Forster

1
Article
Vision

Market Response to the Announcement

17(1) 1–16
© 2013 MDI
SAGE Publications
of Mergers and Acquisitions: An Empirical Los Angeles, London,
New Delhi, Singapore,

Study from India Washington DC

DOI: 10.1177/0972262912469558
http://vision.sagepub.com

Neelam Rani
Surendra S. Yadav
P.K. Jain

Abstract
The present article examines the short-run abnormal returns to India based mergers and acquisitions during 2003–2008 by using
event study methodology. The present work is based on a sample of 623 mergers and acquisitions. We find that acquisitions by Indian
companies significantly create short-term wealth on the announcement day to the shareholders of acquiring companies. Cumulative
average abnormal return (CAAR) for Indian companies’ merger and acquisition activities is 2 per cent (significant at 1 per cent) over
event window of 11 days (−5, +5). It seems the market perceives the merger and acquisition activities by Indian companies as efficiency
enhancing. However, the results indicate presence of high event-induced variance in abnormal return. The present study reports a high
event-induced variance in the abnormal return due to the announcement of mergers and acquisition in Indian context.

Key Words
Mergers, Acquisitions, Event Methodology, Abnormal Returns, Cumulative Average Abnormal Returns (CAAR), Event Window, Synergy

Introduction interests for immediate trading opportunities they create;

Mergers and acquisitions have long been an important
component of corporate strategy as well as represent an
important alternative for strategic expansion through
inorganic growth. Acquisitions as growth strategy have
received attention both from developed as well as emerging
economies. They have been extensively used by managers
as an expansion strategy. Globalization and liberalization
have led firms from emerging markets like India to become
more aggressive and opt for mergers and acquisitions to
fight the competitive battle. Recently, mergers and
acquisitions have grown at a rapid pace, which calls for
research to analyze what drives firms for this phenomenon
and how it affects firms and markets (Andrade et al., 2001;
Holmstrom and Kaplan, 2001).
Previous studies have empirically assessed importance
of acquisitions as a mode of entry in foreign market
(Andersen, 1997; Kogut and Singh, 1988), performance
outcome of acquisitions like knowledge transfer and
learning post acquisition (Bhagat et al., 2002; Brouthers
and Brouthers, 2001) creation of shareholder value etc.
(Gugler et al., 2003; Moeller et al., 2005; Mueller and
Yurtoglu, 2007; Ravenscraft and Scherer, 1987).
Performance of acquiring firms in short term has been
extensively studied empirically. Short-term effects are of
moreover, stock market reactions to mergers and acqui­
sitions announcements could help to predict mergers and
acquisitions profitability. The effects of these announce­
ments appear to be a good indicator of future success. The
most statistically reliable evidence on whether mergers and
acquisitions create shareholders wealth is documented by
conducting event studies. The event study methodology
assesses whether specific events create abnormal stock
returns as stock returns move in response to market-
specific factors or several firm-specific factors, such as,
announcements of earnings, mergers and acqui­sitions, etc.
The methodology is based on the fundamental idea that
stock prices represent the discounted value of firms’ future
stream of profits. Hence, the change in the equity value of
firm observed due to stock market response to the
announcement of merger and acquisition may be considered
as a measure of the (discounted) additional profits that
they are expected to accrue as a consequence of mergers
and acquisition (Duso et al., 2010). The event study
methodology uses average abnormal stock market reaction
as a gauge of value creation or value destruction. Based on
the announcement period stock market response, it may be
concluded that mergers and acquisitions create value for
shareholders of acquiring firms or not. Various studies use
the event methodology to analyze the short-term effects of
2 Market Response to the Announcement of Mergers and Acquisitions
mergers and acquisitions (Asquith, 1983; Asquith et al.,
1983; Davidson et al., 1989; Dennis and McConnell, 1986;
Dodd, 1980; Mitchell et al., 2004; Pettway and Yamada,
1986; Schipper and Smith, 1983; Schipper and Thompson,
1983; Sicherman and Pettway, 1987).
The objective of the present article is to investigate the
market response to the announcement of mergers and
acquisitions in Indian context during January 2003 to
December 2008. The focus of the study is on the acquirer
shareholders.
Literature Review and Hypotheses
There is a significant body of literature analyzing the
success of mergers and acquisitions activity. The purpose
of this article is predominantly assessment of the share­
holders of the acquiring companies. Accordingly, the
review of extant research work is primarily focused on
studies measuring the implications of mergers and
acquisitions on acquirer shareholders’ wealth.
The motives for acquirers engaging in merger and
acquisitions are well documented in the literature. A
number of studies suggest that the value of the acquiring
firms may increase or decrease after mergers and
acquisitions. These studies suggest that the synergy motive
for merger and acquisition is associated with positive
wealth effects for acquirers (Andrade et al., 2001;
Berkovitch and Narayanan, 1993; Bradley et al., 1983;
Dennis and McConnell, 1986). Synergy results when the
value of the combined firm is greater than the sum of the
acquirer and target as individual firms and can be achieved
from combining firms in the same industry sector
(operational synergy), when firms have different financial
resources (financial synergy) or different managerial
resources (managerial synergy) (Trautwein, 1990; Yook,
2003).
A number of studies have also suggested that mergers
and acquisitions may reduce the value of the firm. Jensen
(1986) stated that availability of free cash flow results to
value-reducing mergers. Shleifer and Vishney (1989)
argued that managers might make investments that increase
managerial value to shareholders but do not improve
shareholders’ returns. Further, zero or negative wealth
effects are suggested to be driven by hubris (Roll, 1986),
managerialism (Seth et al., 2000) and empire building
(Shleifer and Vishney, 1989). Weston and Weaver (2001)
opined that shareholders of the acquiring firms will decrease with the relative size of the bidder versus target.
gain from efficiency enhancing mergers. Shareholders may
lose value if mergers and acquisitions are motivated by wealth effects for a sample of 390 deals involving Canadian
hubris or agency considerations. Whether shareholders of
acquiring company experience any effect on their wealth
from mergers and acquisitions or not has been a matter of
ongoing debate among academic researchers. Several
Vision, 17, 1 (2013): 1–16
studies have documented positive return (Beitel et al.,
2004; Cakici et al., 1996; Doukas et al., 2002; Eckbo and
Thorburn, 2000; Kiymaz, 2003; Kohers and Kohers, 2000;
Maquieira et al., 1998; Markides and Ittner, 1994; Schwert,
1996). The findings of these studies report significant
positive abnormal returns for acquirer firms (varying from
0 to 7 per cent) for different event windows before and
after the announcement date.
Many studies report significant negative return in the
range of 1 to 5 per cent for varying windows especially
prior to announcement to shareholders of the acquiring
firms (Beitel et al., 2004; Corhay and Rad, 2000; Datta and
Puia, 1995; DeLong, 2001; Doukas et al., 2002; Goergen
and Renneboog, 2004; Houston et al., 2001; Mitchell and
Stafford, 2000; Mulherin and Boone, 2000; Sirower, 1997;
Walker, 2000).
Andrade et al. (2001) focused on 3,688 completed
merger deals over time period 1973–1998. They found that
targets earn an average three-day abnormal return (one day
before to one day after the announcement date) of 16 per
cent, which is quite stable during the three sub-periods in
their sample. The evidence on the abnormal returns for
acquiring firms is not clear since the average three-day
and longer event window abnormal returns for acquirers
are −0.7 per cent and −3.8 per cent, both of which are not
statistically significant. Fee and Thomas (2004) investigated
the market reactions and reported a positive return of 3.06
per cent over a three-day window for a sample of 554
horizontal deals over the period of 1980–1997. Firth (1980)
found an insignificant abnormal return of 0.01 per cent
over the 36 months following the bid announcement by
examining 434 successful bids and 129 unsuccessful bids
in the UK over the period 1965–1975 using market model
with a moving average method for beta estimation. Moeller
et al. (2004) examined the effect of firm size on abnormal
returns from acquisitions for 12,023 acquisitions by public
companies from 1980 to 2001 in the United States. They
reported small acquirers have significantly higher CAARs
around mergers and acquisitions announcements than do
large acquirers. They argue that the results of their study
are consistent with the view that larger acquirers are more
prone to hubris and have higher agency costs of managerial
discretion.
Asquith et al. (1983) studied the effect of mergers on
bidding firms’ shareholders for 214 mergers in the United
States during 1963–1979. They observe that bidder returns
Eckbo and Thorburn (2000) observed negative shareholder
companies over the period 1962–1983. Morck et al. (1990)
examined market response for a sample of 326 US
acquisitions between 1975 and 1987. The objective of this
study is to examine if bad acquisitions are driven by
Neelam Rani, Surendra S. Yadav and P.K. Jain 3
personal objectives of manager. They found three types of
acquisitions have systematically lower and predominantly
negative announcement period returns to bidding firms.
The return to bidding shareholders are lower than when
their firm diversifies, when it buys a rapidly growing target,
and when its managers performed poorly before the
acquisition. They concluded that managerial objectives
may drive acquisition that reduces bidding firms’ values.
Despite the plethora of literature on the implications of
mergers and acquisitions, the empirical evidence on returns
to the shareholders of the acquirer firm is not conclusive.
In other words, the results of existing studies in finance and
business strategy indicate that wealth effects of share­
holders of the acquiring firms are mixed. The empirical
findings on the subject are varied. While some studies
report negative CAARs, others document zero or positive
CAARs. In a review paper on performance of the acquiring
firm, Bruner (2002) suggests that these mixed results make
the conclusions regarding the acquirer firms’ performance
more complex.
Summing up, extant literature classifies mergers and
acquisitions into two categories—disciplinary and
synergistic mergers and acquisitions (Morck et al., 1988).
Another strand of empirical work divides mergers and
acquisitions into two categories—neoclassical and
behavioural theories. Neoclassical theories include synergy
hypothesis and market for corporate control hypothesis.
Synergy hypothesis states that if mergers and acquisitions
generate synergies, the acquiring firms experience positive
returns on the announcement. Market for corporate control
hypothesis describes the mergers and acquisition as a way
to replace managers who are not able to maximize the
value of their firms due to incompetence or agency
problems (Mueller and Yurtoglu, 2007). According to this
hypothesis, mergers and acquisitions generate non-negative
returns to the acquiring firm shareholders.
Behavioural hypothesis include managerial discre-­ Hypothesis 1A: The shareholders of the Indian acquir-
tion hypothesis, overvaluation hypothesis (Shleifer and
Vishney, 2003) and hubris hypothesis (Roll, 1986).
Behavioural hypothesis states that shareholders of
acquiring firm experience negative return due to agency
problems.
In Indian context, Beena (2000) has investigated the
impact on the stock prices of the acquiring companies
whereas Mann and Kohli (2009) have investigated the
impact on both acquirers as well as target firms. They
report the positive market reaction to stock offers not only
for the target companies but for the acquiring companies.
Rani et al. (2011) also report positive market reaction to the
announcement of foreign acquisitions in pharmaceutical
industry in India. Chakraborty (2010) documents that
takeovers in the financial services sector do not evoke
market reaction. Kohli and Mann (2011) report that
cross-border acquisitions generate significantly higher
wealth gain than domestic acquisitions for Indian acquirers.
Kale and Singh (2005) examined the value creation
from mergers in the post liberalization period in India. The
study divides the period in two phases 1992–1997 and
1998–2002. They notice important difference in the two
segments. During the phase of 1992–1997 acquirers in
India earned positive returns. They observed 5 per cent
mean abnormal returns. MNCs acquirer during this phase
earned significantly greater stock market return to their
acquisitions than their local Indian counterparts. There is
no significant difference between related and unrelated
acquisitions. Average acquisition returns are much lower
during the period 1998–2002 vis-à-vis the period 1992–
1997. The study also concludes that Indian acquisitions
have managed to develop their acquisition capabilities over
time. During this phase, they observed a distinct difference
in acquisition value creation between related and unrelated
acquisition. The stock returns pursuant to acquisition
announcements are more favourable for related acquisitions
(+3.5 per cent) than for unrelated acquisition (+1 per cent).
In recent works, Barai and Mohanty (2010), Gubbi et al.
(2010), Karels et al. (2011) and Zhu and Malhotra (2008)
observed positive returns for cross-border acquisitions by
the acquirer in emerging market firms. These studies analyze
the Indian markets as a special case. Rani et al. (2010) have
observed that the primary motive of mergers in India during
2003–2008 have been to take advantage of synergies.
Operating economies, increased market share and financial
economies have been indicated in order of importance as the
desired synergies to be gained through corporate merger in
India. This lead to the following hypothesis:
Hypothesis 1: The shareholders of the Indian acquiring
firms engaged in M&As earn positive abnormal
return in the short run.
ing firms engaged in M&As earn positive average
abnormal return on the announcement of merger
and acquisition.
Hypothesis 1B: The shareholders of the Indian acquir-
ing firms engaged in M&As earn positive cumula-
tive average abnormal return during the event
window.
The study adds value to the existing literature by
observing abnormal return of a substantial sample of 623
announcements with (manually verified) clean window
period and testing the results with parametric and
non-parametric tests. To the best of our knowledge, an
in-depth research related to the impact of mergers and
acquisitions on the shareholders’ wealth in short run in
India has not been observed. Investigations using event
Vision, 17, 1 (2013): 1–16
4 Market Response to the Announcement of Mergers and Acquisitions

study methodology have exclusively focused on developed Table 1. Sample Selection

security markets, viz., United States, Canada, Japan and
Total number of announcements 5,504
European nations. Moreover, the studies based on Indian
Less acquisitions excluded:
security markets have focused either on specific industries Rumours, and news of acquisitions withdrawn 2,125
(Anand and Singh, 2008 [Banking Sector]; Chakraborty, subsequently
2010 [Financial Industry]; Rani et al., 2011 [Pharmaceutical Minor acquisition 1,829
Industry]) or have analyzed a very small sample size (Mann Acquisition of stake by promoters, inter se transfer 58
and Kohli, 2009). Recently, Kohli and Mann (2011), Gubbi and among associate companies and preferential
et al. (2010) and Barai and Mohanty (2010) have analyzed allotments
Increase in stake and re-announcements for open offers 52
abnormal returns to the announcements of mergers and Acquisition by financial companies 157
acquisitions by conducting event study on large samples Acquisition by unlisted companies and investor groups 76
but have not tested the robustness of returns by any non- Acquisition of business, assets, divisions and brands 71
parametric test. In this context, Ahern (2009) provides Trading data not available 156
evidence that biases are introduced in event study when Confounding events 197
More than one type of acquisition in one 43
sample is small and the sample selection is based on some
announcements
common criterion. This article is a modest attempt to Multiple acquisitions in one announcement 42
investigate the impact of mergers and acquisitions on Formation of subsidiary, restructuring and 45
shareholders’ wealth in short run. reorganization
This study’s contribution is threefold. First, it contributes Date could not be verified 30
important understanding to the performance of event study Selected in sample (5,504−4,881) 623
methodology (in Indian context) by analyzing a substantial Source: Thomson Security Data Corporation (SDC) Platinum M&A
database, year 2003–2008.
sample of 623 announcements with (manually verified)
clean window period. Second, it isolates the ‘pure effect’ of firms, and the different financial reporting of these
announcement of mergers and acquisitions by controlling companies.
confounding events. Third, it tests the robustness of results • To avoid possible information contamination or the
with parametric and non-parametric tests. confounding effect, the firms that undertake any sig-
nificant event, such as, announcements of bonus
shares, dividends or ex-dates on any type of dividend
Data Collection and (cash/stock dividend), within 20 days prior and after
Sample Selection the acquisition are excluded from the sample. There
This study is based on acquisitions which were announced is no announcement of capital investment in a new
by Indian corporations listed on Bombay Stock Exchange project, credit rating and financial results during the
during the period January 2003 to December 2008. For event window.
collecting data, Thomson SDC Platinum Mergers and • The firms must have daily price information availa-
Acquisitions Database has been used. The announcement ble on the Bombay Stock Exchange or Capitaline
dates have been verified from the archives of corporate database. The firms having non-synchronous trading
announcements on Bombay Stock Exchange. have been eliminated from the sample.

These filters reduced the dataset to a sample of 623

Sample Selection Procedure
All transactions that meet the following conditions have
been included in the study:
• Mergers and acquisitions announced between
January 2003 and December 2008 by public limited
companies listed on Bombay Stock Exchange.
• Acquisitions of minor stakes (that is less than 51 per
cent) have been excluded from the sample.
• Mergers and acquisitions in the financial sector are
excluded from the sample. This is because of the dif-
ferent nature of assets and liabilities of financial
announcements (Table 1).
Methodology
The event study methodology is used to examine short-
term stock price reaction to mergers and acquisitions
announcements. The traditional market model with value
weighted market index (BSE SENSEX) has been used to
estimate abnormal return. The traditional market model to
estimate abnormal returns as per equation (1) is:
Ri ,t = αˆ i + βˆi Rm ,t + ε i ,t  (1)

Vision, 17, 1 (2013): 1–16

Neelam Rani, Surendra S. Yadav and P.K. Jain 5

Figure 1. Time Line for an Event Study

Event date

280 26 20 0 +20

Estimation window Event window

Where Ri,t is its return for firm i on day t; information and also captures any adjustment to the share
price (if any) following the announcement.
Rm,t is the corresponding return on the Bombay Stock
The CAARs are daily abnormal returns cumulated over
Exchange (BSE) index SENSEX.
part of the event period. Over an interval of two or more
ε i ,t is the error term.
trading days beginning with day T1 and ending with day
t = −280. . . −26
T2, the CAAR is
The abnormal return (AR) for each day for each firm is
then obtained as per equation (2) 1 N T2
CAAR T1 ,T2 =
N
∑ ∑ AR jt  (4)
ARi ,t − Ri ,t − (αˆ i + βˆi Rm ,t ) where t = −20. . . + 20 (2)      
j =1 t = T1

Where αˆ i and βˆi are estimated from (1) using data from The study also reports precision weighted cumulative
the appropriate estimation window. Abnormal returns are average abnormal return (PWCAAR). The precision
averaged for each event day across firms (where t = 0 is the weighted average is constructed using the relative weights
announcement day when it is first time announced in the of each stock. The precision weighted return weight each
public newspaper) and cumulative abnormal returns stock in inverse proportion to its standard deviation. The
(CARs) are computed by summing average abnormal PWCAAR (as a weighted average of the original CARs)
returns for the window of interest. preserves the sample interpretation of CAAR (Cowan,
The estimation period for the parameter estimation is 2007). The PWCAAR is a better measure than CAAR and
constructed in the following manner. We start with an average standardized cumulative abnormal returns.
announcement date, such as t = 0. An estimation period The precision weighted cumulative average is calculated
window of 255 days is then constructed for a defined as specified in equation (5):
period, such as, the pre-acquisition period trading day
−280 to −26; it implies 280 trading days prior to N T2
PWCAAR T1 ,T2 = ∑ ∑ ω j AR jt  (5)
announcement date ending 25 trading days before j =1 t = T1
announcement date as shown in the Figure 1.     
The average abnormal return (AARt) for each day in the where
event window is calculated as follows:
1
−
 T2 2  2
 ∑ δ AR jt 
N
1
       AAR t = ∑ AR jt  (3)
N
ωj =  1 
j =1 t =T
1
−
N  T2  2
where N is the number of firms. ∑  ∑ δ AR jt 
2

In order to make inferences about the effect of the i =1  t = T1 

announcement, the abnormal returns have been cumulated
across time for each security (if the event window covers where
more than one period) and across securities. The measure
of abnormal returns in this article uses windows for varied −26
 
∑ ( AR )
2
sets of time period (in days), namely, (−20, −2), (−1, 0), ( mt m ) 
2
jk  1 R − R
(−1, +1), (−2, +2), (−5, +5) (−10, +10) and (+2, +20) δ AR
2
= k =−280
1 + + −26
Dj − 2  Dj
∑ ( Rmk − Rm ) 
jt

period. The larger window of pre-event and post-event


19 days includes the effect of possible leakage of the k =−280

Vision, 17, 1 (2013): 1–16

6 Market Response to the Announcement of Mergers and Acquisitions
Dj is the number of non-missing estimation period returns
for firm j. Rmt is the return on the market index on day t in
the event window, Rmk is the return on the market index on
day k in the estimation window. Rm is the mean market
return over estimation period. k represents the trading day
in estimation period.
Statistical Significance of
Event Returns
There are numerous tests for evaluating the statistical
significance of abnormal returns. Each tests the null
hypothesis that abnormal returns are zero, but they differ in
the necessary assumptions about the statistical properties
of (abnormal) returns. The parametric tests implicitly
assume that the residuals follow normal distribution. When
the assumption of normality of abnormal returns is vio-
lated, parametric tests are not well specified. In addition
to parametric statistics, event studies typically report a
non-parametric test. A non-parametric test is normally used
in conjunction with parametric test in event study to verify
that the results are not driven by outliers. Non-parametric
statistics do not require as stringent assumptions about
return distributions as parametric tests. Kang and Stulz
(1996) documented specific robustness issues in event
studies using Asia-Pacific financial market data. Corrado
and Truong (2008) found that non-parametric test
generalized sign (Cowan, 1992) has the best specification
with unique properties of Asia-Pacific security market
returns data.
In order to obtain robust results, one parametric crude
dependence adjustment (CDA) (Brown and Warner, 1980,
1985) test and one non-parametric generalized sign
(Cowan, 1992) test have been applied. CDA test and
generalized sign test are well specified and more powerful
in random samples of Asia-Pacific financial market data
(Campbell et al., 2010; Corrado and Truong, 2008; Corrado
and Zivney, 1992).
The Crude Dependence
Adjustment Test (CDAt)
The test incorporates the sample time series standard
deviation. Brown and Warner (1980, 1985) describe the
test as featuring a ‘crude dependence adjustment’. The test
compensates for potential dependence of returns across
security events by estimating the standard deviation using
the time series of sample mean returns from the estimation
period (Campbell et al., 2010). CDA test uses a single
variance estimate for the entire sample. Therefore, the time
series standard test does not take account of the unequal
return variances across securities. This test avoids the
potential problem of cross-sectional correlation of security
Vision, 17, 1 (2013): 1–16
return. To account for the dependence across firms’ average
residuals, in event time, Brown and Warner (1980) suggest
that the standard deviation of average residuals should be
estimated from the time series of the average abnormal
returns over the estimation period. The estimated variance
of average abnormal return (σˆ AAR
2
) is given by equation
(6):
−26
∑ (AAR k − AAR) 2
σˆ 2
AAR = k =−280
 (6)
      254
Where the market model parameters are estimated over the
estimation period of 255 days and
−26
∑ AAR k
AAR = k =−280
 (7)
255
         
The test statistics for day t in event time is
AAR t
CDA t =  (8)
σˆ AAR
The CDA test for the null hypothesis that CAAR = 0 is
CAAA t
CDA t =
1
( T2 − T1 + 1) σˆ AAR  (9)
     2
Generalized Sign Test (GSignZ)
The generalized sign test compares the proportion of
positive abnormal returns around an event to the proportion
from a period unaffected by the event. The generalized sign
test adjusts for the fraction of positive abnormal returns in
the estimation period instead of assuming 0.5.
The null and alternative hypotheses of interest are:
The null hypothesis of generalized sign test is that
proportion of positive returns is the same as in the
estimation period. The actual test uses the normal
approximation to the binomial distribution. To implement
this test, we first need to determine the proportion of stocks
in the sample that should have non-negative abnormal
returns under the null hypothesis of no abnormal
performance. The value for the null is estimated as the
average fraction of stocks with non-negative abnormal
returns in the estimation period. If abnormal returns are
independent across securities, under the null hypothesis the
number of non-negative values of abnormal returns has a
binomial distribution with parameter p.
The generalized sign test examines whether the number
of stocks with positive CARs in the event window exceeds
Neelam Rani, Surendra S. Yadav and P.K. Jain 7

the number expected in the absence of abnormal perfor­ Empirical Results

mance. The proportion of abnormal returns expected to
have proportion of positive abnormal returns p̂ based on Average abnormal returns on the announcement day and
the 255 day estimation period for a sample of n security CAARs for varying event windows have been analyzed for
event is: the sample.
The relevant data contained in Table 2 shows that the
1 n 1 255 acquirer shareholders earn 0.96 per cent average return on
pˆ = ∑ ∑ S jt 
n j =1 255 t =1
(10)
the announcement day. Precision weighted average
      
abnormal return is 0.87 per cent. Median abnormal return
Where is 0.48 per cent. Shareholders (inasmuch as more than 56
per cent stocks) experience positive abnormal return; the
1 if ARjt > 0
       S jt =  returns are significant at 1 per cent. The proportion of
0 otherwise positive return is different (significant at 1 per cent) from
the proportion of positive return during estimation period.
The following statistic has an approximate unit normal
Frequency distribution reveals the average abnormal
distribution with parameter p̂:
returns on the announcement day; AAR ranges from −14
w − npˆ per cent to 21 per cent (Figure A1, Appendix). The problem
G SIGN Z =  (11) of high variance of AAR has not been observed on the
npˆ (1 − pˆ )
      announcement day (standard deviation = 1.15, Table 2).
Where w is the number of stocks in the event window for On the basis of foregoing result we may conclude that
which the CAR is positive. AAR is positive on the announcement of mergers and
The alternative hypothesis, for any level of abnormal acquisitions in India.
performance, is that proportion of positive returns is Table 3 presents the results of the entire sample
different from the proportion in the estimation period. consisting of 623 announcements of mergers and

Table 2. Abnormal Return to the Acquirer Shareholders on the Announcement Day, 2003–2008

Average Abnormal Precision Weighted Median Abnormal Positive:

Sample Size Return AAR Return Standard Deviation Negative CDAt GSignZ
623 0.92% 0.87% 0.48% 1.15 349:274 6.131** 4.897**
Note: ** Significance at 1 per cent level.

Table 3. Abnormal Return to the Acquirer Shareholders on and Around the Announcement, 2003–2008

Abnormal Return
Cumulative
Day Average (%) Median (%) Average (%) Positive: Negative CDAt GSignZ
−20 0.09 −0.25 0.09 283:339 1.284 −0.331
−19 0.06 −0.26 0.15 278:345 0.811 −0.77
−18 −0.04 −0.17 0.11 290:331 −0.354 0.269
−17 −0.06 −0.20 0.05 286:335 −1.325 −0.053
−16 0.00 −0.16 0.05 293:329 0.235 0.473
−15 0.15 −0.07 0.20 303:319 0.697 1.277
−14 −0.16 −0.24 0.04 280:342 −1.015 −0.572
−13 0.07 −0.07 0.11 295:326 0.193 0.672
−12 −0.05 −0.16 0.06 291:330 0.126 0.35
−11 −0.08 −0.27 −0.02 278:344 −0.308 −0.733
−10 −0.01 −0.22 −0.03 288:333 −0.186 0.108
−9 0.11 −0.08 0.08 301:321 1.637 1.117
−8 −0.21 −0.30 −0.13 275:345 −1.710* −0.902
−7 0.01 −0.08 −0.12 299:323 −0.73 0.956
−6 −0.13 −0.20 −0.25 289:333 −1.101 0.151
−5 0.21 −0.06 −0.04 306:314 1.333 1.596
−4 0.08 −0.06 0.04 303:316 1.112 1.392
−3 0.10 −0.10 0.14 298:323 0.242 0.913
−2 1.05 0.11 1.19 324:299 2.249* 2.927**
−1 0.10 −0.16 1.29 291:331 −0.253 0.312
0 0.92 0.48 2.21 349:274 6.131** 4.897**
(Table 3 continued)
Vision, 17, 1 (2013): 1–16
8 Market Response to the Announcement of Mergers and Acquisitions

(Table 3 continued)
Abnormal Return
Cumulative
Day Average (%) Median (%) Average (%) Positive: Negative CDAt GSignZ
1 0.10 0.04 2.31 315:307 0.801 2.243*
2 −0.10 −0.33 2.21 276:344 −0.607 −0.821
3 −0.26 −0.45 1.95 264:356 −1.836* −1.788*
4 −0.14 −0.36 1.81 266:355 −1.746* −1.663*
5 −0.05 −0.40 1.76 271:350 0.116 −1.26
6 −0.31 −0.46 1.45 264:358 −2.175* −1.859*
7 −0.07 −0.12 1.38 296:325 0.269 0.752
8 −0.22 −0.41 1.16 266:352 −1.987* −1.555
9 −0.16 −0.52 1.00 259:361 −1.059 −2.191*
10 −0.26 −0.24 0.74 279:340 −1.714* −0.543
11 −0.17 −0.39 0.57 270:352 −0.943 −1.377
12 −0.12 −0.12 0.45 295:325 −1.211 0.709
13 0.17 −0.14 0.62 293:328 1.1 0.511
14 0.05 −0.21 0.67 282:339 0.424 −0.375
15 −0.10 −0.22 0.57 294:327 −1.193 0.591
16 −0.20 −0.41 0.37 261:360 −1.341 −2.065*
17 −0.23 −0.19 0.14 288:331 −1.283 0.183
18 −0.24 −0.38 −0.10 271:349 −1.352 −1.224
19 −0.16 −0.28 −0.26 277:342 −1.314 −0.704
20 −0.06 0.00 −0.32 311:310 −0.078 1.960*
Note: * and ** significance at 5 and 1 per cent, respectively.

acquisitions. For each of 41 days in the experimental
period it reports the AAR, median abnormal return for
days −20 to +20 along with the summary statistics for tests
of the null hypothesis. The table indicates that for the are calculated. Table 4 presents the CAAR values and their
20 days before the announcement date there is no consistent
pattern of abnormal returns for the firms engaged in
mergers and acquisitions.
The AARs before the announcement period (−20 to −1
day) are positive only for 12 days out of 20 days. The days
after the announcement show no consistent pattern of the
AARs. Besides, the returns are cumulated over the event
window to assess the net magnitude of the overall returns.
The CAAR starts picking up four days before the
announcement day. During the period (−4 to +1) CAAR
increases up to 2.31 per cent.
Further, CAAR values over various size event windows
corresponding t-statistic values across these event windows.
For pre-announcement event windows (−20, −2) and
(−1, 0) the CAAR values are 1.2 per cent and 1.02 per cent
respectively. However, the PWCAAR is very low 0.29 per
cent. Low precision weighted CAAR indicates the presence
of high event-induced variance in abnormal return. The
median abnormal return is 0.73 per cent. 52 per cent stocks
experience positive CAAR during the pre-event window.
Moreover, the proportion of positive abnormal return

Table 4. Abnormal Return to the Acquirer Shareholders during Multi-days Event Windows, 2003–2008

Cumulative Median
Average Precision Cumulative
Event Abnormal Weighted Abnormal Standard Positive:
Window Sample Size Return (%) CAAR (%) Return (%) Deviation Negative CDAt G Sign Z
(−20, −2) 623 1.20 0.29 0.73 40.49 325:298 1.835 3.007**
(−1, 0) 623 1.02 0.84 0.50 2.24 353:270 4.822** 5.258**
(−1, +1) 623 1.12 0.56 0.95 3.24 337:286 4.323** 3.972**
(−2, +2) 623 2.07 1.28 0.95 21.79 348:275 6.176** 4.856**
(−5, +5) 623 2.00 1.21 1.06 26.77 332:291 4.029** 3.570**
(−10, +10) 623 0.77 0.01 0.03 37.89 315:308 1.118 2.204*
(+2, +20) 623 −2.62 −2.14 −2.64 16.87 253:370 −4.018** −2.744**
Note: * and ** significance at 5 and 1 per cent, respectively.

Vision, 17, 1 (2013): 1–16

 Neelam Rani, Surendra S. Yadav and P.K. Jain 9

Figure 2. AAR over Event Window (−20, +20)

AAR
1.2

0.8
Average Abnormal Return (%)

0.6

0.4

0.2

0
20 18 16 14 12 10 8 6 4 2 0 2 4 6 8 10 12 14 16 18 20

0.2

0.4
Event Window (Days)

during the event window is different from the proportion
during the estimation period (significant at 1 per cent) as
per the generalized sign test. Presence of high variance
(standard deviation = 40.49, Table 4) in CAAR in pre-
event window is also revealed in the frequency distribution
(Figure A1, Appendix). The range of CAAR over pre-event
window of 19 days (−20, −2) vary between −77 per cent
and 63 per cent.
The CAAR values of 2.07 per cent and 2 per cent for
the event window (−2, +2) and (−5, +5) (−10, +10),
(−15, +15) and respectively signify that the short-term
impact of merger and acquisition announcements is
remarkable. The results across almost all the windows
are statistically significant at 1 per cent indicating that
the null hypothesis of zero CARs during these event
windows is rejected.
The graph of AAR of event window (−20, +20) depicted
in Figure 2 shows that the average abnormal return is highest
during event window (−2, +2). The graph of CAAR shown in
Figure 3 reveals that there is consistent fall in CAAR after
achieving its maximum value on day 2 after the announcement.
The findings also reveal the problem of high variance as
revealed by standard deviation (Table 4) for event windows
(−2, +2), (−5, +5), (−10, +10) as well as pre-event window
(−20, −2) and post-event window (+2, +20). The high
variation in CARs for various event windows is also
evident from the range of CAAR for various event windows
(Appendix A).

Vision, 17, 1 (2013): 1–16

 10 Market Response to the Announcement of Mergers and Acquisitions
Figure 3. CAAR over Event Window (−20, +20)
2.5
1.5
Cumulative Abnormal Returns (%)
0.5
0
20 18 16 14
0.5
Conclusion and Implications
This article examines the short-run stock price performance
of 623 Indian acquirer companies engaged in mergers and
acquisitions during the period 2003–2008. The study finds
evidence that shareholders of acquirer Indian corporations
engaging in mergers and acquisitions experience a
statistically significant positive abnormal return on
announcement day as well as statistically CARs over
multi-day event windows.
The empirical findings suggest that mergers and
acquisitions result in wealth creation for shareholders of
the Indian acquirers. The gains are significantly positive
during the event window of two days, three days and five
days surrounding the announcement. These findings are
consistent with the conclusions drawn by Kohli and Mann
(2011), Barai and Mohanty (2010), Gubbi et al. (2010),
Karels et al. (2011), Zhu and Malhotra (2008) and Anand
and Singh (2008). However, these findings, in Indian
context, are in contrast to the findings of hubris hypothesis
(Roll, 1986).
Vision, 17, 1 (2013): 1–16
CAR
12 10 8 6 4 2 0 2 4 6 8 10 12 14 16 18 20
Event Window (Days)
The positive returns observed on announcement and
during pre-event window are in sync with the expectation
of the Indian managers to realize synergies and synergy
hypothesis. Perhaps, this may be due to the reason that
companies acquire another company for strategic reasons,
such as, to exploit economies of scale and scope, and
leverage available resources and capabilities, thus creating
more scope for value creation. Mergers and acquisitions
provide an opportunity to the acquiring company to
combine and judiciously utilize intangible resources of
both the companies on a broader scale. It seems Indian
acquisitions have managed to develop their acquisition
capabilities over time (Kale and Singh, 2005). The market
responds positively if the acquisition is considered value-
adding to the existing product portfolio of the acquiring
company. The findings are also corroborated by an
empirical survey of Indian managers; Rani et al. (2010)
document that the primary motive of the Indian companies
for mergers and acquisition is to take advantage of
operating synergies, implying that markets place greater
trust on synergistic combinations.
 Neelam Rani, Surendra S. Yadav and P.K. Jain 11

The negative abnormal returns in the post-event window
are probably supported by the behavioural hypothesis
which states that acquiring companies experience negative
abnormal returns over post-event windows (Mueller and
Yurtoglu, 2007; Shleifer and Vishney, 2003).
These findings have important implications for Indian
managers who may view the initial increase in stock price
around announcement dates as signal for a positive
shareholder response. The initial findings we present here
bring attention of the managers to consider mergers and
acquisitions as an option to strengthen their competitiveness
as the effects of these announcements appear to be an
indicator of good future success.
On a methodological level, the present study has
demonstrated use of the parametric and non-parametric
significance tests to check the robustness of average
abnormal returns and CAARs. The study documents the
presence of high event-induced variance in abnormal
return in context of Indian stock market. The problem of
high variance of CAR becomes serious with the larger
event windows.
As the study reports market response due to the
announcement of mergers and acquisitions, there is a scope
for future research work. We believe that further research
on determinants of returns due to mergers and acquisitions
will make valuable contributions to the understanding of
scholars as well as practitioners.
Acknowledgements
The authors are grateful to Dr Sultan Khan (Editorial
Coordinator) and anonymous referees for their many helpful
comments and suggestions. We also acknowledge our thanks to
review team for quick feedback.

Appendix A
Figure A1. Frequency Distribution of AAR on and Around the Announcement Day
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(Figure A1 continued)

Vision, 17, 1 (2013): 1–16

 12 Market Response to the Announcement of Mergers and Acquisitions

(Figure A1 continued)
%'XGPVYKPFQY
–+
25 %'XGPVYKPFQY
–+ 21.8% 22.6%

25
20 21.8% 22.6%
17.2%
(%) (%)

14.6%
20
of Stocks

15 17.2%
14.6% 11.1%
Stocks

15
10 8% 11.1%
No. ofNo.

105 8%
1.4% 2.1%
0.6% 0.5%
5
0
1.4% 2.1%
0.6% 0.5%
–13to –13

–7to –7

–3to –3

0 to 0

0 to 30 to 3

3 to 73 to 7

7 to 17

27to 27

37to 37

47to 47
0

–3 to–3

7 to 17
–13 to–13

–7 to–7

17 to17

27 to27

37 to37
–23 to–23

Return (%)

#2TGGXGPVYKPFQY
–– Return (%)
Figure A2. Frequency Distribution of CAAR over Pre-event and Post-event Windows
25
#2TGGXGPVYKPFQY
––
25

20 19.4% 19.3%

20 16.9% 19.4% 19.3%

16.1%
(%) (%)

16.9%
15 16.1%
of Stocks

15
Stocks

10 8.8%
No. ofNo.

7.7%
10 8.8%
7.7%
5 4.3%

5 1.6% 4.3%
1.4% 1.3% 1%
0.5% 0.5% 0.6% 0.6%
0 1.6% 1.4% 1.3%
0.5% 0.5% 0.6% 0.6% 1%
–67to –67

–57to –57

to –47

–37to –37

–27to –27

–17to –17

–7to –7

0 to 0

0 to 70 to 7

7 to 13

23to 23

33to 33

43to 43

53to 53

63to 63
0
–7 to–7
–47

7 to 13
–17 to–17

13 to13

23 to23

33 to33

43 to43

53 to53
–77 to–77

–67 to–67

–47

–37 to–37

–27 to–27
–57 to–57

–47 to

Return (%)

Return (%)
(Figure A2 continued)

Vision, 17, 1 (2013): 1–16

 Neelam Rani, Surendra S. Yadav and P.K. Jain 13

(Figure A2 continued)
$2QUVGXGPVYKPFQY
 
25
23.1%

20 18.8%
0QQH5VQEMU


16.1%
15

11.2%
10 9.6%
7.9%
5.1%
5
3%
1.9% 1.3%
0.3% 0.6% 0.5% 0.5%
0
– 47 to –37
–57 to –47
–67 to –57

–23 to –13
–37 to –23

–13 to –7

13 to 23

23 to 33

33 to 43

43 to 53

53 to 63
–7 to 0

7 to 13
0 to 7
4GVWTP

Figure A3. Frequency Distribution of CAAR over Multi-day Event Windows
#'XGPVYKPFQY
–+
35 33.1%

30
No. of Stocks (%)

25 22.6%
20 18.3% 17.5%
15
10
5 3% 4%
0.2% 0.8% 0.5%
0
–14 to – 4
–34 to –24

–24 to –14

–4 to 0

0 to 6

6 to 16

16 to 26

26 to 36

36 to 46
Return (%)

$'XGPVYKPFQY
–+
30 27.9%
25.4%
25
No. of Stocks (%)

20
14.8%
15 13.3%

10 9%

5 3.5% 2.9%
0.8% 1.1% 1.1% 0.6%
0
–46 to –36

–6 to –0
–36 to –26

–26 to –16

–16 to –6

0 to 

 to 

 to 24

 to 34

 to 44

 to54

Return (%) (Figure A3 continued)

Vision, 17, 1 (2013): 1–16

 14 Market Response to the Announcement of Mergers and Acquisitions

(Figure A3 continued)
%'XGPVYKPFQY
–+
35

30 27.6% 28.7%

25
No. of Stocks (%)

20

15 11.9% 11.4%
10
5.3% 6.4%
5 2.2% 2.9%
1% 1.3% 1.3%
0
–60 to –50

–50 to –40

–40 to –30

–20 to –10

–10 to 0

0 to 10

10 to 20

20 to 30

30 to 40

40 to 50
–30 to –20

Return (%)

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Neelam Rani (neelam.iitd@gmail.com) is a Ph.D. candidate in
Finance at Department of Management Studies at the Indian
Institute of Technology Delhi, India. She has been a Fulbright
visiting scholar at Rutgers Business School, The State University of
New Jersey, Newark. Her research focuses on Mergers and
Acquisitions, Cross-border Mergers and Acquisitions and Corporate
Governance. She has also presented papers in International
conferences held in USA, Japan and Austria. She has contributed
more than 25 papers to journals like Journal of Financial
Management and Analysis and GIFT Journal, financial/economic
newspapers, magazines and national and international conferences.
Surendra S. Yadav (ssyadav@dms.iitd.ac.in) is a Professor of
Finance at Department of Management Studies at the Indian
Institute of Technology Delhi, India. He teaches Corporate
Finance, International Finance, International Business and
Security Analysis and Portfolio Management. He has been a
Visiting Professor at University of Paris, Paris School of
Management, INSEEC Paris, and the University of Tampa, USA.
He has published nine books and contributed more than 115
papers to research journals and conferences. Some of them are
Journal of Derivatives and Hedge Funds, Journal of Advances in
Management Research, Vikalpa, IIMB Management Research,
Journal of Financial Management and Analysis and GIFT
Journal. He has also contributed more than 30 papers to financial/
economic newspapers.
P.K. Jain (pkjain@dms.iitd.ac.in) is a Professor of Finance at
Department of Management Studies at the Indian Institute of
Technology Delhi, India. He has more than 30 years of teaching
experience in subjects related to Management Accounting,
Financial Accounting and Financial Analysis, Cost Analysis and
Cost Control. He has published books. He has contributed more
than 140 research papers in journals, such as, Long Range
Planning, Journal of Derivatives and Hedge Funds, Journal of
Advances in Management Research, Vikalpa, IIMB Management
Research, Journal of Financial Management and Analysis and
GIFT Journal. He has also contributed more than 30 papers to
financial/economic newspapers.
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