Post-Merger Returns in Frontier Markets, or How We Learned to Stop Worrying and Love the Acquirers

Abstract

Abstract. This study presents the results from a comprehensive out-of-sample test of long-run returns following mergers and acquisitions (M&As). Using a unique sample from 23 frontier markets of almost 800 transactions conducted during the years 1992 to 2016, we implement both crosssectional tests and time-series examinations based on a calendar-time portfolio approach. Contrary to evidence from developed markets, the M&As in these frontier markets do not lead to abnormal underperformance of acquirers, regardless of whether they paid for the acquisition with cash or stock. The results are robust to many considerations, including subsample and subperiod analysis, alternative formation periods, different portfolio construction approaches.

Market valuation and acquiring firm performance in the short and long term: Out-of-sample evidence from Spain

“…These researchers propose in the context of behavioural theory that the higher premium is a result of the overvaluation of the stock in comparison with the neoclassical theory where the higher premium comes from the competition from several bidders that have experienced the positive technological shock to the industry. Conversely, Zaremba et al (2018) suggest that results are independent from the form of payment. 2 Chuang (2018) suggests that transactions involved in diversifying acquisitions obtain lower post-announcement returns.…”

“…On the one hand, the irrational investors approach assumes that corporate decisions, as mergers and acquisitions, are the response of fully rational managers to securities market mispricing due to a misestimation of the future gains from acquisitions (Loughran and Vijh, 1997; Rau and Vermaelen, 1998; Zaremba et al, 2018). On the other, the irrational managers’ approach assumes that managers have behaviour biases, as hubris and overconfidence or managerial entrenchment, among others (Roll, 1986; Andrade et al, 2001; Moeller et al, 2004).…”

“… 2. Zaremba et al (2018) claim that frontier markets are typically less recognized by investors, less liquid, less efficient, and have worse corporate governance (higher agency cost) than mature markets. …”

Effect of Acquisition Type on Industrial Development in Emerging Markets: Evidence From China

“…Given their vitally strategic importance for the growth of firms and industries, acquisitions have increasingly become a widespread research theme at various levels and across fields particularly in emerging economies (Deng, 2013;Gaur et al, 2013;Park, 2003;Zaremba et al, 2018). As two distinct types of acquisitions, intra-industry acquisitions are conducted in the same industry, whereas cross-industry acquisitions occur in different industries (Cai & Tian, 2019;Lin et al, 2018;Wu & Deng, 2020).…”

“…Through intra-industry acquisitions, firms can rapidly acquire complementary resources and capabilities, achieve economy of scale, and lead to scope economy effects (Deng & Yang, 2015;Gaur et al, 2013). Through crossindustry acquisitions, companies can obtain more market entry opportunities, get into a new business more quickly, share risks, and get potential synergies (Lin & Chou, 2016;Zaremba et al, 2018). With a rapid economic growth in China, corporate acquisitions of Chinese firms show obvious characteristics of high frequency, large scale, and massive quantity domestically and internationally (Cai & Tian, 2019;Deng & Yang, 2015).…”