how to measure M&A performance Flashcards
what are the three classes of tests for M&A performance
Weak form:
“M&A pays if the acquiring-firm stock price after the M&A announcement
is larger than its stock price before the M&A announcement”.
Semi-strong form:
“M&A pays if the announcement-period stock return for the acquiring firm is higher than the announcement-period stock return on an appropriate benchmark”
Strong form:
“M&A pays if the announcement-period return for the acquiring firm is higher than the return of that same firm would have been without an M&A announcement.”
The literature provides 4 broad methodologies to test M&A performance, what are they
− Survey analysis
− Clinical study
− Accounting study
− Event study
Term: Survey Analysis
Explanation: A methodology used to measure M&A performance by directly asking managers involved in the transactions whether the deals have created value.
strengths and weaknesses of survey anaylasis
Strength:
− Might yield insights unknown by the stock market
(Managers are very familiar with their own transactions)
Weaknesses:
− Might not be focused on economic value
− Memories of past results can be hazy and biased
− Typically very low participation rate
a Strength of survey analysis is Unique Insights, what does this mean
Explanation: Managers’ familiarity with their own transactions can yield insights unknown to the stock market, providing unique perspectives on the value created by M&A deals.
Term: Clinical Research
Explanation: A methodology used to measure M&A performance by conducting an in-depth analysis of a specific transaction.
strengths and weaknesses of clinical research
Strengths:
− In-depth analysis of actual experience
− Ideal for discovering new patterns and developing new hypotheses
Weaknesses:
− Ill-suited to hypothesis testing
− Results often not generalizable
Term: Accounting Study
Explanation: A methodology used to measure M&A performance by analyzing financial statements and accounting data to assess the financial impact and performance of M&A transactions.
strengths and weaknesses of accounting study
Strengths:
− Credibility (checked by auditors)
− Based on measures that are often used by investors
Weaknesses:
− Data before and after might be non-comparable
− Backward-looking
− Differences across companies and countries
Term: Event Study
Explanation: A methodology used to measure M&A performance by empirically examining the stock price responses to financial decisions, such as merger announcements.
what happens in an event study
In event studies, researchers collect the dates on which a sample of firms made similar announcements (e.g., initiating new dividends)
Next, they examine stock returns on the event’s announcement date and the days immediately before and after the event, averaged across all firms in the sample
The fact that there is a sample of firms/events, allows one to perform a statistical analysis of the magnitude and determinants of stock price reactions
strengths and weaknesses of event study
Strengths:
− Direct measure of shareholder wealth impact − Forward-looking
Weaknesses:
− Relies on strong assumptions about stock markets (i.e. semi-strong form efficiency)
− Vulnerable to confounding events
