The Effect of a Merger on the Share Price of the Attacker, Revisited

Abstract

-4n earlier paper (Barnes, 1978) reported the results of a study that investigated the behaviour of share prices of acquiring firms at and around the time of merger. The conclusions were that there were slight increases in prices over the period leading up to the merger and slight decreases immediately following, although these were not statistically significant. These results were roughly in accord with another study at around the same time (Firth, 1976 and 1979), but not in line with the evidence from the USA which usually showed abnormal positive returns for the period leading up to, during, and in some cases immediately after the merger.’ The efEcient capital markets hypothesis was then invoked in these studies in order to interpret the results in terms of the synergistic benefits of merger. It is the purpose of this article to revisit this subject and extend the study in the context of more recent evidence. Particularly, this concerns -efficiency’ and the once and for all adjustment of the share price to merger news. If the market later evaluates the merger differently can the original share price adjustment be regarded as ‘correct’ and dcient? In Barnes (1978) it was argued that synergistic benefits from merger were unassured, firstly because modem portfolio theory would imply that they were already incorporated in prices and secondly that the empirical evidence was reasonably unanimous that they were unrealised (Utton, 1974). Since that time two major studies have substantiated such a view (Cowling et al. 1980; Weeks and Meeks, 1981). However, the view in the USA has reversed.’ Two recent studies there have examined the share price behaviour of the acquirer during the announcement offer period and ‘For a summary and review of these see Jensen and Ruback I 1983).

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