Efficient financial market

Corporate Management. Journal of finance. Business. Acquisitions. Weak, semi-strong efficiency. Public Announcements. Random walk. Insider Trading. Empirical Literature. Acquiring Firms

  • Enviado por: Alvaro
  • Idioma: inglés
  • País: España España
  • 59 páginas



This paper will provide empirical estimates of the stock market reaction to takeover announcements in the UK between 1998 and 2001. The impact of the takeover on the returns to both the acquiring company and the target company is examined, as well as the overall wealth effect of the takeover.

The evidence indicates that over the period of the thirty days preceding the takeover announcement, the announcement date itself and the thirty days following the takeover, target companies earn large significantly positive abnormal returns and therefore gain substantially from takeovers. Bidding firms earn statistically not significant negative abnormal returns over the announcement period. The overall gains from takeovers are not clear maybe due to the size difference between bidders and targets, but takeovers do appear to be value-creating activities.


A Merger is a combination of two business entities under common ownership. For various reasons, such as for accounting and legal purposes, many studies differentiate between the terms merger, acquisition and takeover. However, they are frequently used interchangeably.

Merger and Acquisitions are driven by several motives, and the three major suggested are synergy, agency and hubris. If the managers' main aim is the maximization of shareholders' wealth, the takeover might look for synergies or market power that result by merging the resources of the two firms. However, as several previous papers argue, the reason for the takeover might be far from the interest of shareholders. The agency motive suggests that takeovers occur mainly because the management's self-interest in their own welfare at the expense of acquirer shareholders. The hubris hypothesis suggests that managers make mistakes in evaluating the target firm. However, the literature has not been able to clearly distinguish amongst the different motives, probably due to the simultaneous existence of all three motives in any sample.

In any case, shareholders play a relative passive, but fundamentally important, role of judging the corporate control activities between management teams, being the responsible of the market's price setting function. In this process, the accessibility, quality and timing of the public information used by the shareholders to take decisions is determinant. Past researches study the level of efficiency of the market in respect of the public information available and the response of the market to new announcements, providing some support for the notion of mergers being partially anticipated events. For example Keown and Pinkerton (1981) argue that merger announcements are poorly held secrets and there is trading on this non-public information before the first public announcement of the event.

Fama (1970) defined an efficient financial market as one in which security prices always fully reflect the available information. Hence, if the stock market is efficient, the pre-merger share prices reflect anticipations of mergers, both about mergers eventually announced and about alternatives to these mergers. He differentiates between three levels of efficiency. If stock prices are weak form efficient, then past prices contain no information about future changes and price changes are random. If prices are semi-strong form efficient then prices reflect all public information. If prices are strong form efficient all private information is reflected in the prices.

This dissertation utilise stock market data and measure the performance of merger participants over the acquisition period as the deviation of the shareholders' actual rate of return from its value conditional on a particular process that generates expected returns. This methodology is referred to as either the residual, prediction error or event study approach. The sample used is composed of 49 companies which have merged or being acquired within the period 1998-2001 in the UK stock market.

The purpose of this dissertation is to study how efficient is the response of the UK stock market to the new announcements of Merger and Acquisitions. The remainder of this study is organized as follows. In the next section, we have a deep view of the previous literature on Efficient Market Hypothesis and Merger and Acquisitions. The fourth section contains a description of the data, the event study methodology and the abnormal return model used in the empirical analysis. The analysis is presented in the fifth section, studying separately the response of the total sample, bidders and targets companies. Finally, the sixth section provides the conclusion.


  • In order to achieve the aim of study the UK stock market, the objectives of the research are:

    • To measure the response of the stock market to the takeover announcements.

    • To study the variance in the stock prices during the pre-announcement period compared to previous months.

    • To evaluate the existence of insider trading in the stock market and its influence in the response of the market to new information.

    • To investigate the consistency of the empirical evidence using the implications of the efficient market theory.


    In this chapter, we will revise the previous relevant literature, starting with the theoretical framework of the Efficient Market Hypothesis and its more relevant aspects for this dissertation, such as the effect of public announcements and the random walk theory. Then, we review previous papers about insider trading and event study methodology. Finally, we study the motives and results of Merger and Acquisitions.


  • The Efficient Market Hypothesis (EMH) has been the central proposition of finance for more than thirty years, evolving in the 1960s from the Ph.D. dissertation “The Behavior of Stock Market Prices” by Eugene Fama (1965). In a posterior statement of his hypothesis, Fama (1970) defined an efficient market as one in which security prices always fully reflect the available information. Many of the major stock markets (including the British) have been hold to be efficient and thus the technique has been used to measure the impact of corporate events such as takeovers (Firth, 1979).

    In the first decade after its creation, the EMH turned into a big theoretical and empirical success. A field of academic finance in general, specially focused in security analysis, was created around the EMH and its considerations, and several empirical findings and theoretical reasons emerged to support the hypothesis. Fama (1970, 1991) published extensive reviews of the empirical studies and all the theoretical models that studied the EMH.

    The EMH provided the theoretical basis for much of the financial market research during the seventies and the eighties. Prices were seen to follow a random walk model and the predictable variations in investment returns were found to be statistically immaterial. While most of the studies in the seventies focused on predicting prices from past prices, studies in the eighties also looked at the possibility of forecasting based on variables such as dividend yield (Fama and French, 1988), P/E ratios (Campbell and Shiller, 1988), and term structure variables (Harvey, 1991).

    The hypothesis of EMH have also stimulated several studies that looked, amongst other things, at the reaction of the stock market to the announcement of various events such as earnings (Ball and Brown, 1968), stock splits (Fama, Fisher, Jensen and Roll, 1969), divestitures (Klein, 1986) capital expenditure (McConnell and Muscarella, 1985), and takeovers (Jensen and Ruback, 1983). The relevance of the information is judged based on the market activity associated with a particular event.

    Studies about takeovers using the Efficient Market Hypothesis (EMH) were initially carried in the United States in the seventies, and the early literature is reviewed by Jensen and Ruback (1983) and Jarrell, Brickley and Netter (1988). Fama (1991) argues that with respect to firm-specific information, such as Mergers and Acquisitions, the adjustment of stock prices to new information is efficient. Later in the same article (pg. 1602), he admits some finds against that idea in previous event studies, but attributing it to “some anomalies, spurious and real, which are inevitable.”

    In general, the typical results using event studies showed that security prices seemed to adjust to new information within a day of the event announcement, an inference that is consistent with the EMH. As Seiler and Rom (1997) pointed out, even though there is considerable evidence regarding the existence of efficient markets, one has to bear in mind that there are no universally accepted definitions of crucial terms such as abnormal returns, economic value, and even the null hypothesis of market efficiency. Another constrain which could be added to this list is the limitations of econometric procedures on which the empirical tests are based.

    All these aspects provoked a more cautioned and critical approach to the EMH in the eighties and nineties. Researchers repeatedly challenged the studies based on EMH by raising critical questions such as: Can the movement in prices be fully attributed to the announcement of events? Do public announcements affect prices at all? and What could be some of the other factors affecting price movements?.

    For example, Roll (1988) calculated the R² for the returns of large stocks of the New York and American Stock Exchanges as explained by regular economic influences, by the returns on other stocks in the same industry, and by public firm-specific information. He argues that most price movements for individual stocks using monthly and daily data cannot be traced to public announcements.

    In their analysis of the aggregate stock market, Cutler et al (1989) reach similar conclusions. They report that there is little, if any, correlation between the greatest aggregate market movement and public release of important information. More recently, Haugen and Baker (1996) in their analysis of determinants of returns in five countries conclude that none of the factors related to sensitivities to macroeconomic variables seem to be important determinants of expected stock returns.

  • The theoretical base of the EMH

  • The literature makes a distinction between three levels of pricing efficiency (Fama, 1970):

    Weak Efficiency: share prices fully reflect the information contained in past price movements. Price movements are totally independent of previous movements, so it is impossible to earn superior profits based on the knowledge of past price returns. Assuming risk neutrality, the weak form of the EMH reduces to the random walk hypothesis.

    Semi-Strong efficiency: the market is efficient in the semi-strong sense if shares prices respond instantaneously and correctly to newly published information. The implication is that there is no advantage in analysing publicly available information because as soon as information becomes public, it is immediately incorporated into prices. This includes earnings and dividend announcements, Merger & Acquisitions, rights issues and any new information about the security.

    Strong-Form Efficiency: share prices fully reflect not only published information but also all relevant information including data privately held. Even an insider would not be able to make abnormal profits from their position because the information is quickly assimilated by the market.

    These three levels of efficient markets rest on three arguments that presume progressively weaker assumptions (Keane, 1985). First, investors are supposed to be rational and value securities rationally. Rational investors value each security for its fundamental value, that is, the net present value of its future cash flows discounted using their respective risk rate of discount. When new information about the security become public, they quickly respond to it, so security prices incorporate all the available information almost immediately.

    Second, even if there are some irrational investors, their trades are random and therefore cancel each other out without affecting prices. The EMH argues that, as the trading strategies of the irrational investor are uncorrelated, they will cancel each other out. This reasoning relies on the lack of correlation, making it quite limited and vulnerable to possible correlated trading strategies.

    The third argument of the EMH is based on the notion of stabilizing speculation in the form of arbitrage (Friedman, 1953), arguing that in the market there are rational arbitrageurs who will eliminate the influence of irrational investors on prices. A simple definition of arbitrage was given by Sharpe and Alexander (1990): is the simultaneous purchase and sale of the same, or essentially similar security in two different markets at advantageously different prices. The process of arbitrage brings security prices in line with their fundamental values, even when some investors are not fully rational and their demand are correlated, as long as securities have close substitutes.

    Keane (1985) points out that arbitrage have a further implication. As irrational investors are buying overpriced securities and selling under priced securities, such investors earn lower return than either passive investors or arbitrageurs. Compared to other participants in the market, irrational investors loose money. Moreover, as Friedman (1953) indicates, they cannot lose money forever, so they will become less wealthy and eventually disappear from the market. In the long run, if arbitrage does not eliminate their influence on asset prices market, forces will do.

    According to Arnold (2002), we can define three types of efficiency. Operational Efficiency refers to the transaction cost paid by buyers and sellers during the exchange of securities. They will look for the lowest cost, promoting competition amongst market makers and brokers, and between exchanges for secondary-market transactions. According to the Allocation Efficiency, society allocates its scarce resources in the industrial and commercial firms with the greatest growing potential. Finally, Pricing Efficiency is the main concept focus of this paper. If a market is pricing efficient the investor can expect to earn risk-adjusted return due to the quickly and correct respond of the market to any news.

  • Studies of Public Announcements

  • The vast majority of the literature supports the idea that the market is efficient responding to any publicly available information, including macroeconomic information, so the share prices reflect all public information and respond rapidly to any new information about the market. Hence, only new and unpredictable information moves prices. This reaction is studied analysing the reaction of the market to corporate events, such as dividends, earnings announcements or mergers.

    However, most of these studies examine announcements that have a predictable component, such as the timing and/or anticipated amount of the dividends. Studies typically select a sample for the anticipated portion of the news announcement and then test the market's reaction to the unanticipated portion of the announcement. The common finding is that unanticipated events have an immediate impact on prices, taking place within one to fifteen minutes (Ederington and Lee, 1995), and that the market overreacts to bad news (DeBondt and Thaler, 1985).

    These studies find that there is systematically more information available about larger firms and firms that trade on larger stock exchanges than about smaller firms or firms traded on smaller exchanges (DeBondt and Thaler, 1985). Some studies have attempted to measure the amount of publicly available information about a firm prior to public announcements by counting the number of public press releases about a firm.

  • Market Anomalies

  • The EMH became controversial after the detection of certain anomalies in the capital markets that were apparently inconsistent with the theories of asset-pricing behaviour. These anomalies are empirical results that denote either market inefficiency or imperfections in the underlying asset-pricing model and have to be taken into consideration in studies analysing the market. Several studies in the academic literature found those anomalies disappear, reverse or attenuate after a deeper analysis. The main anomalies are the seasonal deviations that analyse different influences of dates on the market, such as the January, the Weekend or the Pre-holiday Effect. Other studies focus on financial aspects as the Value-Line Enigma or Pricing of Closed-end Funds or analyse other aspects such as the Weather or the Small Firm Effect.

    However, Malkiel (2003) argues that these non-random effects are very small relative to the transactions costs involved in trying to exploit them, so they do not appear to offer arbitrage opportunities that would allow investors to make excess returns. In addition, Constantinides et al (2003) found in their empirical work that some of these anomalies do not hold up in different sample periods. Particularly, the size effect and the value effect apparently disappeared after the papers that studied them were published. The dividend yield effect and the weekend effect have lost seemly their predictive power after the publication of their respective studies, and the small-firm turn-of-the-year effect became weaker in the years after it was first documented. With these findings, they argue that that the anomalies are possibly more apparent that real and researches make the market become more efficient.

    Even though the EMH has some weaknesses in the market pricing mechanism, that have led researchers to question it and to consider alternate modes of theorizing market behaviour, the concept of efficiency is difficult to deny. Bowman and Buchanan (1995) offer three reasons to explain the widespread commitment to EMH amongst the academic world.

    First, the strong empirical evidence in support of the EMH has to be consider without deny the counter evidence. As Keane (1991, pg.34) points out “unexplained price behaviour is not necessarily irrational, and that irrational behaviour is not necessarily exploitable, and finally that exploitable behaviour is not necessarily worth exploiting”. Second, test of market efficiency have to include joint combined test of efficiency and the asset-pricing model used in the test. The anomalies could be a reflection of misspecification of the models used instead of (exploitable) market inefficiencies. Finally, some support the EMH for its economic logic, especially with respect to developed markets.

  • Random walk

  • The EMH is associated with the idea of a “random walk,” which implies that the next move of the speculative price is independent of all past moves or events, so historic prices are of no value in predict future prices. The logic that the random walk follows is that, if all the information related to a security is immediately incorporated to its market price, tomorrow's price change will be caused only by tomorrow's news and therefore will be independent of the price changes today. Moreover, as news is by definition unpredictable, the price changes induced by them must be unpredictable and unsystematic.

    The literature have used often the early precursor idea of the random walk hypothesis found in the Pearson's (1905) study of the optimal search procedure for finding a drunk left in the middle of a field. He argues that if the drunk is expected to wander in a totally unpredictable and random way, he is likely to end up closer to where he had been left than to any other point. We can find other metaphor in Malkiel's best-seller A Random Walk Down Wall Street (1973), which said that the market prices stocks so efficiently that a blindfolded chimpanzee throwing darts at the Wall Street Journal can select a portfolio that performs as well as those managed by the experts.

    In finance, these analogies have been applied to series whose successive returns are serially independent. Kendall (1953) examines in his paper 22 UK security and commodity price movements over time, looking for regular price cycles. The results surprised him and all his contemporary scholars. The prices moved in a random way without any pattern or trend. He concluded that in series of prices that are observed at close intervals the random changes from one term to the next are so large as to swamp any systematic effect that may be present. The data behave almost like wandering series. The near-zero serial correlation of price changes was an observation that appeared inconsistent with the views of economists in the early 1950s, which were expecting to beat the market with detailed analysis of the evolution of the prices in the stock market.

    That new theory was especially relevant for market analysts, who try to predict the future path of security prices. Based in Kendall's finding, Roberts (1959) tried to convince financial analysts of their techniques were against the theoretical studies on the market behaviour. He demonstrated that a time series generated with a sequence of random numbers was indistinguishable from a record of US stock prices. Later, Beaver (1981) found with two or three exceptions that knowledge of price changes yields substantially no information about future price changes. He found that each period price change was not significantly correlated with the preceding period's price change or with the price change of an early period, at least as far as he tested, up to twenty-nine periods.

    Despite all these studies on the randomness of stock price changes, there were occasional findings of anomalous price behaviour with certain series appearing to follow predictable paths. Working (1960) and Alexander (1961) independently discovered that autocorrelation could be induced into returns series because of using time-averaged security prices. Once returns series are base on end-of-period prices, returns appear to fluctuate randomly. The problem of time averaging identified by Working is the first research on thin trading and a precursor to studies of market microstructure.


  • One important aspect to study the reaction of the market to information about Merger and Acquisitions is the existence of insider trading. The EMH assumes that all information is available for all participants in the market at the same time, so any kind of privileged information will be a deviation from the perfect market.

    The U.S. Securities and Exchange Commission (SEC) defines insider trading as the buying or selling of a security by an insider, a person who knows information that is not accessible to the public. The definition of inside information in Europe is in The Market Abuse Directive (“MAD”, 2003/6/EC), being “information of a precise nature which, if it were made public, would be likely to have a significant effect on the prices of [those] financial instruments”. Insiders are both individuals and corporations, and are required to report their Direct Holdings (holdings that are hold in the name of the insider) and Indirect Holdings (holdings that are controlled by the insider yet are held by another entity to which the insider is affiliated). In many cases, several insiders, such as a group of trustees over the same trust, or several partners in the same partnership may claim the same block of indirect stock.

    Some insider trading is legal and other is illegal, depending on whether there is a breach of trust and confidence. Generally, however, the term is used in the context of trades improperly using insider information. Illegal inside trading occurs when the insider violates a fiduciary duty or other relationship of trust and confidence by virtue of the insider trading, and it was specifically made illegal in the UK under the Companies Act 1980.

    The legal version is when corporate insiders (officers, directors, and employees) buy and sell stock in their own companies observing specific laws, such as that they must report their trades to the SIB. Insider trading is in theory detected by the Securities and Investment Board (SIB) in the UK and by the SEC in the USA. Neither agency, however, has any legal powers other than public disclosure nor do they bring prosecutions themselves.

    Insider trading may harm a firm in takeovers situations. Insiders may pursue their personal interests rather than those of the firm or shareholders. If managers of the firm, trying to take over another firm, use their knowledge to engage in transactions in the stock of the target firm, the stock price of the target corporation will increase. Thus, insider trading may increase the costs of the transaction to the acquirer.

    Several papers about insider trading have appeared in the past three decades. Most of these have found that insider trading does take place and corporate insiders earn abnormal return using private information to strategically trade their own shares around corporate events gaining important abnormal returns. The theoretical framework that has been used to interpret the data in these studies has been that the stock market is semi-strong efficient as explained before. They focused on the overall returns, but the use of monthly trading in most of the cases hide much of the information concerning abnormal returns occurring just prior to the announcement date.

  • Empirical Literature

  • Finnerty (1976) argues that the occurrence of profitable insider transactions implies that trading on privileged information is common and that insiders actually do disobey security regulations. Keown and Pinkerton (1981) provide evidence of excess returns earned by investors in acquired firms prior to the first public announcement of planned mergers. As per their view, systematic abnormal price movements can be interpreted as clear evidence of the market's reaction to information in advance of its public announcements. However, Jensen and Ruback (1983) argue that this conclusion is wrong because they not test the alternative hypothesis that the price adjustments prior to the announcement day are unbiased responses to public information that increases the probability of a takeover.

    Many cases of insider trading frauds involved knowledge of an imminent takeover. Meulbroek's (1992) study a sample of takeovers analysing to what extend illegal insider trading involves corporate control transactions to find that insider trading is associated with immediate price movements. The cumulative abnormal return on inside trading days is half as large as the price reaction to the public revelation of the information on which the insider trades. She suggests that the stock market detects informed trading and brings a large proportion of the information into the stock price before it becomes public.

    There are several other papers studying the share evolution around different corporate events. Thus, Karpoff and Lee (1991) show that insiders sell before firm's announcement of new stock offering. Lee, Mikkelson and Partch (1992) report that insiders trade around the announcement of stock repurchases. Other studies that focus on earnings forecasts (Penman, 1982), takeovers (Seyhun, 1990), dividend announcements (John and Lang, 1991) and exchange listings and de-listings (Lamba and Khan, 1999) provide support for the hypothesis that insiders are able to trade profitably around major corporate events.

    Another current of research analyse insider gains by examining the stock price abnormal performance around insider trading activity where the event date is the trade itself. Early investigations conducted in the U.S. (e.g. Jaffe, 1974) showed that insiders are able to achieve substantial exceptional returns, around 5% during the first five months after trading.

    The hypothesis that insiders are able to trade profitably around major corporate events raises a number of important policy issues. First, insider gains mean that there is a wealth transfer from uninformed investors to individuals with privileged information and that financial markets do not compound private information (Jaffe, 1974; Finnerty, 1976; Seyhun, 1986). Regulators and financial community, thus track those transactions to fully assess insider gains and any possible distortions in prices caused by it. However, the question remains as to whether insider-trading practice affects the liquidity and efficiency of financial markets.

    For Manne (1966), the efficiency of the markets is damaged by the current rules against insider trading as they prevent prices from reflecting the correct value of the firm. In addition, the problem with insider trading is that if non-informed investors are aware of the wealth transfer induced by it, they will be more reticent of investing their money in the market, resulting in illiquidity, and therefore inefficiency, in the markets (Kyle, 1985). Thus, regulators need to impose a set of rules to improve investors' confidence about the fairness of trading in financial markets.

    Second, if insiders use private information for their own interest, their transactions can induce trading strategies by less informed participants of the market. Since an insiders' purchase (sale) would be followed by successive outsiders' purchases (sales), insiders can automatically benefit from price run-ups (falls) even though they trade without information (Jaffe, 1974). In this context, John and Narayan (1997) create a model, consistent with empirical evidence, that shows how insiders intentionally hide their trades in order to “reap profits” at outsiders' expense.

    On the other hand, Seyhun (1986) studying transactions reported to the SEC, finds that the excess return after accounting for transactions costs earned by corporate insiders are on average small and relatively more important in large firms. Elliot, Morse and Richardson (1984) and Givoly and Palmon (1985) analyse the timing and frequency of corporate transactions surrounding news announcements. Both studies conclude that corporate insiders do not trade on inside information. Chakravarty and McConnell (1999) analyse the trading activities of a confessed insider trader, and in their tests, they find no difference in the price effect of informed trade and uninformed trade. Further, Jarrell and Poulsen (1989) state that legitimate sources such as media speculation concerning the upcoming takeover and the bidder's purchase shares in the target firm, contribute to the target's stock price run-up.

    In spite of the evidence that suggests in general that insiders are informed, some papers study whether outsiders can profit from knowing what insiders are doing. In their study, Bettis, Vickrey, and Vickrey (1997) show that outside investors can earn abnormal profits, net of transaction costs, by analysing publicly available information about large insider transactions by top executives. Moreover, Manne (1966) and Carlton and Fischel (1983) assert that insider trading encourage efficient capital markets by improving the accuracy of stock prices. Specifically, insider trading promotes quick price discovery, which mitigates the incentive for other individuals to collect the same information.

    In addition, some authors argue that insider trading is a legitimate form of compensation for corporate employees, permitting lower salaries that, in turn, benefit shareholders. It provides an incentive to innovation, some argue, by promising huge rewards for developing a plan or product that will lead to a precipitous rise in the stock. That approach was proposed by Manne (1966) and later by Carlton and Fischel (1983). This argument, however, fails to address the hazard of creating an incentive for corporate insiders to enter into risky ventures for short-term personal gain, as well as to put off the public release of important corporate information so that they can capture the economic returns at the expense of shareholders.

    Other authors studied the effectiveness of insider trading laws, studying to what extend insider trading can impede the market for corporate control by increasing the premium a bidder must offer to acquire a target. Bris (2001) analyses information on insider trading in 52 countries and studies a firm's stock reaction before a tender offer announcement on a sample of 4,540 acquisitions. He finds that profits to insiders, calculated over the fifty-five days that preceded the public announcements, increase after insider-trading laws are enforced. However, the study finds evidence showing that the toughness of the law matters.

    These laws try to avoid the negative effect of illegal insider trading, which costs investors millions of pounds a year by inflating the cost of mergers and acquisitions. Meulbroek (1992) finds that when insiders ran up the stock price of the company being acquired before the announcement, buyers ended up paying a 30 per cent higher premium for the company, on average, than they otherwise would have. Insider trading could even drive up the stock price so much that some otherwise economically efficient mergers would no longer be practical.


  • The original event study (of stock splits) by Fama, Fisher, Jensen and Roll (1969) was created trying to make an extensive use of the newly developed Centre for Research in Security Prices (CRSP) monthly NYSE file, and to justify continued funding from Merrill Lynch & Co. Event studies are now an important part of finance, especially corporate finance. When the announcement of an event can be dated to the day, it allows precise measurement of the speed of the stock-price response, which is the central issue for market efficiency. In addition, daily data can attenuate or eliminate the joint-hypothesis problem, that market efficiency must be tested jointly with an asset-pricing model (Fama, 1991).

    The typical result in event studies on daily data is that, on average, stock prices adjust within a day to event announcements. However, as Fama (1991) points out, although prices on average adjust quickly to firm-specific information, the dispersion of returns increases around information events. Previous studies focused in different financial issues, such as dividends, timing of equity, stock repurchases or takeovers.

    The technique primarily employed to carry out studies with the event study methodology has been the one developed by Fama et al (1969). They suggest that if an event has an information effect, there should be a nonzero stock-price reaction on the event date. The inference is based on the statistical significance of the average announcement effect for a sample of firms announcing the event in question. However, more recent literature (Acharya, 1993; Eckbo et al, 1990) argues that corporate events are voluntary choices of firms and are typically initiated when firms come to possess information not fully known to markets. However, when events are modelled within simple equilibrium settings, “the resulting specifications are typically non-linear cross-sectional regressions that bear little resemblance to the simple models conventionally used in event studies” (Prabhala 1997; pg. 2). It suggests that conventional methods are misspecified.


  • Definition

  • Many millions of pounds are spent each year in Britain in acquiring control of companies, forming a major method of growth for firms (Firth, 1981). There is a high level of interest and speculation in the investment world around this crucial aspect of relation between companies. According to Halpern (1983) mergers occur when “an acquiring firm and a target firm(s) agree to combine under legal procedures established in the countries in which the merger participants are incorporated (pg. 297)”. Many authors differentiate between the terms merger, acquisition and takeover for accounting and legal purposes amongst others. However, as it is often impossible to classify the relationships between companies within the three accepted concepts, they are frequently used interchangeably.

    Arnold (2002) makes a classification of three different mergers. A Horizontal merger combines two companies with the same activity looking for economies of scale or enhancement of market power resulting from the reduction in competition. In a Vertical merger, firms of different stages of the production chain join together. The oil industry is a good example of these merges, combining in one big group from exploration subsidiaries and production companies to distribution companies and petrol stations. In a Conglomerate merger the companies are from unrelated business areas. Some possible reasons for conglomerates merges are cost reduction or risk reduction through diversification.

    Firth (1980) groups the studies to measure the profitability of mergers in papers that examine financial data based on accounting data of the acquiring and acquired firms prior to, and subsequent to the takeover; and examining the returns of their shareholders.

    In their paper review of previous studies on corporate control, Jensen and Ruback (1983) conclude that corporate takeovers generate positive gains, with benefits for the target firm shareholders and absence of loses for the bidding firm shareholders. They differentiate between successful and successful tender offers, founding that both target of successful and unsuccessful mergers earn positive abnormal returns on the offer announcement and through all the merger process. However, the gaining of the target of unsuccessful offers might be just a mere anticipation of subsequent offers and will disappear if no subsequent offer occurs (Bradley, Desai and Kim, 1983).

  • Motives

  • The literature studying the motives for takeovers is large, and several papers use distinct but not mutually exclusive hypotheses to explain the possible reasons for Merger & Acquisitions. In their papers about shareholder wealth effects of takeovers, Firth (1980) and Franks and Harris (1989) base their studies in the two major group of theories of the firm developed in the academic literature: the neoclassical profit maximization of the firm and the maximizing management utility. These economic theories try to explain why companies engage in takeovers and how it contributes to shareholder wealth:

  • The neoclassical profit maximization theory of the firm.

  • As Manne (1965) initially pointed out, management is motivated to maximize profits, and for extension shareholders' wealth, forced by competitive market forces. Hence, takeovers will take place if they help to achieve that main goal. According to Frith (1980), shareholders' wealth will increase because of an increase in the acquiring firm's profitability after the takeover. He argues that this higher profitability can be acquired through synergy, monopoly power or through injecting superior management.

    Synergy motive refers to the increase in the expected cash flows for companies in a merger over their sum as independent firms (Halpern, 1983). These gains might be due to economies of scale for horizontal mergers, excess capacity in some factors of production or economies of scope that create cost advantages when output is increased by the post-acquisition firm in a vector of products. One factor contributing to economies of scale for companies operating at a level below optimum is indivisibilities that may exist with individuals, overheads or equipment (Cooke, 1986). The potential for economies of scale is different for sector with different capital requirement and dimensions. The new firm can use complementary skills or complementary market outlets to sell more goods, or improve its competitive position sharing sources of supply or production facilities (Arnold, 2002).

    Market power. The market power gained through an acquisition is often included in the synergy motive because of the expected increase in post-acquisition cash flows. Arnold (2002) defines it as the ability to exercise some control over the price of the product”. This control can be achieved either a) by monopoly, oligopoly or dominant producer position or b) collusion.

    Public policy is concerned about the increasing market power gained through takeovers, and antitrust authorities investigate them to protect the correct operation of the market. Usually is very difficult to measure the own-price elasticity of demand for the products of the post-merger firm, making merger control more complicated. Hence, anti-trust procedures, such as calculation of market shares or concentration indices, assessment of dominance amongst others, should be seen as indirect indicators of market power.

    Superior Management. Maximization of profits can be achieved with a takeover that removes incompetent management or forces existing management to follow a profit maximizing strategy. In the capital markets of the U.S. and the U.K., hostile takeovers are considered to perform an important role; that of reversing the nonvalue maximizing strategies of under performing companies. In relation to the Agency Theory, Jensen and Meckling (1976) suggest that the value of the firm reflects a valuation by shareholders to include the value of the extra resources consumed by managers as the agents of the shareholders. Therefore, by reducing expenses caused by an inefficient management team, a takeover can maximize the value of target shares.

    Manne (1965) argues that by taking bad run companies, acquiring firms can replace the inefficient management and their policies, improve performance and realize a capital gain on their investment. For him the takeover market is seen as an essential selection mechanism in a system of shareholder capitalism.

    Another group of acquisition motivations are the gain of possible financial advantages (Halpern, 1983). Acquisitions may permit redeployment of excess cash held either by the acquirer or the target or may increase the debt capacity of the new firm. The diversification benefits provided by an acquisition can reduce the probability of default thereby reducing expected bankruptcy costs, giving the firm a better position to negotiate new debt.

    The acquiring firm management can try to maximize shareholders' wealth taking advantage of asymmetry in information. This information hypothesis postulates that the acquirer has information concerning the target firm that is not available to other participants in the market and is not reflected in the current share price of the target firm. That idea is in conflict with the Efficient Market Hypothesis, and is related to section 3.2, where insider trading is studied in detail.

  • Maximizing management utility.

  • The second general class of theories refers to non-value maximizing behaviour by the management of acquiring firms. For Halpern (1983), sometimes management is not looking for maximize value when biding for a company. Instead, acquisitions are attempts to maximize growth in sales or assets or control of a larger firm. However, there is other group of non-value maximizing theories. As Mueller (1969) points out, mergers are usually the consequence of the management of companies acting in their own interest. According to that idea, management interest is not always in line with the idea of maximizing shareholder wealth, and after achieving a satisfactory level of profits, managers will take corporate decisions in their own self-interest and not for maximizing shareholders returns (Firth, 1980).

    As defined in the Agency Theory (Jensen and Meckling, 1976), shareholders (the principal) delegate to managers (the agent) the control of the company, causing two main problems: (i) The agency problem, that arises when the desires or goals of the principal and the agent conflict and it is difficult or expensive for the principal to verify what the agent is actually doing; (ii) The problem of risk sharing, that arises when the principal and the agent have different attitude toward risk.

    Managers can use takeovers to extend their companies in their own interest. These potential divergences of interests between managers and shareholders can appear in firms where management have only a small proportion of share capital. They can be motivated to maximize their salaries, power and prestige and to reduce the risk of loosing their jobs (Firth, 1981). These objectives can be met following a policy of growing because three reasons: (i) Management salary is a function of the size of the company and its rate of increase is a function of the rate of increase in size. (ii)There are more opportunities for managers to exercise their skills and power in larger firms. (iii)The risk of being taken over is lower for larger firms and thus its management is more secure to keep their positions.

    As growing in size could be a self-interested objective of the management, not necessarily all takeovers will result in increased returns to the acquiring firm's shareholders. The problem faced by shareholders is that the cost of detection of this biased behaviour might outweigh the cost of agency problem (Cooke, 1986). A way of avoiding management pursuing their own aims is to offer profit-related rewards such as bonuses or stock options, or change the structure of equity ownership, because write and enforce contracts to avoid the problem is difficult and costly.

    Examining managers' stock transactions for their personal accounts, Seyhun (1990) tries to test the conflict-of-interest hypothesis. He assumes that managers expect a planned takeover decision to decrease the stock price of their firm since they knowingly overpay for the target firm. Therefore, top managers will reduce their stock purchases for their personal accounts below normal levels as they cannot be prosecuted for not trading. After analysing the sample of 393 mergers between 1975 and 1986 in the NYSE, he concludes that the evidence does not appear to support the hypothesis that, on average, top bidder managers knowingly pay too much for target firms. Even though he finds that insiders can anticipate some of the announcement-period abnormal stock price reaction, there is no increase in their sale activity for the overall sample.

    Management can be interested in start a takeover process in order to diversify their personal portfolio, as found in the paper by Amihud and Lev (1981). They argue that firms with disperse ownership (firms with more severe agency problems) engage in more conglomerate acquisitions in order to reduce risk, even when this is not optimal for shareholders. Conglomerates generally lead, through the diversification effect, to reduced risk for the combined entity. As they consider that incentives of entrepreneurs and managers derive from incentive compensation schemes and, more generally, from exposure to their firms' risk, managers usually will engage their companies in a conglomerate merger in their own interest.

    From other point of view of the Agency problem, takeovers can be the response of efficient markets to firms with managers acting in their own interest or taking the wrong decisions. Some studies found that corporate takeovers could have a disciplinary role in the stock market. According to DeBondt and Thompson (1992), companies with management teams deviated from profit maximization purpose have lower share prices than their otherwise could have. They argue that this difference of price between the actual and potential share value makes the firm an attractive objective for outside parties, which will acquire these firms and operate them in profit-maximizing ways.

    For Jensen (1986) takeovers are not only a problem but also a solution. He argues that takeovers partially solve some manager-stockholder conflicts that are more visible in firms which substantial free cash flow. Jensen argues that managers in those firms often invest free cash flow in unprofitable projects, such as value-reducing acquisitions, instead of distribute these gains to stockholders in either dividends or stock buy-backs. Therefore, many takeovers are designed either to solve previous unprofitable acquisitions by target firms or to prevent them from making future unprofitable investments.

    In this aspect, Mitchell and Kenneth (1990) found evidence that the reason for some takeovers is the poor acquisition record of target firms. They studied the reaction of the market to acquisitions made by two sets of firms during 1982-86: firms that become target of takeover attempts (hostile or friendly) after their acquisitions and control group of firms that do not receive subsequent takeover bids during the same period. Their results suggest that one source of value in corporate takeovers, especially hostile ones, come as recovery of target equity value that had been lost because of poor acquisition strategies prior to the bid. These results support the idea previously pointed by Marris (1963), Manne (1965) and Jensen (1986) that some takeovers promote economic efficiency by relocating the target's assets to higher valued uses.

  • Hubris

  • The quality and experience of the management team plays another key role in the Hubris Hypothesis. First introduced by Roll in 1986, it predicts that bidder managers inadvertently overpay for target firms. As Roll says management intentions may be fully consistent with honourable stewardship of corporate assets, but actions need not always turn out to be right. What happens is that managers tend to overestimate their ability to manage the target firm due to hubris and, therefore, systematically overestimate the benefits of corporate combinations.

    It can be argued that the hubris hypothesis goes against the strong-form market because it presumes that one set of market bidders is systematically irrational. However, Roll (1986) maintains that market interactions generate prices and allocations equal to those that would have been generated by rational individuals even though some participants make systematic mistakes.

  • Other classifications

  • Berkovitch and Narayanan (1993) use a different classification of the motives for takeovers. They give three major motives: synergy, agency and hubris, studying the effect of these motivations in the final profitability of the takeover. While other papers had used average gains to distinguish amongst these motives, their paper uses the correlation amongst target, acquirer, and total gains, studying a sample of 330 tender offers made during 1963-1988.

    They conclude that the existing empirical evidence is unable to clearly distinguish amongst these motives probably due to the simultaneous existence of all three in the samples of takeovers. Even though, the empirical results of their study show that synergy is the primary motive in takeovers with positive total gains even though the evidence is consistent with the simultaneous existence of hubris in their sample. They also found that agency is the primary motive in takeovers with negative total gains.

    Another classification by DeBondt and Thaler (1985) sum up the reasons behind takeovers identifying five motives and analyse their social welfare implications at the same time:

    • Target firm undervaluation in financial markets. It assumes that security prices do not always rationally reflect all available information about the firm's performance, so the threats of a takeover forces executives “to manage share prices”. Combined with the view that financial markets are excessively volatile and overreact, the indication is that in these myopic markets make managers become myopic also.

    • Bidder management self-interest and hubris.

    • Breach of trust. When a takeover comes as a surprise for stakeholders, breaking an unwritten contract with the stakeholders.

    • Monopoly power in product markets, especially in horizontal mergers, e.g. in the energy industry.

    • Corporate tax savings. Bidders may be willing to pay takeover premium for the opportunities resulted from the purchase of shares of other firm. To discuss the tax consequences of M&A is important to consider groups of companies, since any acquisition create a group or change previous relationships.

    Finally, another factor to take into account as a motivation for making takeovers is the influence of merchant banks and other financial advisors. These external advisors earn high fees when takeovers bids are made and hence they have a subjective opinion when making a suggestion about the convenience of the takeover.

  • Results of a Merger

  • The study of the effects of mergers on the merging firms and on the market as a whole can be focussed in two different aspects: (i) accounting data of the companies or (ii) stockholders wealth.

    The first approach involves examining the accounting data for firms before and after an acquisition to determine the changes associated with the merger. These studies can focus on accounting rates of return, cash flow returns, profit margins, expense ratios, or any number of other accounting and financial measures of firm performance. These studies try to control confounding factors by comparing the post-acquisition changes in financial performance to industry averages or to multiple regression based on estimates of what would have occurred absent the acquisition. Some of the more recent evidence in this category comes from studies that compare pre-merger and post-merger performance of firms in only one industry (e.g., banking or hospitals).

    The second approach is more relevant for the purpose of this dissertation, as the main focus is on how the shareholders' wealth of the acquiring and target firms is affected, using as indicator the market value of their shares. Several papers study how the return of the bid depends on different variables.

    An aspect studied in the literature is the type of merger, finding that returns of tender offers and hostile acquisitions generate higher target as well as bidder returns than the announcement of friendly mergers or acquisitions. The explanation given by Loughran and Vijh (1997) is “that tender offers, which are often hostile to incumbent managers, may create additional value as new managers are appointed. In the case of mergers, that are friendlier and enjoy the co-operation of incumbent management, the additional value creation is less likely to occur” (pg. 1787).

    Not only the announcement returns to target shareholders are higher in hostile takeovers, but the long-term performance of the combined company after the merger is better too. Franks and Mayer (1996) study a sample of 80 hostile takeover bids in the UK in 1985-1986, finding a larger bid premium for successful tender offers where management opposed the bid, compared with friendly bids: 29.8% compared with 18.4%. In opposed bids there was also a very high degree of management replacement after the acquisition. On average, 90% of the target board was replaced compared with only 50% in friendly bids. They attribute the higher bid premiums in hostile takeovers to larger merger benefits rather than to lower returns to bidders.

    Maquiera et al (1998) find different returns for bidders and targets studying short-term wealth effects of large intra-European takeover bids. They conclude that the type of takeover bid has a large impact on the short-term wealth effects, with hostile takeovers causing substantially larger price reactions than friendly operations. To study that possible relation, Healy, Palepu and Ruback (1992) use a matching scheme in their methodology in which post-takeover performance is regressed on a combined target and acquirer pre-takeover performance, arguing that the relative post-takeover performance of hostile and friendly takeovers depend on the value of the target's strategy and management before the takeover. However, it must be kept in mind that in practice most transactions contain elements of both friendly and hostile deals. That is, some stakeholders are likely to be disadvantaged by the transaction and there are likely to be some economic gains from combining the operations of the bidder and target.

    To study further the distribution of wealth through stakeholders, Asquith and Kim (1982) study monthly and daily bond and stock returns relative to the announcement date of a merger bid for a sample of conglomerate mergers. They find out that the total synergistic gains of a merger do not depend on whether the merger is conglomerate or not, and conclude that mergers generate no noticeable impact on bondholders and no noticeable transfers of wealth or risk between bondholders and stockholders.

    Another aspect of mergers studied is the effect of the method of payment on the final return of a merger, bringing some controversy. Maquiera et al (1998) conclude that there is strong evidence that the means of payment in an offer has an impact on the share price. Studying market-to-book ratios -valuation ratios that reflect how the stock market evaluates incumbent management- of both acquirer and vendor, they find a positive relation between market-to-book ratio of the target and the bid premium paid by the acquirer that led to a negative price reaction for the bidding firm. That affirmation is in line with Loughran and Vijh (1997), who find that acquirers that paid cash in their acquisitions outperform their size and market-to-book based benchmark share returns, whereas acquirers that paid using shares underperform in compared to their benchmark stock returns. These studies predict that bidders obtain higher returns financing acquisitions with cash instead of shares, because they have private information about the value of their assets that allow them to offer shares only when shares are overvalued.

    On the other hand, Healy, Palepu, and Ruback (1992) further examine the effect of the payment method on announcement returns and operating performance. However, they do not find abnormal returns for acquisitions using shares as payment to be lower than those for acquisitions in cash. Moreover, they argue that there is not relation between the method of payment and subsequent improvements in operating performance.

    Another reaction analysed is that corporate diversification destroys value, and there is a large body of supporting empirical evidence. Morck, Shleifer and Vishny (1990) find in the 1980s that bidders earn negative returns when making unrelated acquisitions, suggesting that acquisitions might be driven by managerial motives rather than value maximization. Lang and Stulz (1994) test the negative correlation of diversity and value finding that highly diversified firms have consistently lower average and median q values than single-segment firms. They interpret their findings as evidence that diversified firms are consistently valued less than specialized firms are. This diversification discount could have two explanations. First, it could be that diversification itself destroys value. Second, it could be that diversification and lower value are not causally related, but merely reflect firms' internal decisions. Target Firms

    Most of the literature on the market effects immediately surrounding the takeover comes to the same conclusion: shareholders of target firms invariably receive large premiums (on average between 20-30%) relative to the pre-announcement share price.

    Kaplan and Weisbach (1992), for instance, report average US target abnormal returns of 27% for 1971-82. They focussed on divestitures, examining the post-acquisition experience of 271 large acquisitions for the period. Acquirers did often overpay for their purchases and the acquisition targets, as in other studies, walked away with most of the money. The mean sale price of the divested units was 90 percent of the purchase price, reflecting a loss relative to alternative investments, but a smaller loss than might have been implied by previous literature. Kaplan and Weisbach also make use of stock market event analysis around the time of the acquisition to determine whether the stock price movements are correlated with their ex-post measures of acquisition success. They find that the market partially anticipate the acquisition successes and failures. In their regression model, acquirers' stock returns were more negative for those acquisitions that later turned out to be unsuccessful.

    Additionally, Bradley, Desai and Kim (1988) find that target firm stockholders realize significant positive abnormal returns upon the announcement of a takeover offer even if the takeover does not go through. They argue that these gains are primarily due to stock market anticipation of a future successful acquisition bid for the target. However, targets that repeal a hostile takeover bid ultimately see their stock value return to approximately the pre-takeover level if no takeover takes place.

    One possible reason for the failure of the bid is the existence of anti takeover devices, examined by Comment and Schwert (1995). These defences of the target company provide higher premiums to its shareholders, and these gains are not offset by the extent to which anti takeover measures might deter potential buyers from making a bid. They suggest that anti takeover devices are often used to increase bargaining power and maximize target shareholder wealth but they do not prevent many transactions.

    In a wide analysis of studies of pre-1980 share prices, Jensen and Ruback (1983) find positive returns of between 16 percent and 34 percent to the targets of successful mergers and tender offers. These returns are gained in the month or two surrounding the offer, with a weighted average abnormal return of 29%, whereas the estimated abnormal returns immediately around the merger announcement is just 7.7%. That implies that most of the abnormal returns caused by the merger announcements occur prior to being made public. Acquiring Firms

    In contrast to the general consensus about target firms, there are some discrepancies about the announcement wealth effects for the bidding firms. As Jensen and Ruback (1983) point out, the estimation of returns is more difficult for bidders than for targets. They give as possible reasons (i) that the market fully anticipates the bidder intentions, impeding any response to a merger announcement;(ii) bidding firms can be engaged in more than one acquisition process at the same time.

    About half of the studies report small negative returns for the acquirers whereas the other half finds zero or small positive abnormal returns. The most extended explanation for zero to negative bidder returns is competition, because bidders negotiating in a competitive market will be forced to pay the expected value of non-unique gains to the target.

    Amongst the authors finding negative bidder results is Walker (2000). He classifies corporate takeovers according to the strategic objective motivating the takeover and estimates the relationship between corporate strategy and the change in acquiring-firm shareholder wealth. The results indicate a negative impact on shareholder wealth for takeovers motivated by diversification if overlap exists between the two firms' products. For takeovers based on other strategies, the average change in acquiring-firm shareholder wealth is not statistically significant. These results support both the asymmetric information hypothesis (acquiring-firm shareholders earn higher returns following cash offers) and also the strategic alignment hypothesis (acquiring-firm shareholders earn higher returns following takeovers that expand the firm's operations geographically or increase its market share).

    In line with these findings is the paper by Mitchell and Stafford (2000), which studies abnormal returns subsequent to major corporate events using the mean buy-and-hold abnormal return (BHAR). They find that an average three-year investment in acquiring firms generate 2.7% less wealth than an otherwise similar investment in non-acquirers, on a value-weight basis. Even though this does not seem significant in economic terms, their test statistic suggests that this represents statistically significant long-term mispricing.

    Previously, Firth (1980) studied the response of the markets to takeovers news. In his analysis, he found that the British stock market has a pessimistic view of takeovers, because the unsuccessful bidders earn positive returns in the twelve months after the bid. That shows that the market sees the failure of the takeover as good news, giving as possible reason that investors think that the benefits of takeovers are more than outweighed by the costs.

    Asquith and Kim (1982) find that bidders' abnormal returns are positively related to the relative size of the merger target, and the gains during the announcement period are larger for mergers that are successful. That suggests that the acquisition of a larger firm can provide greater opportunities to achieve economies of scope, but larger mergers may also be more difficult to manage. They find out that bidding firms gain significantly during the twenty-one days leading to the merger announcement. They argue that the differences with the findings of the earlier studies may be due to methodological deficiencies because the findings of their study are consistent with value-maximizing behaviour by the management of bidding firms.

    On the other hand, Jensen and Ruback (1983) attribute the negative abnormal returns that go against the market efficiency to estimation bias of the future efficiency gains of the takeover. Previously, Mandelker (1974) explained the negative return arguing that various performance measures are sensitive to the estimation technique. Trying to bring some light to the issue, Loderer and Kenneth (1992) analyse the post-acquisition share price of acquiring firms in the 1966-1986 period, finding that, on average, acquiring firms do not underperform a control portfolio during the first 5 years following the acquisition. The companies simply earned their required rate of return, no more or no less, with some negative performance for the first 3 years, but it is most prominent in the 1960s, it diminishes in the 1970s, and it disappears completely in the 1980s. That makes them conclude that, especially in the later years, the post-acquisition years do not provide continuing evidence of wasteful corporate acquisitions or strong evidence that contradicts market efficiency.

    Finally, Franks, Harris, and Titman (1991) claim to confirm the thesis of estimation bias finding that, with an appropriate multifactor benchmark, the negative post-acquisition return disappears. But Agrawal et al (1992) contradict them pointing out that these findings are specific to the studied 1975-1984 period, and cannot be replicated for the years before and after. After adjust their sample to the firm size and the beta estimation problems, Agrawal et al find that stockholders of acquiring firms suffer a statistically significant loss of about 10% over the 5-year post-merger period, concluding that the efficient-market anomaly of negative post-merger performance highlighted in Jensen and Ruback (1983) is not resolved. They offer as a possible explanation that the market is slow to adjust to the merger event.

    On contrary, other authors argue that managers of bidding firms act on behalf of their shareholders, because takeovers lead to increased shareholder wealth. Amongst the studies finding positive abnormal return for the bidding company is Dodd's (1980). Analysing the returns on the day before and the day of the first announcement of the merger he find a significant abnormal return of -1.1% for successful bidders. In the same line, Asquith et al (1983) incorporate in their analysis the relative size of target and bidding firms, comparing the period before 1969 to the period after 1969. Bidding firms gain significantly during the 21 days prior to the announcement, with abnormal returns positively related to the relative size of the merger partners, being the gains greater for successful mergers. The results indicate that the inconclusive findings of the earlier studies may be due to methodological deficiencies. These findings show that on average merger bids are positive present value investments, confirming the idea of value-maximizing behaviour by the management of bidding firms.

    Jensen and Ruback (1983), in their study prior to 1980 differentiate also between successful and unsuccessful bidders. They conclude that the bidding firm's shareholders do not lose, and that the target firm's shareholders gain a positive return that does not come from the creation of market power. Asquith and Kim (1982), who examine the effect of mergers announcements on both the shareholders and the bondholders of successful bidding firms, finding that both groups of stakeholders either gain or lose, support that observation.



    • According to the definition gave by Saunders et al (2003), the research philosophy followed in this dissertation is positivism, with a deductive approach. In the deductive approach, a theory and hypothesis are developed before design a research strategy to test the hypothesis, and then is subjected to a rigorous test. On the contrary, in the inductive approach, the data is collected first and then a theory is developed as a result of the data analysis.

      The deductive approach is mainly used in scientific studies using quantitative data. The first main characteristic of the approach is that there is a search to explain casual relationships between variables, such as the response of the market to new announcements. A second characteristic are the controls to allow the testing of the hypotheses, ensuring that changes in the dependent variables studied are due to changes in the independent elements and not other external factors. Third, this approach uses a highly structured methodology to facilitate replication, important to ensure reliability. In addition, and in order to keep the scientific rigour, the researcher should be independent of the event studied. The fifth characteristic is that concepts need to be operationalised to enable facts to be measure quantitatively. Finally, the deductive approach tends to generalise, selecting samples of sufficient numerical size (Saunders et al, 2003).

      On the contrary, the inductive approach is more relevant for social studies using qualitative data, having as a main advantage that it avoids the tendency to construct a rigid methodology that does not permit alternative explanations as with the deductive method. In addition, researches using the inductive approach are particular concerned with the general context of the event for small samples of elements, establishing different views of phenomena. At the same time it is less concerned with generalise and the researcher is an active part of the research process.


    • This study uses secondary data about a sample of 49 companies that merged in the UK stock market between 1998 and 2001, and was researched in DataStream database. According to Saunders et al (2003), the advantages of using secondary data are:

      • Fewer resource requirements: the collection of secondary data is cheaper and less time consuming that primary data, and can be found quickly from reliable sources.

      • Unobtrusive: is quicker to obtain and of better quality than primary data.

      • Permanence of data: secondary data provide a source of data that is both permanent and available to be checked easily by others.

      • Other advantages: it provides comparative and contextual data, can result in unforeseen discoveries

      On the other hand, the main disadvantages of secondary data are that the information may be collected for a purpose that does not match the needs, so the data collected could be inappropriate to the research question. In addition, access to this information may be difficult or costly: market research reports, such as Merger & Acquisitions Report, may cost hundreds of pounds. Finally, there is not a real control over data quality.

      The methodology used in the study is the Event Studies Methodology, which according to Strong (1992), is an empirical investigation that measures the relationship between security prices and economic events, being the announcement of a takeover the economic event of the present study. As Firth (1977) explained, this impact is measured studying the difference between the actual variation in the price and the change in price that would have occurred without the event. To know this last figure the Market Model is used as suggested by Firth (1977). That approach follows the structure adopted in previous studies, such as Strong (1992) or Fama (1991).


    • The main limitation of event studies methodology is the data problems, particularly: (i) Noise in announcement effects (ii) Cross-sectional correlation. Information is often cross-sectional correlated due to macroeconomic or industry influences on firms' decisions to announce events (Prabhala 1997). Hence, an alternative method of event study is proposed in the literature: conditional event studies. The traditional approach uses only data on firms that announced event, whereas this method uses information about non-event firms, firms that were partially anticipated to announce but chose not to announce the event in question. Non-event information can be used to estimate the conditional model with both the event and non-event data. Thus, when non-event data are available conditional methods are more powerful compared to traditional methods. In most practical situations though, non-event date cannot be obtained.

      Another important issue when defining the event study is the use of daily versus monthly data. Morse (1984) analyses factors affecting the power of statistical tests to explore the effect of information on security returns based on return data over different units of time. He takes in consideration the relevant aspects of the information event: (i) the existence of confounding information events during the same period as the information event of interest; (ii) uncertainty about the magnitude of the effect of the information event on security returns; and (iii) uncertainty about the date of the information release. He concludes, after compare his results with previous literature, that only the uncertainty about the announcement date of information could possibly favour the use of monthly instead of daily data. Other characteristics of the announcement and problems with the return-generating model favour the use of daily return data. In addition, Fama (1991) argues that daily data can attenuate or eliminate the joint-hypothesis problem, that market efficiency must be tested jointly with an asset-pricing model.


    • The event study methodology needs benchmark expected returns to measure abnormal returns. Morse (1984) analyses the choice of the proper return-generating model with respect to three problems: (i) errors in measuring individual firm returns and market returns, (ii) structural changes in the model's parameters, and (iii) misspecification of the model.

      Strong (1992) reviews in depth the different procedures for modelling abnormal returns. He identifies five models of benchmarks for the expected return: (a) mean adjusted returns, (b) market adjusted returns, (c) capital asset pricing model, (d) control portfolio and (e) market model.

      The Market Model has been the most popular benchmark for event studies, because it provides data with smaller variances of abnormal returns (relative to other methods), creating a more powerful statistical test, and because it produces smaller correlation across security abnormal returns giving closer conformity to standard statistical tests (Beaver, 1981). Because of this supposed superiority, the Market Model is adopted in this research as the method to evaluate the abnormal returns due to the new information available in the market.


    • This research study uses a sample of 49 companies that have merged or being acquired within the period 1998-2001 in the UK stock market. To select the companies used as a sample, a research in the financial newspapers and relevant financial websites was taken, focussing especially in The Financial Times (FT) articles due to its proved veracity and reliability. The exact date of the official merger announcement was obtained from FT articles and cross checked in the financial website citytext.com to offer a precise view of the market response to the new information. For many purposes the simplification of choosing an event as the FT announcement date or the firm's formal announcement date is satisfactory. However, for many events such as takeovers is difficult to specify a single event day, because inferences about insider trading or leakage require careful consideration of these issues.

      Companies from different sectors are chosen to eliminate any bias or trend which might exist with any particular sector. The criterion to choose the companies is that both companies must be listed in the LSE, with information about the share price available on DataStream for the event window and estimation period. With that restriction, a sample of 36 bidders and 13 target companies was collected. To assess the response of the UK stock market to the merger announcement, the performance of the companies during the merger announcement period is assessed using the external measure of value creation, i.e. Total Standard Abnormal Return (TSAR). The reason for employing TSAR rather than accounting data is to eliminate the distortions and manipulations that could be found due to the use of different accounting methods and principles of creative accounting. The TSAR is preferred to earning per share (EPS) as valuation yardstick because EPS is subject to the same manipulation problems that the accounting data.

      The data collected for this study focus in a window event of sixty one days [t= -30 to t= +30] where t= 0 is the date of the merger announcement, forming the so-called test period. The returns of the test period for both the companies and the market are contrasted with an estimation period of one year prior the event window. The information is grouped in general sample, target companies and bidder companies in order to have a wider understanding of the respond of the stock market, and daily data is used in order to have a deeper approach to the response of the stock market.

      First, the daily return is calculated for both each company and the market for the event window and the estimation period, using the FTSE 100 index as benchmark of the market returns. Second, the estimates of the intercept and slope coefficients of each company are calculated from a time series regression using data on the daily change in the returns for the company and the FTSE 100 from the estimation period.

      Following the methodology used by Strong (1982), each of the sample securities daily rates of return were calculated as:

      Rjt = ln(Pjt+1/Pjt)

      where Pjt is the closing price for the security j on the day t. Then abnormal returns were calculated, assuming that returns are generated according to the formula of abnormal returns:

      jt =j + h mt + jt

      where j and h are intercept and the slope respectively of the linear relationship between the return of stock j and the returns of the general market, and jt is the independent disturbance term in period t. The effect of the announcement is meant to be fully captured in the unsystematic component jt, named the Abnormal Return, which involves regressing share price return against industry or market average returns. Both j and h must be estimated here. To minimize bias in these estimations they were estimated over the first 250 trading days of the study, thus excluding the 30 days prior to the announcement date, resulting in a predicted abnormal return of:

      jt= Rj t -( j + h mt)

      That allows us to standardize the AR by the calculated standard deviation of the risk, obtaining the Standardized Abnormal Returns (SAR) for each firm and the Total Standardized Abnormal returns (TSAR) for each date of the event window. This test procedure is based on the market model and reflects that when the parameters of the market model are estimated from observations outside the test period, abnormal returns are prediction errors rather than true residuals and should therefore be standardised.

      The SAR is calculated as


      Then, the Z-statistic and the p-value is used determine if the TSAR results are significant for each day in the event window. Finally the Cumulative TSAR and its Z-statistic is calculated to test the leakage of the merger announcement in the days prior to the public announcement.


      This dissertation follows the same approach that Jensen and Ruback (1983) in their extensive review of previous papers, analysing the weighted abnormal return for the results using different event periods. In addition to the event window of sixty days around the announcement date, four sub periods were studied. The two first are the subdivision of thirty days before and after the official public announcement. The other two sub periods study the reaction of the market closer to the event date, with a window of 21 and 2 days. The smaller looks at the announcement date and one day before to analyse the first response of the market to determine if it is efficient or not.

      To have a deeper view of the possible efficient response of the market the sample was divided in target and bidder companies and total sample. The cumulative average abnormal return (CAAR) and its standardized version were calculated for all of them. In the absence of abnormal performance, the expected value of the AAR and CAAR are equal to zero, and standardized test statistics are constructed to assess the statistical significance of stock market abnormal performance. Each abnormal return is divided by the square root of its forecast variance to form a standardized abnormal return SARit = ARit/.

      Before doing the analysis, we have to take in consideration that there is evidence that bids follow positive movements in the acquirer's stock price, with the danger that starting the measurement period arbitrarily early will bias the results. There is little consensus on when to start measuring announcement period returns, as evidenced by the great variety of practice in published work and comment, and this dissertation take the first official announcement made public in the Financial Time by the firms.


    • Most of the literature on the market effects immediately surrounding the takeover comes to the same conclusion: shareholders of target firms invariably receive large premiums (on average between 20-30%) relative to the pre-announcement share price. Additionally, Bradley et al (1988) find that target firm stockholders realize significant positive abnormal returns upon the announcement of a takeover offer even if the takeover does not go through. They conclude that these gains are primarily due to stock market anticipation of a future successful acquisition bid for the target. However, targets that defeat a hostile takeover bid ultimately see their stock value return to approximately the pre-takeover level if no takeover occurs.

      Other stock market studies analyse the different variables that affect the stock market response, finding for example that lower returns tend to be associated with negotiated mergers and higher returns with tender offer takeovers. Or that the returns forthcoming from transactions that are paid for in cash are systematically higher than those from transactions that involve stock swaps (Han et al, 1998). For example, Jarrell and Poulsen (1989) examine 663 successful tender offers from 1962 through 1985 and find that takeover premiums averaged 19% in the 1960s, 35% in the 1970s, and 30% in the first half of the 1980s. Similarly, Andrade et al (2001) report remarkably stable target firm returns of 23% to 25% for completed mergers spanning decades in the 1973-1998 period.

      The findings of this dissertation are in line with those conclusions. For the sample of target companies, studying an event window period of thirty days before and after the announcement date, the cumulative average abnormal return (CAAR) for the target companies is 27.28%, with an average daily return of 0.45% and p-value= 0.45%. To have a deeper view of the response of the market, four different sub periods where studied. The first one is the thirty days before through the first public announcement, where the target firms gained a positive CAAR of 16.27% with an average of 0.52% per day, being the 59.3% of the CAAR for the whole event window.

      Event Window


      Daily CAAR










      [-10,+ 10]






      In the study by Malatesta (1983) with a sample of eighty-three successful bids during 1969-1974, the findings are very are similar. He finds returns of 16.8%, giving as explanation a possible leakage of information prior to the official announcement of the merger. In addition, Jensen and Ruback (1983) find a positive CAAR of 15.9% for this one-month announcement effects. Keown and Pinkerton (1981) argue that the fact that half of the price adjustment occurs prior to the announcement date confirm the existence of insider trading, but Jensen and Ruback believe that this abnormal returns may be the unbiased responses to public information that increases the probability of a takeover.

      It is difficult to identify whether this gains prior the merger date are due to the event or just persistently good performance prior the merger. DeBondt and Thompson (1992) proved that the typical merger target is not characterized by poor performance prior the merger and it does not underperform the market, its industry or companies of comparable size. They conclude that perhaps market overreaction rather than poor management is the reason for the takeover or that bidders are superior security analysts who somehow know when a target firm is undervalued.

      A possible explanation is that bidders might have unknown information, that could induce rumours when it starts to become more public. In the Figure 1, it can be seen three different sequences of abnormal returns prior the announcement, and Halpern (1983) suggests that these sequences reflect the resolution of uncertainty concerning the merger and not the underlying economic impact of the merger.

      The second sub period analysed is the thirty days after the announcement date, where a positive CAAR of 11.01% with and daily average of 0.37% were found. Most of the returns of that period arise in the 10 days after his announcement, with some fluctuations in the returns of the post-announcement period. These fluctuations might be produced by the release of new information about the conditions of the merger. As has been explained previously, the form of payment, the motives for the bid and other characteristics of the offer actively influence on the response of the market. For periods after the announcement date, the abnormal returns reflect that the terms of the merger may be revised as new information becomes available. That could mean that the market is not perfect efficient about all the bid information, leaking part of the information about the possible bidders but without confirm the way of payment or the kind of bid (hostile or friendly).

      Another sample period studied in the literature is ten days before through ten days after the offer announcement, used by Bradley et al (1983) and Dodd (1980). Jensen and Ruback (1983) found for their weighted sample a positive CAAR of 20.15%, against return of 33.96% found by Dodd (1980). The findings of an average CAAR of 16.99% of this dissertation are similar to these previous results. We can see in the Figure 2 that 62.3% of the CAAR produced by the announcement is gained in this event period.

      The last event period studied is the two-day period of the day before the announcement and the announcement date itself. Using this window, Dodd (1980) find a positive return of 13.41% for target companies of successful bids during the period 1962-1976, meanwhile Asquith (1983) found a smaller return of 6.20% for the same kind of companies in 1962-1976. The average calculated by Jensen and Ruback (1983) is 7.72%, but the abnormal returns found in this dissertation are even smaller, being 2.57% for the same event period.

      To analyse the statistical significance of the findings, the standardized CAAR and their appropriate p-value were calculated. For the sample of target companies, the finding was a p-value of 0.48 that confirms that the market has a statistically significant response to the new information of a merger. That significance was for both periods before and after the announcement date.

      The combined study of the AAR and the CAAR shows that share prices of target begin to rise prior to the public announcement to reflect the takeover premium offered by the bidder. In the case of the sample studied, three different trends prior the announcement produce a cumulated growing of 16% for the shares value. This variation produced prior the announcement is followed by a continued trend up for twelve days after the announcement, while under the null hypothesis of no announcement effect of the EMH, the CAARs should fluctuate around zero.

      However, general findings of previous studies are that an unanticipated or partially anticipated announcement causes significant abnormal returns after the official announcement. These results are consistent with the semi-strong efficiency, and a possible explanation for these returns could be that further additional information about the bid is given the days after the initial announcement, clarifying all the conditions of the offer.


    • As commented in the previous Literature Review, whether the stockholders of the bidding firms gain is much less certain, and the results have to be analysed more carefully. Most studies covering the 1960s and 1970s find that acquiring firms' stockholders receive small or zero abnormal returns from mergers, and some find negative abnormal returns. Jarrell and Poulsen (1989) identify a decline in the returns to successful bidders in tender offers. They find statistically significant positive abnormal returns of 5.0% to acquiring firms in the 1960s and of 2.2% in the 1970s, but statistically insignificant negative abnormal returns to acquiring firms in the 1980s. The small or negative returns to acquirers in the 1980s have been confirmed in several studies using different measures. For instance, Han et al (1998) use two valuation ratios, earnings-price ratio and book-to-market ratio, to measure the overpayment in takeovers and the consequent negative return for bidding companies.

      Event Window


      Daily CAAR










      [-10,+ 10]






      For the whole event period of thirty days before through thirty days after the first public official announcement a CAAR of -2.08% was found in the bidders sample of this dissertation, with a negative daily average of -0.03%. The previous studies by Dodd and Ruback (1977) and Bradley (1980) use the same event window but differentiating between successful and unsuccessful mergers. Both studies found positive returns for successful mergers and negative returns around 2% for the unsuccessful process.

      During the first sub period studied of thirty days before and the day of the announcement, the bidding companies suffered a negative return of - 3.17%, and these were statistically significant. The percentage of securities showing negative residuals in this period was 53%, with an average daily average SAR of -0.10%. These findings differ from previous papers reviewed by Jensen and Ruback (1983) that find a positive return for bidding firms in successful and unsuccessful mergers and tender offers. On the other hand, Firth (1980) finds statistically significant negative residuals for 80% of his sample of bidding firms on a takeover process. He concludes that the negative results indicate that the stock market regards takeovers as being very expensive for the acquiring firm, with the benefits from the takeover more than outweighed by the costs. Hence, the negative returns found in this dissertation might be caused by a higher presence of bidding firms of a takeover process in the sample studied.

      The next sub period analysed is the thirty days after the public announcement of the merger, with a positive CAAR of 1.10%, and in this case the p-value for the bidding companies show that the positive results are statistically no significant different to zero. This positive return is very similar to the +1.07% found in the period ten days before through ten days after the event date. Most of that positive return for the bidding companies occurs in the 10 days before the takeover announcement, declining in value during five days after the announcement.

      During the 2-day sub period of the day before and day of the public announcement the return was slightly negative (-0.25%) and statistically not significant. Ruback (1983) finds the same effect for a sample of 134 acquiring firms indicating an intention to effect takeover, whereas for companies whose stated purpose was not a takeover the effect was positive. On the contrary, Asquith (1983) finds a small but insignificant positive excess returns at the press day with a no consistent pattern.

      As Halpern (1983) points out, the results of merger studies for acquiring firms must be interpreted carefully. First, in many mergers the acquiring firm already had some share ownership in the target firm, so any gains from the merger may have already been reflected in the acquirer's stock price when the merger was announced. Second, if the target firm is very small relative to the bidder, the impact on the abnormal return of the latter of a profitable merger may be swamped by random noise over the measurement period.

      The previous literature concerning bidding firms of mergers and acquisitions is unanimous in their findings that bidding companies break even or lose a small amount on the announcement of acquisitions. Andrade et al (2001), in a large sample analysis of acquisitions spanning the 1973-98 period, report that bidder abnormal returns average -0.7%, while an abnormal return of -2.08% is found for the sample studied in this dissertation. This negative return is for the whole event window of thirty days before and after the announcement day. However, even though a positive CAAR of 1.10% was found for the bidding companies for the sub period of thirty days after the announcement, the market does not fully anticipate the poor performance at announcement and instead responds slowly to this over a long run period following acquisition (Agrawal et al, 1992). On the other hand, Bradley, Desai and Kim (1988) argue that the positive abnormal returns upon the announcement of a takeover offer even if the takeover does not go through are primarily due to stock market anticipation of a future successful acquisition bid for the target.

      These results are consistent with previous summaries of the literature by Jarrell, Brickley and Netter (1988) and Jensen and Ruback (1983). These researches also indicate that returns to bidders are significantly lower in stock acquisitions and in cases where larger targets are acquired. The most extended explanation for zero to negative bidder returns is competition. Bidders negotiating in a competitive market will be forced to pay the expected value of non-unique gains to the target.

      Other explanations for the negative post-acquisition negative returns argue that the returns do not reflect the performance of the takeover but instead reflect methodological problems in the measurement of long run returns, “chance” events associated with takeover, and overvaluation of the acquiring firm at the time of acquisition. And a final explanation for the negative returns is that acquirers time their acquisitions when their stock is overvalued. Consequently, following the acquisition there is devaluation in the acquirer's share price that has nothing to do with the effect of acquisition and would have happen even in the absence of merger. This explanation receives some support from the robust finding that bids using equity as the method of payment result in significantly negative returns whereas cash bids do not. Fama (1998) argues that equity mergers may simply be part of the seasoned equity-offering anomaly, whereby firms that issue equity in general experience negative returns.


    • In the total sample of 49 firms, 53% of them earn a positive abnormal return and 47% suffer losses. The abnormal return for the total sample is positive and statistically not significant (p-value= 0.29). During the total event window of 60 days around the announcement, the combined sample of bidding and target companies earned a CAAR of 5.79%. Most of these gaining are created in the sub period of ten days before through ten days after the announcement date, when the companies earned a positive return of 4.95% (p-value= 0.40). In the last twenty days studied, the returns stabilized with a positive significant CAAR of 0.95%.

      Event Window


      Daily CAAR










      [-10,+ 10]






      The effect of merger and acquisitions in the final value of the conglomerate is studied by Malatesta (1983) and Bradlesy, Desai and Kim (1982), who conclude that since targets gain and bidder have a small lose, takeovers create value. However, since bidding firms are generally larger than target firms, the sum of the returns to bidding and target firms do not measure the real gains to the merging firm. Several studies have attempted to measure aggregate dollar gains directly to get a better conclusion.

      For example, using average dollar gains, Jensen and Ruback (1983) conclude that the dollar value of small percentage losses for bidders exceed the dollar value of large gains to targets. To study this effect, they analysed previous papers to conclude that changes in corporate control increase the combined market value of assets of the bidding and target firms. In another paper, Bradley et al (1982) report positive but statistically no significant total dollar gains to bidders and targets, whereas the average percentage change in total value for the combination of target and bidder firm is a significant 10.5%.


      The main aim of this research has been to study the response of the stock market in the UK to new information about merger and acquisitions. Three main objectives were pursued and these were the following: to measure the response of the stock market to the takeover announcements studying the abnormal returns of the firms, to evaluate the existence of insider trading in the stock market and investigate the consistency of the Efficient Market Hypothesis. To achieve these objectives we conducted a desk research based on secondary data from The Financial Times and DataStream.


    • To attain our main aim, in chapter 2 we introduce the main objectives and the topic with a general view of previous conclusions. In chapter 3, we review the previous literature, starting with the analysis of the main framework of this dissertation: the Efficient Market Hypothesis and related ideas of market anomalies and random walk. We revise as well previous papers about insider trading, event studies and specially Merger and Acquisitions, studying their motives and results. In chapter 4 we comment the methodology used to collect and prepare the sample necessary for the analysis done in the chapter 5, were we can see the abnormal returns of target and bidding firms.


    • The empirical literature contains numerous attempts to test the driving motives for mergers, such as market power or efficiencies, and the response of the market, but differences in methodology have given diverging results. In these studies different event periods are used in order to have a close view of the efficiency of the market. According to the Efficient Market Hypothesis, if the market is efficient, unanticipated events have an immediate impact on stock prices.

      The results of this dissertation show a progressive adjustment to the new information about Merger and Acquisitions in a period of ten days before through ten days after the announcement date for the sample of target companies. These companies earn a significant CAAR of 27.28% during the event window of thirty days before and after the announcement date. The fact that more than half of this return is created prior the announcement date might be because of rumours or of insider trading according to Keown and Pinkerton (1981) or unbiased responses to public information that increases the probability of a takeover according to Jensen and Ruback (1983). In addition, 62.3% of the CAAR is generated in the period of twenty days around the announcement date. The last twenty trading days of the event window, the cumulative average abnormal return remains steady around 26%, showing that the market has incorporated all the relevant information about the M&A to the share price.

      On the other hand, the effect of the M&A announcement on the wealth of the bidding shareholders is small: at the announcement, there is a statistically not significant abnormal return of -0.25%, and a CAAR of -2.08% for the total event window of sixty days around the announcement date. In addition, the CAAR of the bidding companies have a uniform evolution around -2.8% along the event window.

      These findings are in line with the ones reported by Han et al (1998), and confirm the negative evolution of the bidding companies' returns along the decades, from statistically significant positive abnormal returns of 5.0% in the 1960s to small or negative insignificant returns in the 1980s and 1990s. Firth (1980) argues that the negative results indicate that the stock market regards takeovers as being very expensive for the acquiring firm, with the benefits from the takeover more than outweighed by the costs. Hence, the negative returns found in this dissertation may be caused by a higher presence of bidding firms of a takeover process in the sample studied.

      For periods after the announcement date, the abnormal returns reflect that the terms of the merger may be revised as new information becomes available. That could mean that the market is not perfect efficient about all the bid information, leaking part of the information about the possible bidders but without confirm the way of payment, the kind of bid (hostile or friendly) or any other detail of the merger.

      The main limitation of this dissertation is in the method of regressing the cumulative abnormal returns of target and bidding firms. Several previous papers analyse different variables such as the means of payment, the status of the bid, the location of the target and bidder firm or the target and bidder characteristics. That offers a more precise view of the response of the market and gives a clearer explanation of the final effect of the announcement. Hence, a deeper and more complex analysis would require more information about the M&A used as sample for study.

      Finally, this dissertation have similar findings that previous studies, concluding that the effect of announcement of M&A in the UK market during the period 1998-2001 is a significant positive abnormal return for target companies and a small negative return for bidding companies. In addition, the market could be defined as efficient in the semi-strong sense but with some evidences of insider trading prior the announcement.


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