Stock price reaction to merger announcements: An empirical note on Indian markets

Abstract

This research work empirically investigates the differences in stock price reaction of target and acquiring companies due to merger announcements. The role of insider information before merger announcements is also empirically tested and explained to be the cause for observed pre-announcement price run-ups. The investigation has been carried out using traditional event study methodology. Various event windows have been considered and compared to find out the period where the price run-up initiates. The post-merger price variations have also been studied. This analysis is suggestive of an upward trend in cumulative abnormal returns for companies in the pre-announcement period which in turn is indicative of insider information or anticipation. In addition, the evidence also suggests that around the announcement period the returns for the acquiring companies are higher than those for the target companies. In the post amalgamation period there is a downward trend in the cumulative returns implying a negative result of the merger. © Arun Kumar Gopalaswamy, Debashis Acharya, Jaideep Malik, 2008.