+7 925 966 4690, 9am6pm (GMT+3), Monday – Friday
ÈÄ «Ôèíàíñû è êðåäèò»

JOURNALS

  

FOR AUTHORS

  

SUBSCRIBE

    
Digest Finance
 

Event study methodology in M&A research

Vol. 26, Iss. 1, MARCH 2021

Received: 20 February 2021

Received in revised form: 1 March 2021

Accepted: 15 March 2021

Available online: 30 March 2021

Subject Heading: RISK, ANALYSIS AND EVALUATION

JEL Classification: G14, G34

Pages: 4–25

https://doi.org/10.24891/df.26.1.4

Veronika S. VINOGRADOVA National Research University Higher School of Economics (HSE University), Moscow, Russian Federation
vvinogradova@hse.ru

https://orcid.org/0000-0003-3085-6478

Subject. The article presents the basic principles of the event research methodology, which is one of the most popular empirical tools in corporate finance, and mergers and acquisitions.
Objectives. The article introduces the main methodologies for calculating expected and abnormal returns, the main approaches for testing abnormal returns and measuring the statistical significance of the results, and it also notes the advantages and limitations of the methodology.
Methods. Based on a content analysis of the top classical works in event analysis, the main algorithm and research approaches of the method are presented. The basic concept has been expanded taking into account the results of modern work aimed at improving the methodology. The applicability of the method and its relevance were verified based on the analysis of spotlight publications for 2015–2020.
Results. The article provides a review of the latest developments in M&A research. It highlights the main modern trends in the application of the event analysis method. The methodology is shown to be easy to use, with market data used for analysis available in major financial databases. This allows for empirical research with a large sample of securities. In addition, stock prices reflect the direct expectations of investors and best reflect the value created by the event when compared to financial statement analyses that are often misstated.
Conclusions and Relevance. It is concluded that the event analysis method remains the key methodology in the field of mergers and acquisitions and is actively used by researchers. Improved econometric approaches allow for increased statistical significance and more accurate results.

Keywords: event study, empirical capital market research, stock returns, corporate finance, M&A

References:

  1. Dolley J.C. Characteristics and Procedure of Common Stock Split-ups. Harvard Business Review, 1933, vol. 11, iss. 3, pp. 316–326.
  2. Ball R., Brown P. An Empirical Evaluation of Accounting Income Numbers. Journal of Accounting Research, 1968, vol. 6, iss. 2, pp. 159–178. URL: Link
  3. Fama E.F., Fischer L., Jensen M.C., Roll R. The Adjustment of Stock Prices to New Information. International Economic Review, 1969, vol. 10, iss. 1, pp. 1–21. URL: Link
  4. Brown S.J., Warner J.B. Measuring Security Price Performance. Journal of Financial Economics, 1980, vol. 8, iss. 3, pp. 205–258. URL: Link90002-1
  5. Brown S.J., Warner J.B. Using Daily Stock Returns: The Case of Event Studies. Journal of Financial Economics, 1985, vol. 14, iss. 1, pp. 3–31. URL: Link90042-X
  6. Mitchell M.L., Netter J.M. The Role of Financial Economics in Securities Fraud Cases: Applications at the Securities and Exchange Commission. Business Lawyer, 1994, vol. 49, iss. 2, pp. 545–590.
  7. Bruner R. Applied Mergers and Acquisitions. John Wiley & Sons, 2004, 1056 p.
  8. Andrade G., Mitchell M., Stafford E. New Evidence and Perspectives on Mergers. Journal of Economic Perspectives, 2001, vol. 15, no. 2, pp. 103–120. URL: Link
  9. Dodd P., Warner J. On Corporate Governance: A Study of Proxy Contests. Journal of Financial Economics,1983, vol. 11, iss. 1-4, pp. 401–438. URL: Link90018-1
  10. Kothari S.P., Warner J.B. Econometrics of Event Studies. Working Paper. Tuck School of Business, 2006.
  11. Spyrou S., Siougle G. Mergers and Acquisitions of Non-Financial Firms in Europe: The Case of the Athens Stock Exchange. Applied Economic Letters, 2007, vol. 14, no. 7, pp. 523–527.
  12. Corrado C. Event Studies: A Methodology Review. Accounting and Finance, 2011, vol. 51, iss. 1, pp. 207–234. URL: Link
  13. MacKinlay A.C. Event Studies in Economics and Finance. Journal of Economic Literature, 1997, vol. 35, iss. 1, pp. 13–39.
  14. Sharpe W.F. Portfolio Theory and Capital Markets. McGraw-Hill, 1970.
  15. Ritter J.R. The Long-Run Performance of Initial Public Offerings. Journal of Finance, 1991, vol. 46, no. 1, pp. 3–27.
  16. Sharpe W.F. Capital Asset Prices: A Theory of Market Equilibrium under Conditions of Risk. Journal of Finance, 1964, vol. 19, iss. 3, pp. 425–442. URL: Link
  17. Lintner J. The Valuation of Risky Assets and the Selection of Risky Investments in Stock Portfolios and Capital Budgets. Review of Economics and Statistics, 1965, vol. 47, iss. 1, pp. 13–37. URL: Link
  18. Mullins D.W. Jr. Does the Capital Asset Pricing Model Work? Harvard Business Review, 1982, vol. 60, iss. 1, pp. 104–114.
  19. Mandelker G. Risk and Return: The Case of Merging Firms. Journal of Financial Economics, 1974, vol. 1, iss. 4, pp. 303–336. URL: Link90012-9
  20. Ross S.A. The Arbitrage Theory of Capital Asset Pricing. Journal of Economic Theory, 1976, vol. 13, iss. 3, pp. 341–360. URL: Link90046-6
  21. Bhagat S., Romano R. Event-Studies and the Law. Part I: Technique and Corporate Litigation. Yale ICF Working Paper, 2001, No. 00-31
  22. Zaremba A., Plotnicki M. Mergers and Acquisitions: Evidence on Post-Announcement Performance from CEE Stock Markets. Journal of Business Economics & Management, 2016, vol. 17, iss. 2, pp. 251–266. URL: Link
  23. Dell'Acqua A., Etro L., Piva M., Teti E. Investor Protection and Value Creation in Cross-Border M&As by Emerging Economies. Journal of International Financial Management & Accounting, 2018, vol. 29, iss. 1, pp. 83–100. URL: Link
  24. Gregory A., O'Donohoe S. Do Cross-Border and Domestic Acquisitions Differ? Evidence from the Acquisition of UK Targets. International Review of Financial Analysis, 2015, vol. 31, pp. 61–69. URL: Link
  25. Mall P., Gupta K. Impact of Merger and Acquisition Announcements on Stock Returns and Intraday Volatility: Evidence from Indian Banking Sector. Journal of Entrepreneurship & Management, 2019, vol. 8, iss. 3, pp. 1–11.
  26. Arslan H.B., Simsir S.A. Measuring Takeover Premiums in Cross-Border Mergers and Acquisitions: Insights from Turkey. Emerging Markets Finance & Trade, 2016, vol. 52, iss. 1, pp. 188–203. URL: Link
  27. Pandey D.K., Kumari V. Effects of Merger and Acquisition Announcement on Stock Returns: An Empirical Study of Banks Listed on NSE and NYSE. Review of Finance & Banking, 2020, vol. 12, iss. 1, pp. 49–61.
  28. Peterson P.P. Event Studies: A Review of Issues and Methodology. Quarterly Journal of Business and Economics, 1989, vol. 28, no. 3, pp. 36–66.
  29. Dissanaike G. On the Computation of Returns in Tests of the Stock Market Overreaction Hypothesis. Journal of Banking and Finance, 1994, vol. 18, iss. 4, pp. 1083–1094. URL: Link00061-1
  30. Moeller S.B., Schlingemann F.P., Stulz R.M. Firm Size and the Gains from Acquisitions. Journal of Financial Economics, 2004, vol. 73, iss. 2, pp. 201–228. URL: Link
  31. Campbell J.Y., Lo A.W., MacKinlay A.C. The Econometrics of Financial Markets. Princeton University Press, 1997, p. 632.
  32. Patell J.M. Corporate Forecasts of Earnings per Share and Stock Price Behavior: Empirical Tests. Journal of Accounting Research, 1976, vol. 14, no. 2, pp. 246–276. URL: Link
  33. Boehmer E., Musumeci J., Poulsen A.B. Event-Study Methodology under Conditions of Event-Induced Variance. Journal of Financial Economics, 1991, vol. 30, iss. 2, pp. 253–272. URL: Link90032-F
  34. Serra A.P. Event Study Tests: A Brief Survey. Working Papers da FEP 117. Universidade do Porto, 2002.
  35. Kothari S.P., Warner J.B. Measuring Long-Horizon Security Price Performance. Journal of Financial Economics, 1997, vol. 43, iss. 3, pp. 301–339. URL: Link00899-9
  36. Corrado C.J. A Nonparametric Test for Abnormal Security Price Performance in Event Studies. Journal of Financial Economics, 1989, vol. 23, iss. 2, pp. 385–395. URL: Link90064-0
  37. Cowan A., Sergeant A.M.A. Trading Frequency and Event Study Test Specification. Journal of Banking & Finance, 1996, vol. 20, iss. 10, pp. 1721–1757. URL: Link00021-0
  38. Campbell C.J., Wesley C.E. Measuring Security Price Performance Using Daily NASDAQ Returns. Journal of Financial Economics, 1993, vol. 33, iss. 1, pp. 73–92. URL: Link90025-7
  39. Kiesel F., Tielmann A., Ries J.M. The Impact of Mergers and Acquisitions on Shareholders’ Wealth in the Logistics Service Industry. International Journal of Production Economics, 2017, vol. 193, pp. 781–797. URL: Link
  40. Ranju P.K., Mallikarjunappa T. The Effect of Cross-Border Mergers and Acquisitions on Shareholder Wealth: Evidence from Indian High-Technology Industry. South Asian Journal of Management, 2018, vol. 25, no. 2, pp. 139–166.
  41. Rani N., Yadav S.S., Jain P.K. Impact of Mergers and Acquisitions on Shareholders' Wealth in the Short Run: An Event Study Approach. The Journal of Decision Makers, 2015, vol. 40, no. 3, pp. 293–312. URL: Link
  42. Chuang K.S. Glamour Versus Value, Market Timing and Firm Performance: Evidence from Mergers and Acquisitions. Review of Quantitative Finance & Accounting, 2018, vol. 51, iss. 4, pp. 967–1003. URL: Link
  43. Karamanos A., Bakatselos G., Agolli R. Abnormal Stock Market Returns to Announcements on M&A Banking Deals in Greece 1996–2013. Management Dynamics in the Knowledge Economy, 2015, vol. 3, no. 2, pp. 317–338.
  44. Tao F., Liu X., Gao L., Xia E. Do Cross-Border Mergers and Acquisitions Increase Short-Term Market Performance? The Case of Chinese Firms. International Business Review, 2017, vol. 26, iss. 1, pp. 189–202. URL: Link
  45. Firk S., Maybuechen F., Oehmichen J., Wolff M. Value-Based Management and Merger & Acquisition Returns: A Multi-Level Contingency Model. European Accounting Review, 2019, vol. 28, iss. 3, pp. 451–482. URL: Link
  46. Arik E., Kutan A.M. Do Mergers and Acquisitions Create Wealth Effects? Evidence from Twenty Emerging Markets. Eastern European Economics, 2015, vol. 53, iss. 6, pp. 529–550. URL: Link

View all articles of issue

 

ISSN 2311-9438 (Online)
ISSN 2073-8005 (Print)

Journal current issue

Vol. 29, Iss. 1
March 2024

Archive