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Wealth Effect of Mergers & Acquisitions in an Emerging Market:

A Case Study of Pakistans Banking Sector

Sana Tauseef
Lecturer, Economics and Finance
Institute of Business Administration (IBA), Karachi
Email: sasghar@iba.edu.pk
and
Mohammed Nishat, PhD
Professor, Economics and Finance
Institute of Business Administration (IBA), Karachi
Email: mnishat@iba.edu.pk

Abstract
This study investigates the short term market response associated with the announcement of seven mergers and
acquisitions (M&As) in the banking sector of Pakistan during the period 2003 to 2008 using the event study
methodology. We categorize the sample M&A deals as (1) Acquisition of Pakistani banks by the foreign investors,
(2) Merger of Pakistani banks with the other domestic banks and (3) Merger of Pakistani banks with the foreign
banks operating in Pakistan. The results indicate statistically significant investor reactions around the merger
announcements. For individual target and bidder banks, the cumulative abnormal returns (CARs) range from
significant positive to significant negative. The combined mean CARs for the target banks group and bidder group
are both positive and statistically significant. The mean CAR for the combined banks in the domestic mergers is also
positive but is largely impacted by the substantial positive CAR of one bidder bank.

Key Words: Merger & Acquisition, Wealth effect, emerging market, banking
JEL: G34, G38, E21, G21, F40

Electronic copy available at: http://ssrn.com/abstract=1653690

Wealth Effect of Merger & Acquisition in an Emerging Market:


A Case Study of Pakistans Banking Sector

1. Introduction
In the face of technological advancement, globalization, and increased competition, the firms all
over the world are trying to maintain their competitive position. There is a growing trend towards
consolidation to reap the benefits through synergies, thereby, enhancing efficiency and
performance. The same trend has been observed in Pakistan. In the recent past, after 1998, there
are a large number of mergers taking place every year, both within and across sectors. Although
there is mounting evidence available for developed economies on the issue, little research exists
to examine the value creation through mergers in smaller and less developed markets.
Considering the large number of mergers and acquisitions taking place in different sectors of
Pakistan, there is a need to study the wealth creation for the shareholders of targets and bidders.
Building on the earlier studies done on the topic in developed and other less developed countries,
we attempt to examine the wealth impact of mergers deals in Pakistan. Of all the mergers that
took place during the mentioned period, more than 50% occurred in the financial sector,
including banks, leasing companies, modarabas, and mutual funds. This resulted mainly due to
the SBPs regulatory policies, which focused on consolidating the weak financial institutions by
strengthening their capital base.
According to the State Bank of Pakistans BSD Circular No. 06 dated October 28, 2005, all
locally incorporated banks were required to raise their minimum Paid up Capital (net of losses)
to Rs. 5 billion by December 31, 2008, Rs. 6 billion by December 31, 2009, Rs. 10 billion by
December 31, 2010, Rs. 15 billion by December 31, 2011, Rs. 19 billion by December 2012, and
Rs. 23 billion by December 31, 2013. With this policy of SBP, the banks which were not able to
meet the requirements were merged with other banks or were acquired by some large banks.
Keeping in view the global crisis and domestic economic slowdown, the State Bank of Pakistan
as per the BSD Circular No. 07 dated 15th April 2009 has slashed the paid-up capital limit to be
maintained by the banks. The banks are now required to raise their minimum Paid up Capital
(net of losses) to Rs. 10 billion by December 31, 2013, but the trend towards consolidation
continues and therefore there is a need to study the wealth impact of the merger and acquisition
deals in the banking sector.
A lot of empirical research has been done to explore the wealth effect of merger activity in the
developed economies, especially U.S., U.K., and Europe. The studies conducted to analyze the
wealth creation through mergers use different measures. One set of studies uses the event study
methodology, looking at the short to medium run stock performance of the bidder, target and the
merged entity. This methodology is based on the assumption of efficient market where the stock
prices react in a timely and unbiased manner to new information (Fama 1970; Roberts 1967).
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Electronic copy available at: http://ssrn.com/abstract=1653690

The other set of studies looks at the accounting performance indicators, like ROE and various
cash flow measures, to compare the pre and post merger performance. Such studies believe that
the gains or losses resulting from a merger eventually appear in the firms accounting records
(Tuch and Sullivan 2007). Both set of studies have ended in variable results.
Short run event studies including the US takeovers during 1960s (Asquith 1983) and UK
takeovers during 1950s (Franks and Harris 1989) reported significant positive returns to the
acquirers. However, the remaining event studies, both short run and long run, conducted on US
and UK takeovers provide either no significant change or report significant negative returns for
the acquirers (Tuch and Sullivan 2007). On the other hand, the target firms announcement
returns in US and Europe are found to be large and significantly positive (Kiymaz and Baker
2008). According to these researches, the mergers merely transfer the wealth and the target
shareholders gain at the expense of the acquiring firms and no wealth is created in process. A
study covering 54 mergers including 13 European banking markets of European Union and the
Swiss market for the period 1988 to 1997 has reported positive and significant increase in the
shareholder wealth of bidder and target banks (Cybo-Ottone and Murgia 2000). Campa and
Hernando (2004) found a negative return around the bid announcement for the regulated
European Union acquirers and reported no significant return for the bidders from unregulated
industries. In Canada, the acquiring firms are reported to have positive returns (Ben-Amar and
Andre 2006).
The evidence from the research using accounting information is also mixed. The studies
examining the post-bid accounting performance of the acquirers for the period between 19481977 in UK reported either a decline in the profitability following the merger (Meeks 1977;
Ravenscroft and Scherer 1987) or significantly lower returns for the acquirers compared to the
non-acquirers (Dickerson 1997). The study by Healy (1992) reports an improvement in the asset
productivity (measured through operating Cash flow return on market value of assets) of the
acquiring firms in US. Andrade (2001) also finds an improvement in the post merger
performance (measured through ratio of cash flow to sales) for the US mergers. The study
conducted by Altunbas and Marques (2004) on mergers taking place during the period 19922001 in Europe reported superior post merger performance; however, the improvement in
performance following the cross border mergers is reported to be more compared to the
performance improvement of banks entering into domestic mergers.
Since the researches using the accounting information use different measures to capture the
change in performance, they are difficult to compare. The mixed evidence on the returns from
mergers encouraged the researchers to examine the different bid characteristics to identify the
drivers of differential performance. These studies report that for strategically closer institutions
the performance improves more than for dissimilar institutions, thereby supporting the synergy
hypotheses (Altunbas and Marques 2004; Tuch and Sullivan 2007). Moreover, the institutions
performing very well prior to mergers are not able to improve their performance as much as the
low performers in both the domestic and cross border mergers. The studies also report that the
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Electronic copy available at: http://ssrn.com/abstract=1653690

hostile takeovers, where the takeover activity takes place despite of the target managements
opposition, are associated with better performance if excessive takeover premiums are not paid.
This is taken as an indication that the hostile takeovers play a governance role and target the
firms where managers are under performing (Tuch and Sullivan 2007).
Although there is extensive evidence available for developed countries on the issue, little
research exists for the emerging and less developed economies. In a study of cross border
mergers and acquisitions by the Chinese firms positive and significant wealth gains were found
for the acquiring firms (Boateng, Qian and Tianle 2008). Mishra and Goel (2005) in their study
of a merger deal in Indian energy and petrochemical sector found that despite the deal appearing
favorable to the shareholders of bidder company, the announcement returns for bidders were
found to be negative. The returns for the target firm were positive but the combined firm was
reported to have negative excess returns. Such negative returns were linked to the managerialism
hypothesis, indicating that the acquirers management is motivated by its own self-interest and is
not pursuing the merger deal for their shareholders benefit (Nishra and Goel 2005; Tuch and
Sullivan 2007). In the Indian banking Industry, merger announcements were found to have a
positive and significant wealth effect both for the bidder and the target banks (Anand and Singh
2008).

2. Data and Research Design


Our research uses the standard event study methodology to measure the impact of merger
announcements on the wealth of the merging firms shareholders. To conduct the study, we
consider the following seven mergers/acquisitions that occurred in the banking sector of Pakistan
during the period 2003 to 2008: Acquisition of Saudi Pak Commercial Bank Limited by M/s
Shaukat Tarin & Consortium, merger of PICIC commercial bank with and into NIB, merger of
Prime Commercial Bank with and into ABN Amro (Pakistan) Limited, acquisition of majority
shares of Crescent Commercial Bank Limited by SAMBA Financial Group, merger of Union
Bank Limited with and into Standard Chartered Bank (Pakistan), merger of Trust Investment
Bank Ltd., Fidelity Investment Bank Ltd., and Doha Bank into Trust Commercial Bank Ltd (a
new entity), and merger of Platinum Commercial Bank with and into Khadim Ali Shah Bukhari
and Co.1
Table 1
Serial
Number

Bidder Bank

Consortium
including

Target Bank/s

Announcement
Date

Merger/
Acquisition
Date

Saudi Pak Bank


Bank

January 07, 2008

March

31,

Table 1 illustrates the sample mergers/acquisitions with the respective announcement dates and the effective
merger dates.

2
3
4
5
6
7

Muscat and Japans


Nomura
NIB
ABN
Amro
(Pakistan) Limited
Samba
Financial
Group
Standard Chartered
Bank (Pakistan),
Trust Commercial
Bank (new entity)
KASB

2008
PICIC Commercial Bank
Prime Commercial Bank

June 29, 2007


Mar 05, 2007

Dec 31, 2007


Sept 01, 2007

Crescent Commercial Bank

Nov 17, 2006

Union Bank Limited

August 09, 2006

March
31,
2007
Dec 30, 2006

Trust Inv.Bank Ltd, Fidelity


Inv.Bank Ltd., and Doha Bank
Platinum Commercial Bank

August 06, 2003

May 05, 2004

February 25, 2003

May 08, 2003

The sample mergers and acquisitions fall into three broad categories:
I.

Acquisition of Pakistani banks by the foreign investors. The acquisition of Saudi Pak
Bank (renamed as Silkbank) by a Consortium comprising of IFC, Bank Muscat, Nomura
International and Sinthos Capital and the acquisition of Crescent Bank by SAMBA
Financial group were the foreign ventures attracted by the Pakistan's strongly performing
banking sector and reflected the investor-friendly policies pursued by the Government of
Pakistan.

II.

Merger of Pakistani banks with the other domestic banks. The merger of NIB and
PICIC has resulted in NIB Bank becoming the seventh largest bank in the country in
terms of the distribution network. The amalgamation of Trust Investment Bank Limited
(TIBL) and Fidelity Investment Bank Limited (FIBL) together with the Doha Bank
Pakistan Branches created Trust Commercial Bank Limited which was then merged with
and into the Crescent Commercial Bank. The acquisition of Platinum Commercial Bank
Limited by KASB was the first merger of a stock brokerage firm with a commercial bank
in Pakistan and the name of the company was subsequently changed to KASB bank
Limited.

III.

Merger of Pakistani banks with the foreign banks operating in Pakistan. After the
acquisition of and amalgamation with Union Bank, the new entity Standard Chartered
Bank (Pakistan) Limited was incorporated in Pakistan and currently it is the largest
international bank operating in Pakistan. The amalgamation of Prime Bank with ABN
Amro allowed the new entity ABN Amro Pakistan limited to increase its branch network
in the country and become the second largest international bank in Pakistan.

The study tests the following hypothesis:

The merger announcements in the banking sector of Pakistan do not create shareholders
wealth for the merging banks
In order to test the hypothesis, the study requires the announcement dates for each of the five
mergers, the window period and the clean period data for each merger deal. Announcement date
(t=0) is the date on which the information about the merger deal was first made public. These
dates are obtained from the news clipping available on the websites of Daily Business Recorder
(www.brecorder.com.pk) and Daily Dawn (www.dawn.com.pk).
The event window has been taken from t=-30 to t=+30, where t=-30 represents 30 days before
the merger announcement date (t=0) and t=+30 represents 30 days after the merger
announcement is made. We employ the single-factor market model to compute the abnormal
return for each bank stock in the 60-day window. The market model parameters are computed
using an estimation period of 180 days before the window period for each participating firm. The
period of 30 days prior to the announcement date is not included in this clean period to prevent
the events influence on the parameter estimates.
The following market model is employed for the parameter estimations:
ARit = Rit E(Rit)
where,

ARit = Abnormal return for bank stock i on day t.


Rit = Actual return of bank stock i at time t.
E(Rit) = Expected return on bank stock i at time t. This is measured by the
following equation: E(Rit) = + Rmt
= Ordinary least squares estimate of the intercept of the market model
regression.
= Ordinary least squares estimate of the coefficient in the market model
regression.

Cumulative abnormal returns are used to explore whether the share holders of the each bidder
and target bank gained or loosed from the respective merger deal. These CARs are computed for
the period surrounding the merger announcement (-30 to +30), i.e., from 30 days before the
merger announcement to 30 days after the merger announcement, using the following equation:
t=30
CAR = ARt
t=-30

To examine the wealth effect for the shareholders of the bidder banks group and target banks
group, the daily average abnormal returns in a 60-day window is computed for the bidder block
and the target block by using the following equation for arithmetic average:
AVG ARt = ARit/n
Where,

n = Number of banks in the bidder and target groups.

The cumulative average abnormal returns for the days surrounding the merger announcement (30 to +30) is estimated for each group (bidder and target). The cumulative average abnormal
returns for the event window is also computed for the target group in each category.
Abnormal returns of the combined banks (for category 22) will be calculated to assess the market
expectations and reactions to the merger deals. The market values (i.e. market capitalization) of
the bidder and target banks for the day before the merger announcement (t=-1) are used to
compute the market value weights.3 The weighted average cumulative abnormal returns are then
estimated for each merger announcement.
Table 2
Bidder
Bank

Target
Bank/s

S. No.
1

NIB

Trust
Commercial
Bank (new
entity)

KASB

PICIC
Commercial
Bank
Fidelity
Inv.Bank
Ltd.,
and
Doha Bank
Platinum
Commercial
Bank

Market Capitalisation

Market Value
Weights

Date
(value as on)

Bidder Bank

Target Bank

June 28, 2007

7,126,426,640

12,088,147,500

37.089%

62.911%

August
2003

05,

422,476,200

357,075,000

54.195%

45.805%

February 24,
2003

575,446,500

492,800,000

53.868%

46.132%

The average AR (abnormal return) for each target and bidder bank, the average CAR
(cumulative abnormal return) for each target and bidder, the average CAR for the target banks
group and bidder group, the average CAR for the targets in each of the three M&A categories,
and the CARs of combined entities are then tested for statistical significance using t-statistic.
Statistically significant AR or CAR implies that there are abnormal returns associated with
merger announcements.

2
3

The required data is not available for the other two categories.
Exhibit 2 illustrates the market value of equity as on the previous day of the merger announcement (t=-1)

3. Empirical Results
Table 3A provides the details of the regression results for all target and bidder banks. These
coefficients were used to estimate the expected returns for the respective bank during the event
window.
Table3B gives the mean residual return for each bank and the t-statistic. From the target group,
Saudi Pak Bank and Prime Commercial Bank reported significant negative mean AR. For each
of the other target bank, the mean AR is statistically insignificant.
Table 3C summarizes the mean CAR over the 61-day event window for each bank. From the
target group, six banks out of seven are found to have significant and substantial positive or
negative CAR. Saudi Pak Bank, Fidelity Investment, Union Bank and Prime Commercial Bank
have shown significant negative mean CAR. Crescent Commercial and PICIC have earned
significant positive mean CAR. In the bidder banks, NIB has earned a substantial and statistically
significant positive mean CAR, where as the other two banks, Trust Investment and KASB have
earned significant negative mean CARs.

Target and Bidder Groups:


For the bidder group, the mean CAR (cumulative abnormal returns) is positive (18.33%) and
statistically significant. This combined CAR is propped up due to a substantial positive CAR
earned by PICIC. The CAR of the bidders in the time window -24 to +30 is positive. In relative
terms, the CAR increased by 25.88% during the 24 days prior to the merger announcement (-24
to -1) and then declined by 4.6% during the 30 days following the merger announcement (+1 to
+30). On the day of announcement (t=0), the bidder group earned a positive return of 0.63%.

Table 3A
Summary Statistics-Bidder and Target Banks
Target Banks
Saudi Pak Bank
Crescent Commercial Bank
PICIC
Fidelity Investment Bank
Platinum Commercial Bank
Union Bank
Prime Commercial Bank
Bidder Banks
NIB
Trust Investment Bank
KASB

0.295
-0.147
-0.017
0.480
0.102
0.357
0.484

0.688
0.993
1.160
-0.141
0.999
0.808
0.645

0.044
0.591
0.139

0.844
0.018
0.240
8

Table 3B
Abnormal Returns-Bidder and Target Banks
Target Banks
Saudi Pak Bank
Crescent Commercial Bank
PICIC
Fidelity Investment Bank
Platinum Commercial Bank
Union Bank
Prime Commercial Bank
Bidder Banks
NIB
Trust Investment Bank
KASB
* significant at 5% level.

Mean AR

Standard Error

t-statistic

-0.387
0.617
0.298
-0.514
-0.082
0.199
-0.534

0.188
0.396
0.262
0.543
0.442
0.249
0.175

-2.061*
1.559
1.136
-0.947
-0.187
0.800
-3.051*

1.596
-0.452
-0.107

0.416
0.503
0.354

3.838*
-0.899
-0.303

Table 3C
Abnormal Returns-Bidder and Target Banks
Target Banks
Saudi Pak Bank
Crescent Commercial Bank
PICIC
Fidelity Investment Bank
Platinum Commercial Bank
Union Bank
Prime Commercial Bank
Bidder Banks
NIB
Trust Investment Bank
KASB
*significant at 5% level.

Mean CAR

Standard Error

t-statistic

-14.075
31.860
12.501
-5.650
0.129
-2.007
-15.736

0.537
1.355
1.041
1.533
0.829
0.675
1.087

-26.230*
23.513*
12.009*
-3.686*
0.155
-2.973*
-14.483*

65.582
-2.460
-8.122

3.674
1.163
0.803

17.851*
-2.116*
-10.109*

Table 4 shows the announcement effects of bidder group into various sub-periods within the
event window. The increase in CAR during the 20 days through 11 days prior to the
announcement accounted for 60.97% of the total increase in the event window. The positive
trend in CAR continued till the announcement date. During the 20 days following the merger
announcement (+1 to +20) the CAR declined which was followed by an increase in the CAR for
the last 10 days in the event window (+21 to 30) and this increase accounted for 20.22% of the
total increase.
9

Over the event window, the target group accumulated a CAR of -3.52%. The CAR increased by
5.85% between the period of one to prior to announcement to one day after the merger
announcement (-1 to +1). Exhibit 4 shows a mixed trend in CAR for the target group during the
61 day event window. The CAR improved during the period -20 to +1 by 8.57% after which it
started
declining.
CAR
declined
by
12.06%
during
the
period
+2 to +30. The mean CAR for the group is positive and significant.
The mean CARs for both the target and bidder groups, thus, are positive and significant at 5%.
Anand and Singh (2008) found the same trend in their study for the bidders and targets of the
Indian private sector banks.
Table 4
CAR-Announcement Effect for Target and Bidder groups
Sub-period
Target Group
CAR
Announcement
Effect
(-30 to 0)
Announcement
Effect
(0 to +30)
Announcement
Effect
(-30 to +30)
Bidder Group
CAR
Announcement
Effect
(-30 to 0)
Announcement
Effect
(0 to +30)
Announcement
Effect
(-30 to +30)

-30
to
-21

-20
to
-11

-10
to
-1

+1
to
+10

+11
to
+20

+21
to
+30

-0.364

1.650

2.580

2.324

-1.023

-7.681

-1.002

-5.88%

26.66%

41.68%

37.54%

31.48%

-13.86%

-104.05%

-13.57%

-30
to
0

0
to
+30

6.190

-7.382

-10.35%

46.93%

73.39%

66.10%

-29.10%

-218.46%

-28.5%

176.05%

-209.95%

10.264

12.849

1.927

0.630

-1.449

-7.409

4.262

25.670

-4.597

39.98%

50.05%

7.51%

2.45%

13.70%

-31.52%

-161.17%

2.99%

-6.88%

-35.16%

48.7%

60.97%

9.14%

92.71%
20.22%

Targets in different categories:


The CARs for the targets of foreign acquirers (category 1) are positive over the entire event
window except for the 30th day prior to the merger announcement. The announcement effects for
various sub-periods of the event window are given in exhibit 3. During the period of 30 days
prior to the merger announcement till the announcement day (-30 to 0), the CAR increased by
10

-30
to
+30

-3.516

21.074

15.25% and in the period between the 1st day of announcement till 30 days (+1 to +30), it
decreased by 8.24%. On the announcement day, these shareholders of these targets earned an
average abnormal return of 4.91%. The mean average CAR for targets in foreign acquisitions in
8.89% and is statistically significant.
In the domestic merger deals (category 2), the average CAR for the target group is 2.32% and is
statistically significant. CARs over the event window, however, show a mixed trend. During the
period of 30 days prior to the merger announcement till the announcement day (-30 to 0), the
CAR increased by 8.28% and in the period between the 1st day of announcement till 30 days (+1
to +30), it decreased by 14.34%%.
Table 5
CAR-Announcement Effect for Category-wise Targets
-30
to
-21

-20
to
-11

-10
to
-1

+1
to
+10

Targets in Category 1
5.915
CAR

-0.195

4.621

4.913

-0.456

Sub-period

Announcement
38.78%
Effect
(-30 to 0)
Announcement
Effect
(0 to +30)
Targets in Category 2
-1.565
CAR
Announcement
-18.90%
Effect
(-30 to 0)
Announcement
Effect
(0 to +30)
Targets in Category 3
-4.840
CAR
Announcement
Effect
(-30 to 0)
Announcement
Effect
(0 to +30)

-80.53%

-1.28%

30.29%

95.64%

0.841

10.15%

1.085

-98.35%

3.148

52.38%

-3.520

-30
to
0

0
to
+30

-30
to
+30

15.254

-8.244

7.009

-5.53%

-1.985

-51.77%

-9.525

8.282

-14.348

-6.066

-6.010

-4.204

-10.215

-42.70%

-2.839

13.10%

7.56%

-5.911

-4.268

+21
to
+30

32.21%

59.59%

7.921

+11
to
+20

1.593

-13.83%

-0.148

-66.39%

-8.329

-19.79%

4.273

26.51%

37.89%

-3.52%

-198.12%

101.64%

In the merger of domestic banks with the foreign banks operating in Pakistan (category 3), the
result is contrary to the result for the targets of first two merger types. The targets in this
category earned a significant negative average CAR (-8.87%). For most of the event window, the
CARs for these targets are negative. On the day of announcement, these targets earned an
average abnormal return of 1.59%.
11

Combined banks:
The mean ARs and CARs for the three combined banks in domestic mergers are given in exhibit
6. The average CAR for the combined banks is positive and substantial. However, the combined
CAR has been increased largely due to a very high CAR earned by the merger deal of NIB and
PICIC. In the NIB-PICIC merger, the shareholders of both banks have accumulated substantial
positive CARs, with a mean CAR of 16.77%. The returns earned by the bidder (PICIC),
however, are much higher compared to those earned by the target shareholders. The other two
merger deals have reported negative mean CARs showing that the merger deals accumulated
losses for the combined entities. For these two merger deals, both bidders and targets reported
negative CARs.

Table 6

Mean AR
Standard Error
t-statistic
Mean CAR
Standard Error
t-statistic
*significant at 5%

NIB-PICIC
0.779
0.237
3.288*
32.188
1.919
16.772*

TRUST-FIDELITY
-0.413
0.474
-0.870
-1.820
1.195
-1.523

KASB-PLATINUM
-0.096
0.277
-0.347
-4.316
0.481
-8.980*

Combined
Group
0.090
0.2101
0.4295
8.684
0.745
11.657*

4. Summary and Concluding Remarks


The paper investigates the short-term value creation associated with the mergers and acquisitions
in the banking sector of Pakistan from 2003 to 2008. The wealth for the shareholders of target
and bidder banks is examined by estimating the abnormal returns and cumulative abnormal
returns for a 61-day period surrounding the merger announcement. The study finds that the
targets and bidders of the bank mergers in Pakistan accumulate significant returns associated
with merger deals. For the individual target or bidder bank, these abnormal returns range from
significant positive to significant negative. For the combined target group and bidder group, the
study documents positive mean cumulative return.
This is the first study of value creation surrounding the merger deals in the context of Pakistans
banking sector. However, the study includes a small sample of seven merger deals and examines
the short term wealth effects. Future researches can be conducted on larger set of merger deals.
The studies can also be conducted for the merger deals in other sectors of the market. Moreover,
medium to long-term effects can also be examined either through the event study methodology
12

or through examining the firms accounting performance indicators before and after the merger
deals.

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