Donner index
3. Disclosure of mergers without regulatory restrictions: Who gains from mergers?
3.5 Event-study analysis
3.5.1 `Recalling´ the basic concept
The aim of event-studies is to detect abnormal returns caused by events like merger announcements. Accordingly, abnormal returns are the deviations of current returns observed during the event period from normal returns. As mentioned above, the normal returns are estimated based on observations collected during an estimation window. Unfortunately, there are six different ways to calculate these normal stock price movements and several additional modifications of these basic concepts are possible.91
89 Because many firms in the year 2000 were not listed before July 1999, I decide to start the estimation period later in comparison to my former sample of the year 1908. This problem is of special interest, when mergers among young companies listed on the “Neuer Markt” (a segment for the so called new economy) are taken into consideration.
90 The picture is similar for the year 1908 as shown in chapter two.
91 Armitage (1995) provided an excellent overview of the different ways to estimate normal returns.
Figure 3.1: Determining the correct event period for the sample drawn in the year 2000
I plot the average p-value of the abnormal returns (AR) to justify the chosen event period; thereby, the vertical line indicates the event day.
0,3 0,35 0,4 0,45 0,5 0,55 0,6
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31
average p-value of the ARs during event period
days of the event period
As discussed in chapter two, a simple mean reverting process92 of returns is appropriate for the historical time period. This assumption leads to the constant mean return model (CMR) and enables to calculate normal returns without using a market index. Because the sample drawn in the year 1908 should be compared to the sample of the year 2000, the calculation of normal returns is based on the CMR model for both samples. Of course, the argument that a trustworthy market index on a daily basis is not available in the year 1908 cannot be used for the later time period. However, if one wants to compare the adaptation process of stock prices due to a merger between these two time periods, it is reasonable to use the same model to determine normal returns. This procedure avoids that the chosen model to estimate normal returns is responsible for detected differences with regard to the abnormal returns around the announcement. Thus, I stick to the simple CMR model and refer to my previous results.93 Besides the comparability of two different time periods, one should keep in mind that the CMR model and the more sophisticated stochastic market model lead to very similar results as shown in chapter four. Thereby, the portfolio weighted abnormal returns of the whole sample of the year 2000 are obtained using the CMR respectively the market model. Hence, relying on the CMR does not lead to remarkable losses in accuracy of estimating the impact of events.
3.5.2 Results of the estimation period in the year 1999
In comparison to the results of the year 1908 (see chapter two), some estimated daily mean returns differ significantly from zero. In general, one can observe a positive drift component of the suggested random walk of daily stock prices. Figure 3.2 plots the 95% confidence interval of the estimated mean returns obtained from the estimation period of the year 1999.
92 A mean reverting process describes a time series that has a long-term mean.
93 See chapter two.
Figure 3.2: Estimated mean returns and confidence intervals for the year 1999 of individual stocks
Results from the estimation period contain the upper- and lower-bound of the constructed 95% confidence interval of the estimated mean returns.
-1,5 -1 -0,5 0 0,5 1 1,5 2
Mean low er upper
3.5.3 Abnormal returns and cumulated abnormal returns in the year 2000
Using the test statistics derived in chapter two as well as the necessary assumptions, I calculate the abnormal returns for each stock and the portfolio weighted average abnormal return for the whole sample and test for significance. Figure 3.3 and table 3.2 show the portfolio weighted abnormal return for each day of the event window and the cumulated portfolio weighted abnormal return; thereby, the time interval over which the daily abnormal returns are added up increases till the whole event period is covered. This cumulated return measures the total change in the market value of the firms triggered by the merger announcement. Figure 3.3 also indicates using gray boxes if the abnormal or cumulated abnormal return is significant on the 10% level of significance. The whole sample consisting of 61 stocks exhibits a decline in stock prices by 3.60% (p-value 0.11) over the whole period of 31 days. However, about three days (t=13) before the announcement day (t=16) the abnormal returns are positive and significantly different from zero. Moreover, distinguishing between executed and prevented mergers enables to assess the knowledge of the market regarding the probability that the declared merger is executed later.
3.5.4 Does the market know if a merger fails to overcome the hurdles?
A large portion of announced mergers that fail to achieve the necessary majority in shareholder gatherings respectively were rejected by the advisory boards could be observed in the year 2000. In addition, restrictive antitrust laws prevented many mergers. In my sample, 22 out of 61 announced mergers were not executed later. The legal framework was completely different to the situation in the year 1908 and, hence, was responsible for the high scale of failed mergers as well as the time intensive process till a merger was accepted by antitrust authorities. Did the market anticipate the failure of mergers? To answer this question, I build up two categories. The first group contains all announced mergers that are later executed, whereas unsuccessful mergers belong to the second group. Then the cumulated
Figure 3.3: Abnormal return and cumulated abnormal return of the whole sample in the year 2000
Figure 3.3 contains the portfolio weighted abnormal returns εt∗ for each day t∈{1,2,…,31} of the event window and the aggregation over increasing time intervals C
( )
1;τn . Gray boxes indicate significance on the 90% confidence level.-4 -3 -2 -1 0 1 2 3 4
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31
porfolio weighted abnormal return cumulated portfolio weighted abnormal return
Table 3.2: Abnormal and cumulated abnormal return for the sample of the year 2000 Table 3.2 contains the portfolio weighted abnormal return εt∗at each event day t; the third column shows the p-value of εt∗. The aggregation over different time intervals C
(
1;τn)
is listed and the significance is assessed, using p-values that appear in the fifth column. The event day is t=16.τn = t εt∗ p-value C
(
1;τn)
p-value τn = t εt∗ p-value C(
1;τn)
p-value 1 -0.3391 0.402 -0.3391 0.402 17 -0.1940 0.631 2.1288 0.202 2 -0.2369 0.558 -0.5761 0.314 18 -1.4778 0.000 0.6510 0.704 3 0.1329 0.743 -0.4435 0.527 19 -0.2992 0.459 0.3518 0.842 4 -0.2393 0.554 -0.6828 0.399 20 -0.2315 0.567 0.1203 0.947 5 0.4429 0.274 -0.2400 0.791 21 -0.4389 0.278 -0.3187 0.864 6 -0.0178 0.965 -0.2577 0.795 22 -0.4555 0.260 -0.7741 0.683 7 0.0227 0.955 -0.2351 0.826 23 -0.6674 0.099 -1.4415 0.457 8 0.1752 0.665 -0.0599 0.958 24 0.1377 0.733 -1.3038 0.511 9 -0.2040 0.614 -0.2639 0.828 25 -0.1230 0.761 -1.4268 0.481 10 -0.3806 0.347 -0.6445 0.614 26 -0.6022 0.137 -2.0290 0.325 11 -0.5667 0.161 -1.2113 0.367 27 0.2595 0.521 -1.7695 0.400 12 0.3815 0.346 -0.8297 0.554 28 -0.6779 0.094 -2.4473 0.253 13 1.4954 0.000 0.6656 0.648 29 -0.0336 0.934 -2.4809 0.255 14 2.7458 0.000 3.4115 0.024 30 -0.9147 0.024 -3.3957 0.125 15 0.0124 0.975 3.4239 0.029 31 -0.2006 0.620 -3.5963 0.11016 -1.1011 0.006 2.3228 0.151
abnormal return is calculated for both subgroups; figure 3.4 shows the results. The adaptation process is very similar between the two subgroups; this empirical finding stresses that the market did not perfectly know whether the merger was later executed. Note that the time span between the declaration of the willingness to merge and the transfer of assets was several months. So to assess if the market reacts to a failed merger, one should use an additional sample constructed around the public announcement of the failure. Note that this declaration is in turn public information. In general, failed mergers were more successful than really executed mergers.
Figure 3.4: Cumulated abnormal return of failed and successful mergers in the year 2000
Figure 3.4 plots the aggregated cumulated abnormal return for increasing intervals starting at t=1 and ranging till t=31; thereby, we divide between mergers that are not executed (failed mergers) and successful ones.
-6 -4 -2 0 2 4 6 8
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31
Failed mergers Successful mergers
3.5.5 The way of disclosure in the year 1908
In the year 1908, thirteen firms decided to hide information and postponed the public declaration of their willingness to merge, whereas 33 firms revealed their intentions. This firm behavior affects the adaptation pattern of stock prices before and after the event day. Before comparing both groups, the portfolio weighted abnormal return and the cumulated portfolio weighted abnormal returns are calculated. Table 3.3 contains the results for firms that hide information and table 3.4 shows the measures for well-informing firms. Figure 3.5 plots the cumulated effect for both subgroups to evaluate whether the time paths differ.
The stock prices of firms that hide information exhibit a remarkable upsurge over the whole period of 31 days by 5.60% (p-value 0.000), whereas the market values of firms that disclose mergers increase only by 1.63% (p-value 0.027). This in general does not mean that the strategy of hiding influences the success of a merger as measured by the cumulated abnormal return positively. I concentrate on this issue in a subsequent section. It is also likely that important announcements, which possess the capability to change the market value after its declaration tremendously, are hidden by the management of the firms to use this self-created time lag for insider-trading. This impression is confirmed by analyzing the pre-merger gains. These so called run-ups are the cumulated abnormal returns over the pre-event period (t=1,2,…,15). Note that t=16 is the event day. Following the definition of Banerjee and Eckard (2001) as well as Keown and Pinkerton (1981) that significant price adjustments prior to the public release of a merger are due to insider trading, I compare the pre-event gains between the two ways of disclosure. Table 3.5 contains these run-ups for hidden and disclosed information. If the merger is correctly made public, the cumulated abnormal return prior to the event day adds up to 0.73% (p-value 0.152) and is insignificant. On the event day, the
Table 3.3: Abnormal and cumulated abnormal return for firms that hide mergers Table 3.3 contains the portfolio weighted abnormal return εt∗at each event day t; the third column shows the p-value of εt∗. The aggregation over different time intervals C
(
1;τn)
is listed and the significance is assessed, using p-values that appear in the fifth column. The event day is t=16.τn = t εt∗ p-value C
(
1;τn)
p-value τn = t εt∗ p-value C(
1;τn)
p-value 1 0.1268 0.338 0.1268 0.338 17 0.3929 0.003 5.1725 0.000 2 0.1223 0.355 0.2492 0.183 18 0.1676 0.205 5.3400 0.000 3 0.3979 0.003 0.6470 0.005 19 0.4523 0.001 5.7923 0.000 4 0.1701 0.199 0.8171 0.002 20 -0.0464 0.726 5.7459 0.000 5 0.0616 0.641 0.8787 0.003 21 0.1633 0.217 5.9091 0.000 6 0.2175 0.100 1.0962 0.001 22 0.1818 0.170 6.0909 0.000 7 -0.0423 0.749 1.0539 0.003 23 0.5500 0.000 6.6409 0.000 8 -0.1307 0.323 0.9232 0.014 24 -0.0619 0.640 6.5790 0.000 9 0.1757 0.184 1.0989 0.006 25 -0.0556 0.674 6.5234 0.000 10 0.3001 0.023 1.3990 0.001 26 0.0698 0.598 6.5932 0.000 11 -0.2897 0.029 1.1093 0.011 27 -0.3789 0.004 6.2143 0.000 12 0.8108 0.000 1.9200 0.000 28 -0.2874 0.030 5.9269 0.000 13 2.3959 0.000 4.3159 0.000 29 -0.1946 0.141 5.7322 0.000 14 0.1533 0.246 4.4692 0.000 30 -0.0090 0.946 5.7232 0.000 15 0.3182 0.016 4.7875 0.000 31 -0.1230 0.353 5.6002 0.00016 -0.0079 0.952 4.7796 0.000
Table 3.4: Abnormal and cumulated abnormal return for firms that disclose mergers Table 3.4 contains the portfolio weighted abnormal return εt∗at each event day t; the third column shows the p-value of εt∗. The aggregation over different time intervals C
(
1;τn)
is listed and the significance is assessed, using p-values that appear in the fifth column. The event day is t=16.τn = t εt∗ p-value C
(
1;τn)
p-value τn = t εt∗ p-value C(
1;τn)
p-value 1 0.0894 0.499 0.0894 0.499 17 0.0874 0.509 1.2247 0.025 2 -0.0985 0.457 -0.0091 0.961 18 0.3351 0.011 1.5598 0.005 3 0.2384 0.072 0.2293 0.317 19 0.0147 0.912 1.5745 0.006 4 -0.1059 0.424 0.1235 0.641 20 -0.0357 0.787 1.5387 0.009 5 0.0163 0.902 0.1397 0.637 21 -0.0310 0.815 1.5077 0.013 6 0.1989 0.133 0.3386 0.296 22 -0.0192 0.885 1.4885 0.016 7 0.0194 0.883 0.3580 0.306 23 -0.1868 0.158 1.3018 0.040 8 0.2578 0.051 0.6158 0.100 24 -0.0490 0.711 1.2528 0.053 9 0.3476 0.009 0.9634 0.015 25 0.0961 0.468 1.3488 0.041 10 0.1493 0.259 1.1127 0.008 26 0.0295 0.824 1.3783 0.041 11 -0.0704 0.595 1.0424 0.018 27 0.0160 0.904 1.3943 0.043 12 -0.0646 0.626 0.9778 0.033 28 -0.0035 0.979 1.3908 0.047 13 0.0709 0.592 1.0488 0.028 29 0.3089 0.020 1.6998 0.017 14 -0.2359 0.075 0.8128 0.101 30 -0.0748 0.572 1.6249 0.025 15 -0.0793 0.549 0.7335 0.152 31 0.0026 0.984 1.6275 0.02716 0.4037 0.002 1.1372 0.032
Figure 3.5: Cumulated abnormal return of firms that disclose respectively hide information in the year 1908
Figure 3.5 plots the aggregated cumulated abnormal return for increasing intervals starting at t=1 and ranging till t=31; thereby, I distinguish between firms that disclose an impending merger and firms that withhold new information from the public.
-1 0 1 2 3 4 5 6 7
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31
disclosed information hidden information
average market value goes up by 0.40% (p-value 0.032); thus, the announced willingness to merger has a relatively strong impact on the stock prices on the event day. After its revelation, the adaptation process of stock prices is not yet finished, and the cumulated significant effect reaches 0.89% (p-value 0.091). Therefore, it is possible for outsiders by reading the daily newspaper to make profits by buying the stocks of companies involved in merger activities. In contrast, hiding information hurts outsiders because a pronounced upsurge in stock prices by 4.79% (p-value 0.000) occurs during the fifteen days before the merger becomes public information. After outsiders update their information, profits by buying stocks of merging companies shrivel up. Note that the event day has nearly no impact on market values; the abnormal return is very close to zero. Moreover, a considerable part of 85.49% of the whole price impact of a merger is already reflected in the market prices before the release takes place. There is also anticipation of the impending merger if firms do not misbehave – but only 45.07% of the total effect flows into the market prices prior to the announcement.
Table 3.5: Measuring the run-ups for different types of disclosure Note that p-values appear in parentheses.
Revelation of information Hidden information Pre-announcement gains
t∈{1,2,…15}
0.7335 (0.152) 4.7875 (0.000)
Gains on the event day t=16
0.4037 (0.032) -0.0079 (0.952) After-announcement gains
t∈{16, 17,…31}
0.8940 (0.091) 0.8128 (0.125)
Total change in market value over the 31 days
1.6275 (0.027) 5.6002 (0.000)
Pre-announcement gains in per cent of total change
45.07% 85.49%
3.5.6 Was the regulation of insider trading successful during the last 92 years?
Looking at the figures 3.3, 3.4, and 3.5 gives the impression that nowadays it is only possible making profits by buying in advance of a public announcement. After the event day, the cumulated abnormal returns decline sharply regardless which subgroup is considered. Table 3.6 contains the pre-event respectively after-event changes in market values; thereby, I distinguish among the subgroups: targets, acquiring companies, executed, and prevented
mergers. In the two groups of acquiring companies and prevented mergers, remarkable pre-event profits are possible. This gains reach 5.85% (p-value 0.000) in the case of acquiring firms respectively 5.96% (p-value 0.000) if the merger is not undertaken after its declaration.
Both aggregated values are highly significant. On the day of the newspaper announcement, acquiring firms loose –1.20% (p-value 0.003) of their market values, whereas prevented mergers show a decrease in stock prices by –1.30% (p-value 0.003). After the event day, both categories exhibit a sharp fall in stock prices by –9.09% (p-value 0.000) and –8.52% (p-value 0.000). So gains from announced mergers are only possible before the newspaper prints the announcement or rumor.
Table 3.6: Pre-event and after-event changes in market values in the year 2000 Note that p-values are set in parentheses.
Target firms Acquiring Gains on the event day
t=16 The two other subgroups, targets and executed mergers, show a different behavior. Pre-merger gains are relatively weak and insignificant; especially, target firms’ market values remain nearly unaffected (0.37% with a p-value of 0.813). However, the event day has a strong negative significant impact; hence, targets go down by –0.98% (p-value 0.015) and executed mergers by –0.99% (p-value 0.010). Thereafter, a considerable decline in stock prices takes place. The negative impact of the event day and after-event losses are common features shared by all stocks in the year 2000 – but in some cases pre-event gains are possible.
Are these positive cumulated abnormal returns before the official announcement a hint for insider trading as they are in my sample of the year 1908?
If this positive cumulated effect is seen as a result of trading motivated by private information, one has to conclude that 92 years of regulation are worthless in prohibiting insider-trading. If I stick to the argumentation of Banerjee and Eckhard (2001) respectively
Keown and Pinkerton (1981), these uncovered positive run-ups stem from insider activities.
But, out of my point of view, there is an obvious difference between the run-ups of the year 1908 and the ones of the year 2000. The run-ups in the historical period correctly anticipate the whole economic impact of the merger, whereas the pre-event adaptation nowadays goes in the opposite direction regarding the total effect of the merger. If one keeps closely to the concept of insider-trading and its influence on the information content of market prices,94 run-ups that point in the false direction do not convey privately held superior knowledge.
Moreover, insider buying stocks of affected companies prior to the public release should make profits in the sense that the market responds during a specific time interval as predicted by insiders. This is not the case in the year 2000 because on the event day all stocks loose on average, despite the positive reaction during the three days before the announcement. Putting this in other words, it states that observing the considerable increase before the event does not help to improve the expectations regarding the whole change in market values triggered by the merger. Therefore, this observed stock price behavior in the year 2000 is due to speculation driven by pseudo-information or irrational trading rules like buy on rumors and sell on facts. Zivney et al. (1996) provided evidence that rumors about impending takeover bids cause a speculative overreaction of the market. Furthermore, Pound and Zeckhauser (1990) found that rumors are followed by strong price reactions – but about half of the published rumors were false in the sense that a merger is not announced later. Note that I excluded false rumors from my sample, maybe taking also false rumors into consideration would provide interesting insights into overreactions of the market. This is a possible extension of my analysis. In addition, I include rumors that are followed by negotiations and a public announcement of a merger. This means that in these cases even before a rumor appears in the newspaper, it spreads and influences the market prices.