Wednesday, April 30, 2008
Posted by D. Daniel Sokol
Ioannis Kokkoris of the OFT and City University weighs in on A Practical Application of Event Studies in Merger Assessment: Successes and Failures.
ABSTRACT: The stock market‘s reaction to news can be a particularly valuable source of information that may lead to inferences about the nature of a merger or a take-over. The idea underlying event studies is that the reaction of share prices - which reflect expectations about a firm‘s stream of future profits - will allow alternative hypotheses as to the consequences of a merger to be tested. By examining who gains and loses when mergers or merger challenges are announced, different hypotheses can be tested regarding expectations about market power or efficiency. Conducting an event study analysis for the merging parties as well as for rival firms, by comparing their actual stock price returns around the announcement date with a counterfactual measure of what the return would have been had the merger not taken place, would provide useful insights of the likely expectation of the market of the profitability in the post-merger market. This article will analyse the usefulness and efficiency of event studies for mergers and present a tractable way of implementing such analysis. It will include examples of efficient implementation of event studies, as well as, cases where the event study led to less satisfactory results.