glamour acquirers underperform value ones as no stochastic dominance relations between the two. In general, the results underline the importance of examining long-run post-merger stock performance from alternative perspectives.

Suggested Citation

  • Abhay Abhyankar & Keng-Yu Ho & Huainan Zhao, 2005. "Long-run post-merger stock performance of UK acquiring firms: a stochastic dominance perspective," Applied Financial Economics, Taylor & Francis Journals, vol. 15(10), pages 679-690.
    • Handle: RePEc:taf:apfiec:v:15:y:2005:i:10:p:679-690
    DOI: 10.1080/09603100500065305
    as

    Download full text from publisher

    File URL: http://www.tandfonline.com/doi/abs/10.1080/09603100500065305
    Download Restriction: Access to full text is restricted to subscribers.
    File URL: https://libkey.io/10.1080/09603100500065305?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Kathleen Fuller & Jeffry Netter & Mike Stegemoller, 2002. "What Do Returns to Acquiring Firms Tell Us? Evidence from Firms That Make Many Acquisitions," Journal of Finance, American Finance Association, vol. 57(4), pages 1763-1793, August.
    2. Franks, Julian R & Harris, Robert & Mayer, Colin, 1987. "Means of Payment in Takeovers: Results for the UK and US," CEPR Discussion Papers 200, C.E.P.R. Discussion Papers.
    3. Mitchell, Mark L & Stafford, Erik, 2000. "Managerial Decisions and Long-Term Stock Price Performance," The Journal of Business, University of Chicago Press, vol. 73(3), pages 287-329, July.
    4. Jensen, Michael C. & Ruback, Richard S., 1983. "The market for corporate control : The scientific evidence," Journal of Financial Economics, Elsevier, vol. 11(1-4), pages 5-50, April.
    5. Garry F. Barrett & Stephen G. Donald, 2003. "Consistent Tests for Stochastic Dominance," Econometrica, Econometric Society, vol. 71(1), pages 71-104, January.
    6. S. Viswanathan & Bin Wei, 2008. "Endogenous Events and Long-Run Returns," The Review of Financial Studies, Society for Financial Studies, vol. 21(2), pages 855-888, April.
    7. Joy, O. Maurice & Porter, R. Burr, 1974. "Stochastic Dominance and Mutual Fund Performance," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 9(1), pages 25-31, January.
    8. Dennis, Debra K. & McConnell, John J., 1986. "Corporate mergers and security returns," Journal of Financial Economics, Elsevier, vol. 16(2), pages 143-187, June.
    9. Fama, Eugene F. & French, Kenneth R., 1993. "Common risk factors in the returns on stocks and bonds," Journal of Financial Economics, Elsevier, vol. 33(1), pages 3-56, February.
    10. Roll, Richard, 1986. "The Hubris Hypothesis of Corporate Takeovers," The Journal of Business, University of Chicago Press, vol. 59(2), pages 197-216, April.
    11. Alan Gregory, 1997. "An Examination of the Long Run Performance of UK Acquiring Firms," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 24(7‐8), pages 971-1002, September.
    12. Jensen, Michael C, 1986. "Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers," American Economic Review, American Economic Association, vol. 76(2), pages 323-329, May.
    13. Loughran, Tim & Vijh, Anand M, 1997. "Do Long-Term Shareholders Benefit from Corporate Acquisitions?," Journal of Finance, American Finance Association, vol. 52(5), pages 1765-1790, December.
    14. John D. Lyon & Brad M. Barber & Chih‐Ling Tsai, 1999. "Improved Methods for Tests of Long‐Run Abnormal Stock Returns," Journal of Finance, American Finance Association, vol. 54(1), pages 165-201, February.
    15. Sara B. Moeller & Frederik P. Schlingemann & René M. Stulz, 2005. "Wealth Destruction on a Massive Scale? A Study of Acquiring‐Firm Returns in the Recent Merger Wave," Journal of Finance, American Finance Association, vol. 60(2), pages 757-782, April.
    16. Kothari, S. P. & Warner, Jerold B., 1997. "Measuring long-horizon security price performance," Journal of Financial Economics, Elsevier, vol. 43(3), pages 301-339, March.
    17. R. A. Chatterjee, 2000. "The financial performance of companies acquiring very large takeover targets," Applied Financial Economics, Taylor & Francis Journals, vol. 10(2), pages 185-191.
    18. Moeller, Sara B. & Schlingemann, Frederik P. & Stulz, Rene M., 2004. "Firm size and the gains from acquisitions," Journal of Financial Economics, Elsevier, vol. 73(2), pages 201-228, August.
    19. Myers, Stewart C. & Majluf, Nicholas S., 1984. "Corporate financing and investment decisions when firms have information that investors do not have," Journal of Financial Economics, Elsevier, vol. 13(2), pages 187-221, June.
    20. repec:bla:jfinan:v:58:y:2003:i:2:p:483-518 is not listed on IDEAS
    21. Agrawal, Anup & Jaffe, Jeffrey F & Mandelker, Gershon N, 1992. "The Post-merger Performance of Acquiring Firms: A Re-examination of an Anomaly," Journal of Finance, American Finance Association, vol. 47(4), pages 1605-1621, September.
    22. Stewart C. Myers & Nicholas S. Majluf, 1984. "Corporate Financing and Investment Decisions When Firms Have InformationThat Investors Do Not Have," NBER Working Papers 1396, National Bureau of Economic Research, Inc.
    23. Tehranian, Hassan, 1980. "Empirical Studies in Portfolio Performance Using Higher Degrees of Stochastic Dominance," Journal of Finance, American Finance Association, vol. 35(1), pages 159-171, March.
    24. Porter, R. Burr, 1973. "An Empirical Comparison of Stochastic Dominance and Mean-Variance Portfolio Choice Criteria," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 8(4), pages 587-608, September.
    25. Russell Davidson & Jean-Yves Duclos, 2000. "Statistical Inference for Stochastic Dominance and for the Measurement of Poverty and Inequality," Econometrica, Econometric Society, vol. 68(6), pages 1435-1464, November.
    26. Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, vol. 3(4), pages 305-360, October.
    27. Fama, Eugene F., 1998. "Market efficiency, long-term returns, and behavioral finance," Journal of Financial Economics, Elsevier, vol. 49(3), pages 283-306, September.
    28. Eckbo, B Espen & Giammarino, Ronald M & Heinkel, Robert L, 1990. "Asymmetric Information and the Medium of Exchange in Takeovers: Theory and Tests," The Review of Financial Studies, Society for Financial Studies, vol. 3(4), pages 651-675.
    29. Alan Gregory, 1997. "An Examination of the Long Run Performance of UK Acquiring Firms," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 24(7&8), pages 971-1002.
    30. Fama, Eugene F & Jensen, Michael C, 1983. "Separation of Ownership and Control," Journal of Law and Economics, University of Chicago Press, vol. 26(2), pages 301-325, June.
    31. Anderson, Gordon, 1996. "Nonparametric Tests of Stochastic Dominance in Income Distributions," Econometrica, Econometric Society, vol. 64(5), pages 1183-1193, September.
    32. K. -Y. Ho, 2003. "Long-run stock price performance after IPOs: what do tests for stochastic dominance tell us?," Applied Economics Letters, Taylor & Francis Journals, vol. 10(1), pages 15-19.
    33. repec:bla:jfinan:v:44:y:1989:i:1:p:41-57 is not listed on IDEAS
    34. Dodd, Peter, 1980. "Merger proposals, management discretion and stockholder wealth," Journal of Financial Economics, Elsevier, vol. 8(2), pages 105-137, June.
    35. Raghavendra Rau, P. & Vermaelen, Theo, 1998. "Glamour, value and the post-acquisition performance of acquiring firms," Journal of Financial Economics, Elsevier, vol. 49(2), pages 223-253, August.
    36. Porter, R Burr & Gaumnitz, Jabk E, 1972. "Stochastic Dominance vs. Mean-Variance Portfolio Analysis: An Empirical Evaluation," American Economic Review, American Economic Association, vol. 62(3), pages 438-446, June.
    37. Malatesta, Paul H., 1983. "The wealth effect of merger activity and the objective functions of merging firms," Journal of Financial Economics, Elsevier, vol. 11(1-4), pages 155-181, April.
    38. Fama, Eugene F, 1980. "Agency Problems and the Theory of the Firm," Journal of Political Economy, University of Chicago Press, vol. 88(2), pages 288-307, April.
    39. Firth, Michael, 1979. "The Profitability of Takeovers and Mergers," Economic Journal, Royal Economic Society, vol. 89(354), pages 316-328, June.
    40. Franks, Julian & Harris, Robert & Titman, Sheridan, 1991. "The postmerger share-price performance of acquiring firms," Journal of Financial Economics, Elsevier, vol. 29(1), pages 81-96, March.
    41. Langetieg, Terence C., 1978. "An application of a three-factor performance index to measure stockholder gains from merger," Journal of Financial Economics, Elsevier, vol. 6(4), pages 365-383, December.
    42. M. S. B. Aw & R. A. Chatterjee, 2004. "The performance of UK firms acquiring large cross-border and domestic takeover targets," Applied Financial Economics, Taylor & Francis Journals, vol. 14(5), pages 337-349.
    43. Barber, Brad M. & Lyon, John D., 1997. "Detecting long-run abnormal stock returns: The empirical power and specification of test statistics," Journal of Financial Economics, Elsevier, vol. 43(3), pages 341-372, March.
    44. Travlos, Nickolaos G, 1987. "Corporate Takeover Bids, Methods of Payment, and Bidding Firms' Stock Returns," Journal of Finance, American Finance Association, vol. 42(4), pages 943-963, September.
    45. Russell Davidson, 2006. "Stochastic Dominance," Departmental Working Papers 2006-19, McGill University, Department of Economics.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Chikashi Tsuji, 2006. "Does EVA beat earnings and cash flow in Japan?," Applied Financial Economics, Taylor & Francis Journals, vol. 16(16), pages 1199-1216.
    2. Enrico Tanuwidjaja, 2006. "Multi Factor SUR in Event Study Analysis : Evidence from M&A in Singapore’s Financial Industry," Finance Working Papers 22577, East Asian Bureau of Economic Research.
    3. Tadanori Yosano & Yoshinori Shimada, 2010. "Market Reactions to Accounting Policy Choices for Mergers and Acquisitions: Evidence for the Japanese Adoption of International Accounting Standards," Discussion Papers 2010-53, Kobe University, Graduate School of Business Administration.
    4. Umut Ugurlu & Oktay Tas & Celal Barkan Guran & Aysun Guran, 2018. "SSD Efficiency at Multiple Data Frequencies: Application on the OECD Countries," Prague Economic Papers, Prague University of Economics and Business, vol. 2018(2), pages 169-195.
    5. M. Mark Walker & Chi-Sheng Hsu, 2007. "Strategic objectives, industry structure and the long-term stock price performance of acquiring and rival firms," Applied Financial Economics, Taylor & Francis Journals, vol. 17(15), pages 1233-1244.
    6. Bryan Mase, 2006. "Investor awareness and the long-term impact of FTSE 100 index redefinitions," Applied Financial Economics, Taylor & Francis Journals, vol. 16(15), pages 1113-1118.
    7. Guariglia, Alessandra & Yang, Junhong, 2016. "A balancing act: Managing financial constraints and agency costs to minimize investment inefficiency in the Chinese market," Journal of Corporate Finance, Elsevier, vol. 36(C), pages 111-130.
    8. Yang, Junhong & Guariglia, Alessandra & Guo, Jie (Michael), 2019. "To what extent does corporate liquidity affect M&A decisions, method of payment and performance? Evidence from China," Journal of Corporate Finance, Elsevier, vol. 54(C), pages 128-152.
    9. Andriosopoulos, Dimitris & Yang, Shuai & Li, Wei-an, 2016. "The market valuation of M&A announcements in the United Kingdom," International Review of Financial Analysis, Elsevier, vol. 48(C), pages 350-366.
    10. Andy Cosh & Alan Hughes, 2008. "Takeovers after "Takeovers"," Working Papers wp363, Centre for Business Research, University of Cambridge.
    11. repec:prg:jnlpep:v:preprint:id:649:p:1-27 is not listed on IDEAS
    12. Ilaria Galavotti, 2019. "Firm-level recent profitability and acquisition performance: exploring competing theoretical perspectives," Eurasian Business Review, Springer;Eurasia Business and Economics Society, vol. 9(3), pages 319-345, September.
    13. Enrico Tanuwidjaja, 2006. "Multi Factor SUR in Event Study Analysis: Evidence from M&A in Singapore’s Financial Industry," SCAPE Policy Research Working Paper Series 0607, National University of Singapore, Department of Economics, SCAPE.
    14. Maran Marimuthu & Haslindar Ibrahim, 2013. "A Case Study of the Local Bank Merger: Is the Acquiring Entity Better Off?," Accounting and Finance Research, Sciedu Press, vol. 2(2), pages 1-22, May.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Antonios Antoniou & Philippe Arbour & Huainan Zhao, 2008. "How Much Is Too Much: Are Merger Premiums Too High?," European Financial Management, European Financial Management Association, vol. 14(2), pages 268-287, March.
    2. Martynova, M. & Renneboog, L.D.R., 2005. "Takeover Waves : Triggers, Performance and Motives," Discussion Paper 2005-029, Tilburg University, Tilburg Law and Economic Center.
    3. Martynova, M., 2006. "The market for corporate control and corporate governance regulation in Europe," Other publications TiSEM 8651e281-4914-41f2-ac14-1, Tilburg University, School of Economics and Management.
    4. Martynova, Marina & Renneboog, Luc, 2008. "A century of corporate takeovers: What have we learned and where do we stand?," Journal of Banking & Finance, Elsevier, vol. 32(10), pages 2148-2177, October.
    5. Kanungo, Rama Prasad, 2021. "Uncertainty of M&As under asymmetric estimation," Journal of Business Research, Elsevier, vol. 122(C), pages 774-793.
    6. Dutta, Shantanu & Jog, Vijay, 2009. "The long-term performance of acquiring firms: A re-examination of an anomaly," Journal of Banking & Finance, Elsevier, vol. 33(8), pages 1400-1412, August.
    7. Andrey Golubov & Dimitris Petmezas & Nickolaos G. Travlos, 2013. "Empirical mergers and acquisitions research: a review of methods, evidence and managerial implications," Chapters, in: Adrian R. Bell & Chris Brooks & Marcel Prokopczuk (ed.), Handbook of Research Methods and Applications in Empirical Finance, chapter 12, pages 287-313, Edward Elgar Publishing.
    8. Lien Duong & Izan H. Y. Izan, 2012. "Consequences of Riding Takeover Waves: A ustralian Evidence," International Review of Finance, International Review of Finance Ltd., vol. 12(4), pages 399-434, December.
    9. Malcolm Baker & Richard S. Ruback & Jeffrey Wurgler, 2004. "Behavioral Corporate Finance: A Survey," NBER Working Papers 10863, National Bureau of Economic Research, Inc.
    10. An, Suwei, 2023. "Essays on incentive contracts, M&As, and firm risk," Other publications TiSEM dd97d2f5-1c9d-47c5-ba62-f, Tilburg University, School of Economics and Management.
    11. Jeffrey Harrison & Matthew Hart & Derek Oler, 2014. "Leverage and acquisition performance," Review of Quantitative Finance and Accounting, Springer, vol. 43(3), pages 571-603, October.
    12. Renneboog, Luc & Vansteenkiste, Cara, 2019. "Failure and success in mergers and acquisitions," Journal of Corporate Finance, Elsevier, vol. 58(C), pages 650-699.
    13. Chris Ratcliffe & Bill Dimovski & Monica Keneley, 2017. "The Performance of REIT Acquirers in the Post-Merger Period," ERES eres2017_43, European Real Estate Society (ERES).
    14. Bruyland, Evy & Lasfer, Meziane & De Maeseneire, Wouter & Song, Wei, 2019. "The performance of acquisitions by high default risk bidders," Journal of Banking & Finance, Elsevier, vol. 101(C), pages 37-58.
    15. Szilagyi, P.G., 2007. "Corporate governance and the agency costs of debt and outside equity," Other publications TiSEM 9520d40a-224f-43a8-9bf9-b, Tilburg University, School of Economics and Management.
    16. Bhagat, Sanjai & Dong, Ming & Hirshleifer, David & Noah, Robert, 2005. "Do tender offers create value? New methods and evidence," Journal of Financial Economics, Elsevier, vol. 76(1), pages 3-60, April.
    17. George Alexandridis & Antonios Antoniou & Huainan Zhao, 2006. "Valuation Effects of Short Sale Constraints: the Case of Corporate Takeovers," European Financial Management, European Financial Management Association, vol. 12(5), pages 747-762, November.
    18. Chris Ratcliffe & Bill Dimovski & Monica Keneley & Tom Smith, 2017. "Long-Term post-merger announcement performance. A case study of Australian listed real estate," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 57(3), pages 855-877, September.
    19. Chiuling Lu & Tzujui Mao & Yang-pin Shen, 2015. "Beyond friendly acquisitions: the case of REITs," Review of Quantitative Finance and Accounting, Springer, vol. 44(1), pages 139-159, January.
    20. Martynova, M. & Renneboog, L.D.R., 2006. "The Performance of the European Market for Corporate Control : Evidence from the 5th Takeover Wave," Other publications TiSEM af864e61-b989-415e-ba58-7, Tilburg University, School of Economics and Management.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:taf:apfiec:v:15:y:2005:i:10:p:679-690. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Chris Longhurst (email available below). General contact details of provider: http://www.tandfonline.com/RAFE20 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.