Do shareholders of the acquiring and combined firms benefit from mergers and acquisitions

Abstract

While the effect of merger announcement on the shareholder wealth of acquired firms is significantly positive, the effect of merger announcement on the shareholder wealth of acquiring and combined firms is inconclusive. For the shareholder wealth of acquiring firms, while most studies find that merger announcement effect is Malatesta nonnegative, Dodd (1980), Firth (1980), (1983), and Bradley, Desai, and Kim (1988) report that merger announcement effect is negative. For the shareholder wealth of combined firms, while Dennis and McConnell (1986), and Bradley, Desai and Kim (1988) show that the merger announcement effect is significantly positive, Malatesta reports that the merger announcement effect is positive but insignificant. A number of measurement problems have been pointed out in the literature to be responsible for the effect on the inconclusive results of merger announcement shareholder wealth of acquiring and combined firms. Therefore, this study corrects those measurement problems, and uses both general and stratified merger samples to reexamine merger announcement effect on the shareholder wealth of acquiring and combined firms to resolve the inconclusive results of the merger announcement effect on the shareholder wealth of acquiring and combined firms. A number of major findings that suggest several interesting issues for future research have been obtained.