Spillover Effect of M&A Announcements on Acquiring Firms’ Rivals: Evidence from India

Abstract

Motivated by the paucity of empirical studies examining the impact of mergers and acquisition (M&A) announcements on the acquiring firms' rivals, we made an attempt to uncover the spillover effect of M&A announcements on the stock market reaction of acquiring firms' rivals. Using a sample of 97 M&A announcements during the period from April 2014 to March 2016 and 179 rivals of acquirers, we found that acquiring firms and acquiring firms' rivals react positively to the announcement of M&As. The results of the disaggregated analysis suggest that horizontal M&As do not result in a significant positive reaction of acquiring firms' rivals. Therefore, this study does not support the collusion theory. We also found negative (insignificant) stock market reaction of acquiring firms' rivals upon the announcement of cross-border M&As. However, overall results show that acquiring firms' rivals react positively to the announcement of M&As. This significant positive reaction of acquiring firms' rivals goes in line with signalling theory. Thus, we argue that M&A announcements signal information regarding the growth potential of rivals, which results in positive stock market reaction of acquiring firms' rivals upon the M&A announcements.

COVID and World Stock Markets: A Comprehensive Discussion

“…The historical performance of stock markets has been documented in the previous literature regarding influenza and other major epidemics. Similarly, the scholars have examined the influences of significant events on the stock markets, i.e., Severe Acute Respiratory Syndrome (SARS), (Chen et al, 2018 ), natural disasters (Caporale et al, 2019 ), corporate events (Ranju and Mallikarjunappa, 2019 ), public news, and political events (Bash and Alsaifi, 2019 ). Some other studies have also demonstrated that SARS in 2003 weakened the Taiwanese economy (Chen et al, 2007 ) and regional stock markets (Chen et al, 2018 ).…”

Investor Response to Financial Performance and Business Prospect

“…Investors consider corporate actions taken by the company in making decisions. According to research by [102], most investors reacted positively to the announcements issued [103], [104], [105], [102]. Corporate action taken by the company is a signal for investors.…”

“…The company's abnormal returns increase due to M&As [113]. Several previous studies have proven that investors respond positively to M&A [105], [114], [115], [116]. M&A provides benefits to shareholders, including the target company and the bidding company [107], [108].…”

Effects of Cross-border Merger and Acquisition on the Operational Risk of US and Canadian Companies

“…Mergers and acquisitions have been pursued by companies as an important growth strategy (Ranju & Mallikarjunappa, 2019). Domestic and cross-border M&A happen for a common reason, gaining synergy (Erel et al, 2012).…”