CORPORATE MERGERS AND SECURITYHOLDER RETURNS
Abstract
This study is an investigation of the way in which the gains generated by corporate mergers are allocated among the participating firms' securityholders. The major contribution of this study is that it focuses detailed attention upon the returns earned by the senior securityholders of merging firms. This is an event-time study with the event being the announcement of an impending merger. The research methodology employed is an analysis of the abnormal returns to securityholders around the announcement date of an impending merger. One suggestion for the motivation of a merger is the investment hypothesis where both the acquiring and acquired firms participate in a merger if it is a positive net present value project. Another potential reason for the existence of merger is the co-insurance effect where due to less than perfect correlation between the merging firms' income streams, the risk of default decreases. This may result in a revaluation of senior securities and a change in firm value. By studying both acquiring and acquired firms and returns to all classes of securityholders of merging firms, this study provides evidence regarding the investment and co-insurance hypotheses. Our results indicate that acquiring firms' securityholders do not experience abnormal returns from a merger. We find that acquiring firms neither gain nor lose when a merger is announced even when the merging firms are of comparable size. We find positive abnormal returns that are statistically significant for all three classes of securityholders of acquired firms; common stockholders, convertible senior securityholders, and non-convertible senior securityholders. These results are consistent with the investment hypothesis. We also find some evidence consistent with the existence of a co-insurance effect.
Degree
Ph.D.
Subject Area
Business community
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