Profitability Analysis of Mergers and Acquisitions: An Event Study Approach

Abstract

The purpose of this research is to test the efficiency of market with respect to announcements of mergers and acquisitions using an event study methodology. Specifically, this study analyzed the effects of banks mergers and their announcements on the prices of stocks, in Europe. We study 18 deals that involve banks in Merger and Acquisition from year 2001 to 2010 in order to investigate the returns of shareholder of the targets and acquirers. Evidence here supports that significant cumulative abnormal returns were short lived for the acquirers. At the end of the event window, the cumulative abnormal returns were 0. Evidence of excess returns after the merger announcement was also observed along with the leakage of information that resulted in the rise of stock prices few days before the announcement of merger or acquisition. At the same time, the results of cumulative abnormal returns showed that target banks earned abnormal returns on the merger announcement day.