M&A announcements and how they affect peer firms: evidence from the US
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School of Business |
Master's thesis
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Date
2016
Department
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Mcode
Degree programme
Finance
Language
en
Pages
75
Series
Abstract
Purpose of the study The aim of my thesis is study how M&A announcements affect the valuations of the merging firms and the peers of the acquirer. In addition, I analyze if the method to determine the peer group causes the possible peer effect to differ. To study the peer effects, prior literature has relied on industry classifications whereas I, in addition to the traditional method, employ the new common analyst based method (Kaustia & Rantala, 2013). Furthermore, I also examine how the single, closest peer of the acquirer, also determined by the common analyst method is affected by the merger announcement. Data and methodology The final sample consists of 563 M&A announcements of public, US companies between January 1999 to December 2013 by US based firms listed on the New York Stock Exchange. The data on the mergers was obtained from SDC Platinum. The stock price data was obtained from CRSP. The common analyst method constructs the peer groups based on joint analyst coverage and the analyst data is available in IBES. The industry classification based peer groups I formed by matching the acquirer’s 4-digit SIC code to all other firms sharing the same industry classification. Finally, I used the event study methodology to determine the abnormal returns on and around the announcement day. Findings of the study The abnormal returns to the acquiring firm were slightly negative, while the target firm encountered highly positive abnormal returns; on average the mergers were value-creating with a positive combined wealth effect. The peers, on average, irrespective of the methodology used, did not encounter significant abnormal returns. When further splitting the sample based on the CWE of the merger, the peers faced a similar signed effect as the CWE; this result provides support for the contagion effect for peers in mergers. The results are robust to the peer group method used and both methods returned extremely similar results. Furthermore, in support of the common analyst method, the closest peer determined by it showed the most prominent effect in the merger announcements.Description
Thesis advisor
Kaustia, MarkkuKeywords
M&A, event study, announcement effect, peer group, closest peer, industry classification, common analyst