Indexing mergers and acquisitions |
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Authors: | Jianhua Gang Nan Hu |
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Affiliation: | 1. China Financial Policy Research Centre, School of Finance, Renmin University of China, Beijing, China;2. Adam Smith Business School, Glasgow University, University Lane, Glasgow G12 8QQ, UK |
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Abstract: | We measure the efficiency of mergers and acquisitions by putting forward an index (the ‘M&A Index’) based on stochastic frontier analysis. The M&A Index is calculated for each takeover deal and is standardized between 0 and 1. An acquisition with a higher index encompasses higher efficiency. We find that takeover bids with higher M&A Indices are more likely to succeed. Moreover, the M&A Index shows a strong and positive relation with the acquirers’ post-acquisition stock performance in the short run and operating performance in the long run. After constructing three portfolios under a buy-and-hold strategy, we find that efficient portfolios with the highest indices earn higher equity returns and monthly alphas than inefficient portfolios with the lowest indices. Overall, our findings indicate that the M&A Index is positively associated with merger outcomes for acquirers. |
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Keywords: | Mergers and acquisitions (M& A) Stochastic frontier analysis (SFA) Efficiency |
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