Merger announcements and market efficiency: do markets predict synergetic gains from mergers properly?

Abstract

This paper examines whether market evaluates merger announcements in a reasonable way based on their effect on fundamental value using a sample of 37 mergers from U.S. industries completed within 1992-1997. For this purpose, the postmerger performance measures were regressed by abnormal returns at the announcement period. The research findings provide partial support to market efficiency hypothesis. Full sample analysis shows that bidder abnormal stock return at the merger announcement is a good predictor of the postmerger cash flow changes, whereas subsample analyses yield varying results that cast doubt to market efficiency. The variation of the findings across subsamples suggests that the market sticks to its dynamic clichés in the evaluating merger’s future success in the environment of asymmetric information and these clichés sometimes incorporate misleading information content.