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

Abstract

We investigate bidder’s short- and long-term performance in periods of high and low valuation market in response to announcements of acquisitions carried out by Spanish listed firms over the period 1991–2016. We find that acquirers of unlisted targets fully react at the announcement date in high valuation periods, meanwhile the underreaction of listed target bidders at the moment of the announcement in low valuation markets is the result of return continuations. In addition, we find that the market reaction do not depend on recent merger history. Therefore, we provide evidence that bidder reaction to acquisitions is not consistent with the predictions of market sentiment (optimism) after controlling for the listing status of the target firm, not supporting, for a thinner market as the Spanish one, the evidence observed in US and UK markets. JEL CLASSIFICATION G14; G34; L33; D81

The Impact of Merger and Acquisition on Investor Reaction and Acquirer Firm’s Financial Performance in Technology Firms

“…Previous research has also tested the effect of merger activities on a company's financial performance [4] [5][6] [11] [12][13] [14].The findings show that there is a positive effect on M&A activity announcement on a company's performance [2] [12] Nevertheless, these results are not solid as many other researchers have found that M&A activities negatively affect financial performance [4] [11] [15] [16] [17]Meanwhile, few studies found no effect between them [18] [14].…”

“…Investor reaction is a form of reaction given by the investor to an action taken by the company [15].If the information provided by the company has guaranteed quality, then the investor's reaction to the information will be faster. Generally, the measurement of investor reaction uses Abnormal Returns (AR), which is the difference between the actual returns and the expected returns of the stock.…”

“…Meanwhile, several researchers found a negative effect [4][15] [18][19] [29]. Researchers found that the company's ROA decreased after conducting M&A [15][19] [29]. The company's operating performance also decreased within three years after conducting M&A [18].…”

“…Several researchers have conducted the research using ROA as the measurement and found that by conducting M&A, there will be a negative effect on the company where the acquirer firm's financial performance may experience a decline [15][19] [29]. Thus, this study will focus on the profitability ratio, which is the company's ROA, to determine the firm's financial performance.…”

“…Research conducted in several countries such as China, the US, UK, and Hong Kong showed that M&A was responded positively by investors [26] [22] Reference [23] [18] [16] [7][6] found positive results that focus on transactions in several countries in Asia, such as Hong Kong, China, Taiwan, Singapore, South Korea, and Japan. Meanwhile, research that found negative investor reactions to mergers and acquisitions focused on M&A transactions in Pakistan [27] Spain [15] and Turkey [11].Therefore, from previous research, it can be concluded that transactions conducted in developed countries receive a positive reaction from investors.…”