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Mergers & Acquisitions in the Pharmaceutical Industry


Thomas Grauer Nielsen & Jimmy Thien Phu Nguyen
Advisor: Damiana Rigamonti

May 2016
Department of Economics and Business Economics
Aarhus University

(Characters: 133.128)

* Subject area: M&A. Education: BSc and BScB

Student ID: 201305672 | Email: thomasgnielsen@hotmail.com

Student ID: 201305954 | Email: j-phu@hotmail.com


Abnormal returns in stock markets are subject to many studies. In particular, the ability
to test on specific industries has received much attention. The number of M&As have
increased in the last decade, which also includes M&A deals in the pharmaceutical
(pharma) industry, where companies acquire to reach distinctive capabilities to survive
in the dynamic and complex business environment. Companies also utilize M&A to in-
crease their ability to create shareholder wealth, though this has shown partially not to
be correct. Previous studies conducted, have found rather different results on M&A

This thesis examines the impact on shareholder wealth in pharmaceutical M&As,

more precise the study tests the abnormal stock return around the announcement day.
Furthermore, the study is conducted with a data sample consisting of 250 deals in the
pharma industry between 2000 and 2014. The data used in this thesis is obtained manu-
ally from Zephyr starting with 367 deals, where the excess 117 deals are excluded man-
ually due to lack of information such as missing ISIN number or overlapping events etc.

Four main characteristics are defined in order to examine cumulative abnormal re-
turn (CAR). The thesis distinguishes between cross-border and domestic, method of
payment, deal value, and geography. The geography is defined as the location of the
bidder in either EU or US. Methodologically the event study is based on abnormal stock
returns in a three-day event window.

Historically previous studies have found evidence for both positive but also nega-
tive shareholder wealth on M&A deals. Also, some deal characteristics have more signif-
icant results than others. If the deals are made cross-border, the abnormal return is high-
er compared to domestic deals. After sorting for deal characteristics, the deal values are
tested and discovered to have no significant result. Hence, there is no impact on the ac-
quirers shareholder wealth. Eventually, these findings are associated with the previous
empirical studies.

Implementing a cross-sectional regression analysis, using comparative metrics, it is

possible to further investigate all characteristics and compare them with each other.
Moreover, this thesis examines the characteristics and evaluates the impacts in order to
explorer whether cross-border, method of payment, deal value or geography can ex-
plain CAR. According to the efficient market hypothesis (EMH), the results disprove the
theory stating that the market is efficient in semi-strong form. Hence, the prices fully
reflect all available information and therefore it is not possible to earn an abnormal re-
turn because investors change investment strategy immediately after receiving new rel-
evant information.

After analysing the data, it is discovered that the data deviates from a normal dis-
tribution. Thus, test statistics are conducted to test for the M&A characteristics and in-
clude seven parametric tests. To account for robustness; marginal significance, non-
parametric tests, and robustness of asset pricing models are considered.

Conclusively the event study shows partial significant result regarding the acquire
companys ability to create a positive return for their shareholders. The findings from
the regression analysis are rather complex due to the non-normality of the data. Never-
theless, the results show that two of the characteristics are significant, cross-border and
share-based payment. With a 5% significance level, cross-border deals have shown a
positive effect for bidders shareholders, whereas with a 1% significance level, share-
based payment have a negative effect. Hence, there seems to be evidence for limited
conclusive event-study results.

Thus, the analysis concludes that the extent to which M&A deals can create share-
holder wealth from announcements is limited and open for further research.

Keywords: Event study, Pharmaceutical industry, M&As, Shareholder wealth, CAR,

Cross-border, Method of payment, Deal value, EU, US, Efficient Market Hypothesis.
Table of Contents

1. INTRODUCTION .................................................................................................................................... 1
1.1 MOTIVATION AND PROBLEM STATEMENT ..................................................................................... 2
1.2 DELIMITATION ................................................................................................................................. 3
1.3 DATA SOURCES ................................................................................................................................ 4
1.4 THESIS STRUCTURE .......................................................................................................................... 4

2. THEORY AND LITERATURE REVIEW .............................................................................................. 5

2.1 THE ROLE OF PHARMACEUTICAL M&A ............................................................................................. 5
2.2 THEORY OVERVIEW.............................................................................................................................. 6
2.2.1 Behavioural theory......................................................................................................................... 6
2.2.2 Neoclassical theory ........................................................................................................................ 8
2.3 REVIEW OF RELEVANT EMPIRICAL EVIDENCE .................................................................................... 9
2.3.1 Underlying strategic motives in Health Care M&A .................................................................. 10
2.3.2 Cross-Border or domestic acquisitions ........................................................................................ 11
2.3.3 Method of payment ...................................................................................................................... 14
2.3.4 Deal Value ................................................................................................................................... 16
2.3.5 US or EU ..................................................................................................................................... 18
2.4 SUMMARY OF PREVIOUS STUDIES ...................................................................................................... 19

3. EVENT STUDY METHODOLOGY .................................................................................................... 19

3.1 INTRODUCTION TO THE EVENT STUDY METHODOLOGY ................................................................. 20
3.2 EFFICIENT MARKET HYPOTHESIS ...................................................................................................... 21
3.3 EVENT WINDOW, DATE AND ESTIMATION PERIOD .......................................................................... 22
3.4 ABNORMAL RETURN & CHOICE OF MODEL ..................................................................................... 23
3.5 PARAMETRIC AND NON-PARAMETRIC TESTS ................................................................................... 25
3.5.1 Parametric tests ........................................................................................................................... 26
3.5.2 Non-parametric tests ................................................................................................................... 27
3.6 CROSS-SECTIONAL REGRESSION ....................................................................................................... 29
3.7 THIN TRADING ................................................................................................................................... 31

4. SAMPLE DATA ..................................................................................................................................... 32

4.1 DATA SELECTION PROCESS................................................................................................................ 32
4.2 DESCRIPTIVE STATISTICS ................................................................................................................... 34
4.3 VALIDITY OF SOURCES ....................................................................................................................... 36
4.4 TESTING FOR NORMALITY ................................................................................................................. 36

5. EMPIRICAL FINDINGS ....................................................................................................................... 38

5.1 TESTS STATISTICS ............................................................................................................................... 38
5.1.1 Cross-Border versus Domestic .................................................................................................... 40
5.1.2 Method of payment ...................................................................................................................... 41
5.1.3 Deal Value ................................................................................................................................... 43
5.1.4 US or EU ..................................................................................................................................... 44
5.2 SUMMARY OF FINDINGS .................................................................................................................... 45
5.3 CROSS-SECTIONAL REGRESSION ANALYSIS ...................................................................................... 47

6. SUMMARY AND CONCLUSION ...................................................................................................... 50

7. CRITICAL DISCUSSION ...................................................................................................................... 53

REFERENCES............................................................................................................................................. 55
APPENDICES ............................................................................................................................................. 63

List of figures


FIGURE 3: ESTIMATION PERIOD AND EVENT WINDOW ............................................. 22

List of tables
TABLE 1: PREVIOUS STUDIES ................................................................................................ 19

TABLE 2: REGRESSION VARIABLES ..................................................................................... 29

TABLE 3: SAMPLE SELECTION .............................................................................................. 34

TABLE 4: DESCRIPTIVE STATISTICS..................................................................................... 35

TABLE 5: NORMALITY ............................................................................................................. 37

TABLE 6: TOTAL SAMPLE TEST STATISTICS ..................................................................... 39

TABLE 7: CROSS-BORDER SAMPLE TEST STATISTICS .................................................... 40

TABLE 8: DOMESTIC SAMPLE TEST STATISTICS.............................................................. 40

TABLE 9: CASH PAYMENT SAMPLE TEST STATISTICS .................................................. 41

TABLE 10: SHARE PAYMENT TEST STATISTICS ............................................................... 41

TABLE 11: MIXED PAYMENT TEST STATISTICS................................................................ 42

TABLE 12: DEAL VALUE 1 TEST STATISTICS ..................................................................... 43

TABLE 13: DEAL VALUE 2 TEST STATISTICS ..................................................................... 43

TABLE 14: DEAL VALUE 3 TEST STATISTICS ..................................................................... 43

TABLE 15: DEAL VALUE 4 TEST STATISTICS ..................................................................... 44

TABLE 16: US TEST STATISTICS ............................................................................................. 44

TABLE 17: EU TEST STATISTICS............................................................................................. 45

TABLE 18: SUMMARY OF FINDINGS ................................................................................... 46

TABLE 19: CORRELATION ...................................................................................................... 48


List of abbreviations
APT Arbitrage Pricing Theory

BMP Boehmer, Musumecia and Poulsen

CAPM Capital Asset Pricing Model

CAR Cumulative Abnormal Return

DV Deal Value

EMH Efficient Market Hypothesis

EU European Union

FDI Foreign Direct Investment

M&A Mergers and Acquisitions

MSCI Morgan Stanley Capital International

MV Market Value

NASDAQ National Association of Securities Dealers Automated Quotations

NPV Net Present Value

OLS Ordinary Least Squared

R&D Research & Development

UK United Kingdom

US United Stated

USD United States Dollar

WACC Weighted Average Cost of Capital

Note: Comma (,) is used as decimal separator and punctuation (.) as thousands separator.
1. Introduction
Mergers and acquisitions (M&As) are one of the most critical means, when companies
have to adapt to the dynamic business environment. Moreover it is the consolidation
between two companies, most likely with an adjustment in company control through
the change in ownership or a new entity. In time, this form of investment has become
important in the business development and is one of the most preferred strategies when
firms aim to expand and remain competitive. The core objective is to create shareholder
value (Bruner, 2004). M&As are often seen in the United States of America (USA) and
Europe, who holds the majority of the number of deals. Since the 19th century, global
M&As have progressively increased its yearly activity. The motives behind M&As can
differ but are usually caused due to macroeconomic factors, from technological changes
and regulatory issues, to management incentives. Nevertheless, M&As create opportuni-
ties for firms to enter new markets or increase market share. Furthermore, it enables
businesses to achieve their goals faster and often at lower costs. M&As are preferred
since it gives the opportunity to create synergies in line with improving efficiency.
Martynova and Renneboog (2009) explain that it generates increasing share prices at the
announcement. After the financial crises in 2008 M&As have had a relapse, and since
2009, it has recovered and hit a record point in 2014. Based on Mergermarket (2014)
global M&A activity in 2014 consisted of USD 3.230 billion.

M&As are a commonly researched topic with many empirical studies; two of them
is often the effect on shareholders wealth or the drivers of M&As. Implementing M&As
do not differ from other corporate decisions, when it comes to creating shareholder
wealth. The basis for any investment is an expectation that the return on investment ex-
ceeds what is invested. This phenomenon is universal and can be observed almost eve-
rywhere in everyday life. The shareholders consistently expect that any decisions made
by the management are directed to increase the value or else principal agency conflicts
will emerge. In literature relative return is referred as "abnormal return." Investors will
always try to create an abnormal return and thus "beat the market". Active trading strat-
egies with this property are examined in numerous studies. In line with this, specific
industries have had several studies' interest.

The pharma industry is the combination of biotechnology and drug industries. To-
gether they represent a high-tech industry due to the amount of R&D concentration and
the amount of investments firms put into R&D on total costs. Moreover, intangible as-
sets are seen to be the most valuable since it gives the company the potential to develop
and produce blockbusters. R&D and innovation are highly prioritized that it intensifies

acquisitions for target companies with high R&D activity. Especially foreign firms ac-
quire, to capture new innovative activities. The incentive is bigger for foreigners than
domestic acquires since, in theory, they are already part of these activities (Ruckman,

It is found interesting to conduct a study that can contribute to the existing empirical
literature. Is it profitable for the acquirers' shareholders to be involved in M&A transac-
tions? Or do other M&A characteristics improve the firm's ability to create shareholder
wealth? Or worse case, can the shareholder wealth get destroyed upon the announce-

1.1 Motivation and Problem statement

The pharma industry is diverse and led by the biggest drug producers in the world. The
industry differentiates with higher scientific knowledge than manufacturing know-how.
This is by far the most interesting aspect of the pharma industry. The firms invest in
many intangible assets without actually knowing whether or not it will succeed. Thus,
performance for pharma companies is measured in R&D. R&D covers the research as
well as the failures including. These aspects are financed through the sales of existing
products. R&D is often associated with the size of the company in line with a number of
sales. Pharma companies invest with different motives in order to meet their individual
goals, meaning that there are many characteristics in M&As in the pharma industry that
can be identified as determinants. Thus, there can be different patterns in the complex
pharma industry, which raises the question regarding or not there is a correlation be-
tween M&A characteristics and the way they invest in the pharma industry.

Several previous studies are made on M&As effect on the shareholder wealth
where few studies are pharma industry specified. Most industry-specific studies are
conducted on the financial sector. This thesis represents an analysis based on the litera-
ture on M&As and on different M&A characteristics. Additionally, the unique aspect
will be by measuring M&As in the pharma industry and to identify if there are any
trends. The analysis will be based on existing literature on M&A deals as well as the
pharma industry, regarding a quantitative analysis that will examine the M&As back-
ground in the pharma industry. To consider this, CAR will be tested during the an-
nouncement of the deal.

Since this industry is globally interdepended, companies engage intensively in
M&As, where it is implemented both as complements and substitutes to early stage re-
search. Finally, the potential abnormal returns to blockbuster drugs are significant.

Hence, if abnormal returns exist, this is a likely industry to discover them.

The research question that will be investigated is defined as:

RQ: Analysing M&As in the pharmaceutical industry: Can acquirers' shareholders expect a cu-
mulative abnormal return on M&As?

To get a conclusive and deeper understanding, four sub-questions are defined to

enhance the importance of the deal as well as the complexity. The sub-questions will be
answered in line with the research question:

SRQ 1: Do cross-border and domestic acquisitions create shareholder wealth in the pharma in-

SRQ 2: Do methods of payment have an impact on the shareholder wealth in the pharma indus-

SRQ 3: Does the deal value have an impact on the shareholder wealth in the pharma industry?

SRQ 4: Do acquiring companies located in EU or US create shareholder wealth in the pharma


1.2 Delimitation

Delimitation is necessary to make, due to the scope of the study. Most considerably this
study only focuses on the short-term wealth of shareholders. Also, only the acquirer's
shareholders influence return is assessed on deal announcement. This thesis builds upon
the assumption regarding efficient capital markets; the efficient market hypothesis
(EMH) will be explained in section 3.2. Hence, the particular gain for each deal and the
long-term wealth of shareholders will not be evaluated or analysed. Since the term
M&As contain both mergers and acquisitions, this thesis will only analyse acquisitions,
thus signifying the controlling share, as an M&A deal. Moreover, this thesis only inves-
tigates the pharma industry and excludes all other industries since it is not appropriate.
Tests on specific industry related variables such as the amount of R&D will not be cov-
ered. Hence, strategic motives will not be tested on each specific deal, though a brief ex-
planation is presented.

Only completed and announced deals in the period from 1/1/2000 to 31/12/2014
is implemented. Though deals that are announced in 1999 and completed in the begin-
ning of 2000 are not excluded in the sample.

Finally, a limit of 300 million in deal value is included. A value lower than this
may cause the issue regarding thin trading, which will be explained in section 3.7. Fur-
thermore, smaller deals may also cause missing stock data.

1.3 Data Sources

This thesis has used secondary data. These data are extracted from Zephyr and
Datastream. Zephyr has been utilized to obtain all M&A deals and Datastream to collect
stock and index prices to calculate CAR. Zephyr has provided all the 250 M&A deals,
and they can conclusively represent the whole sample of the thesis.

All literature implemented are either primary or secondary sources. Furthermore,

all literatures are known and reliable sources, collected within the authors responsibil-
ity. Nevertheless, all sources are evaluated to be valid and either research articles from
respected journals and scientifically known books. Authors have ensured reliability and
validity by evaluating the sources from an objective point of view.

1.4 Thesis structure

This thesis is structured with the principle that theory is examined and presented before
the practical is analysed. The event study approach will be implemented to answer the
research question(s). Hence, tests should be made to test whether the shareholder return
is higher than the market return. This thesis is structured in four parts. Section 1 covers
an introduction in line with motivation and the authors' thoughts towards the thesis.
The first central section (Section 2) will investigate the role of pharmaceutical M&As.
Moreover, the literature forms the basis for the questions formulated in this thesis. The
theories and models are explained as well. Section 3 consists of the methodology with
the essential factors to conduct an event study. Additionally, the test statistics and cross-
sectional regression are defined. Also accurate descriptions of the estimation period and
event window are presented. Section 4 presents the data used in the thesis. A deeper
description will be made of the data selection and process. The validity of the tests and
the regression will be shown as well. In section 5, empirical findings and the regression
will be analysed and presented in a table. Section 6 discusses the key findings and closes

the thesis with a conclusion that contains a clear answer to the research question. Section
7 starts with a critical discussion and the limitations regarding this thesis; the section
closes with suggestions for further research.

2. Theory and literature review

The following section introduces the role of pharmaceuticals M&As, including the activ-
ity in the industry. Further, a discussion on behavioural theories and neoclassical theo-
ries associated with M&As is conducted. The section also includes empirical evidence on
previous studies involving ross-border versus domestic, method of payment, deal value and a
geographical perspective focusing on EU and US. In the end, a summary of the previous
findings is presented in table 1.

Many studies are conducted regarding stock price returns based on M&As. An
overview on both general as well as industry specified research is given. Deeds & Hill
(1996) suggest that product development is the key driver of firms in the pharmacy in-
dustry. Baum, Calabrese, & Silverman (2000) explain as success criteria that firms must
look at the entry mode and how to address know-how and resources, to choose an op-
timal partner. A study made by Shan, Walker, & Kogut (1994) on correlations among
firms amount of innovation, size and method of payment show that bigger companies
tend to have an increasing focus on internal research (Rothaermel & Deeds, 2004).

2.1 The role of pharmaceutical M&A

The Economist (2014) explains that developing drugs is a high risk and uncertain busi-
ness. The majority of new medicines either fail during phase development or fail due to
the costs of developing them, meaning firms do not earn enough to recover. If enterpris-
es in the pharma industry do not have the necessary drugs or do not have any confirm-
ing drugs in the process to grow, they buy other firms. Examples can be some of the
largest drug makers; GlaxoSmithKline (GSK) and Pfizer, who have emerged from

Through time, the strategies from these firms have changed. Drug makers used to
develop a broad scope of drugs to obtain an extensive product portfolio. With pressure
from different aspects such as knowledge sourcing and transferable drug research and
innovation, firms focus more on being the best in one area and giving up on where they
are weak (Halliday, Drasdo, Lumley, & Walker, 1997). A study made by Bain & Compa-

ny proved that this approach is successful. Further, their research proves that during the
past twenty years, the ten biggest pharmaceutical companies all to some extend have
implemented M&A in regard to create shareholder return. An example of this trend is
GSKs deal with Novartis to trade assets. GSK benefits by improving their already
strong position regarding vaccines and Novartis by improving their position in cancer
drugs (economictimes.com).

Regardless of country and company in the pharma industry, M&A motives are still
to some extend mutual. In the pharma industry firms intend to improve innovation to
enhance their efficiency and keep up with the technology. They aim to increase the size
and market value, to increase their market portfolio and attract new customers. Lastly,
firms aim to diversify their products, if possible, and to reach full integration, which is
one of the main reasons for takeover in the health care industry.

Global M&As have given the opportunity for firms to enter foreign markets. This
allows firms to reach their underlying motives from global perspectives, which includes
international diversification and global market power.

The motives need to support the main objective, which is to create shareholder value.

2.2 Theory overview

The following sections are a theoretical framework created to answer research question.
The subjects included are behavioral theory containing agency theory and the hubris
motive. Further, the neoclassical theory and synergies will be discussed. The chosen
theories will overlap and therefore not equally exclusive. Moreover, the theories are all
fundamentally rooted in corporate finance, and thereby the M&A theories.

2.2.1 Behavioural theory

Behavioural theory can be distinguished between two major categories on why corpora-
tions merge: the agency theory and the hubris motive. Following sections distinguishes
between the two theories Agency theory

Agency theory is a well-known phenomenon about behavioural finance and corporate

actions such as M&As. Agency theory explains the arising problems between agents

(shareholders, stakeholders etc.) and principals (executives, managers etc.), also known
as agency problems (Ackert & Deaves, 2010). The problem arises, when incentives be-
tween agents and principals are not aligned. Ross (1973) describes the agency theory as:

an agency relationship has arisen between two (or more) parties when one, designated as the
agent, acts for, or on behalf of, or as a representative of the other, designated the principal, in a
particular domain of decision problems.

In other words, the issue occurs when agents do not act in the best interests of the
principals. It is difficult for the principals to control the act of the agents. If they spend a
significant amount of money on business trips, or engage in risky investment, it may not
necessarily be in the interest of the principals (Ackert & Deaves, 2010). The management
of the acquiring company is mostly concerned about own utilities, and therefore chooses
the target company, who are creating the highest value for them and not for the owners
(Berkovitch & Narayanan, 1993). This issue is often related to companies where owner-
ship and management are separated (Ackert & Deaves, 2010). Further (Michael C Jen-
sen, 1987) suggests that management will not give up on projects that they have been
working on for a long time, even though it destroys value.

The agency theory is combined with many financial theories, including a theory of
the ownership structure in firms (Michael C. Jensen & Meckling, 1976). The theory en-
lightens the issues of cost created when the agency problem arises between the agents
and principals, and how the problem can destroy market value of a firm. The authors
define the costs as the costs of controlling managers behaviour and the loss in the firm.
The costs arise, when the level of management and ownership increases, and managers
are often more concerned about maximizing own utility instead of maximizing market
value. The owners spend the money for monitoring the managers and thereby increas-
ing the costs.

Hence, regarding M&A activity the managers may have a tendency of assessing
companies who creates most internal value, instead of shareholder wealth, which is a
principal-agency problem.

7 The Hubris Motive

The hubris motive explains the managerial psychology and suggests that managers tend
to behave irrationally when assessing the target firm. Roll (1986) argued that the incen-
tive when acquiring a company lies in the pride, or the hubris, even knowing that there
exists considerable evidence against earning abnormal returns from acquisitions. He
further argues that negative returns following acquisitions are well known, and there-
fore managers will strive for succeeding where others have failed. This strive leads to
overconfident behaviour, and managers act similar to the market, which do not reflect
all available information. This behaviour causes an interpretation of the merged compa-
ny to have a higher market value than the market expects (Roll, 1986). Oppositely from
the agency theory, the management believes that their behaviour is in line with the
shareholders interests. Hence they are unaware and unknowingly act wrong and over-
estimate their own abilities to valuate the merger correctly (Malmendier & Tate, 2008).
Roll (1986) argues for that if there are no synergies to corporate takeovers hence the hu-
bris states that on average the market value of the target should be more than substitut-
ed by the average decrease in the value of the acquiring firms. Further, he explains that
expenses regarding takeovers create an aggregated net loss of acquisition.

Regarding M&As the hubris motives, states too much in the sense of explaining
why most deals fail within three years. Particularly, in the pharma industry companies
invest in millions, where the majority still fail (Bruner, 2004). The hubris increases the
welfare in societies, through innovation and expansion in markets and products (Amel,
Barnes, Panetta, & Salleo, 2004). Bruner (2004) argues for that hubris can be one motive
to explain M&A activity.

2.2.2 Neoclassical theory

The neoclassical clarification on why company merge is a reaction to a change in the

firms environment regarding, technology, economy, and regulatory (Mitchell & Mul-
herin, 1996). M&A activity is a rational response of dynamic and changing industries,
and rational managers obtain or advance the performance of the firm by reacting to the-
ses changes. If managers have a rational behaviour, they should be able to create a posi-
tive net present value (NPV), and further to create shareholder wealth by increasing
market value (S. Sudarsanam, Holl, & Salami, 1996). Firms only implement M&As, if the
expected NPV is positive for both the acquirer and the target. If NPV is positive for ac-
quirers, synergies are created (Berkovitch & Narayanan, 1993). Referring to synergies it

can be distinguished between, operational, managerial and financial synergies. The op-
erational synergies refer to operational enhancement, which normally are an increase of
the revenue, cost reduction, asset reduction or tax reduction (Bruner, 2004).

A synergy enhancement of the revenue refers to a merged company that they can
sell more products and thereby create higher revenues, than the two firms independent-
ly. Cost reduction mainly refers to the economics of scale, improved utilization of assets,
greater purchasing power, etc. Asset reduction is in line with cost synergies because as-
set reductions are often an exclusion of unused assets after a merger, including redun-
dant buildings or inventories. Tax reduction discusses an increase in depreciation tax
shield, following the transaction. Tax reduction can also be a transferring of net operat-
ing losses, which is fulfilled if the target company is unable to fulfil the expenditures to
reduce tax expenses. By combining the operating losses with a profitable acquiring
company, the transferring of losses can optimize tax synergies (Bruner, 2004).

Managerial synergies are achieved if the management of the acquiring firm is more
competitive compared to the management of the target company (Trautwein, 1990). The
financial synergies discuss a reduction of the merged weighted average cost of capital
(WACC) and thereby optimizing tax shield by debt. If the financing of the deal creates
value for the investors that cannot be created without the other part, thus synergies are
generated. Combining two not perfectly correlated cash flows can also generate financial
synergies because the joint stream created at this moment is less risky. The probability of
financial distress is lower and entails lower risk per unit of cash flow (Lewellen, 1971).
Further, this risk reduction will imply attractiveness for creditors and potential inves-

2.3 Review of relevant empirical evidence

Previous event studies have been conducted and have proven that M&A transactions
can generate abnormal return. These studies are made both on a particular M&A charac-
teristic or a specific industry. The following section will address important aspects that
characterise an M&A deal. Finally, the sub-questions are defined based on empirical
evidence. Moreover, the sub-questions are utilized as variables in the regression. The
regression will be further explained in the analysis. The overall purpose is to analyse
what influence they have on the acquirers CAR.

2.3.1 Underlying strategic motives in Health Care M&A

M&A activity in the pharma industry is increasing, especially with regards to cross-
border technology sourcing (Gugler & Dunning, 1992; Contractor & Lorange, 1988; Ha-
mel, 1991). The overall principle of M&As are that businesses go beyond own frames
and increase their capabilities (Hamel, 1991). Moreover, M&As include both the
knowledge sharing as well as increasing capabilities. A previous empirical study on
pharma industry shows that there is evidence of a statistically significant positive CAR.
Their results show a mean of 4,17%, hence shareholders can in average expect a positive
return on 4,17% (Hassan, Patro, Tuckman, & Wang, 2007)

This section focuses on the strategic motives behind M&As, where the first interest
is technology. Technology sourcing is defined as the amount of technology the acquir-
er can obtain from target to enhance the firms competitive advantage. The extent of
technology sourcing can be expressed as absorptive capacity. Moreover Cohen & Levin-
thal (1990) define that absorptive capacity cannot be seen as a substitution but as a com-
plement for firms existing development. The newly acquired technologies are building
upon the existing internal technology. Further Hamel (1991) suggest that firms have dif-
ferent motives. Thus, they learn in different places regarding their learning-related char-
acteristics. Dyer & Singh (1998) emphasizes the importance of company sourcing of
knowledge and experience similarities are more important than one companys base.

Another motive behind M&As are the strategic orientation. Koza & Lewin (1998)
clarifies that M&As in the pharma industry can be divided into exploitative or explora-
tive. A firm that pursues M&As are explorative and aim for long-term growth through
innovation and diversification or viability through new resources. The motive behind
explorative M&As are the economic incentive to discover new opportunities. On the
other hand, exploitative M&As are more internally focused, which aim to improve cur-
rent businesses by searching for new sources, firms can refine capital and assets (Koza &
Lewin, 1998). This form of M&As motives is also associated with cross-border R&D.

In the international business environment for the pharma industry, there has been
an increased interest in intangible assets such as technology, R&D, and knowledge. It is
essential for firms to seek targets that feature these factors (Doz & Hamel, 1995). Hence,
this leads to an increase in cross-border deals based on technology sourcing. Hagedoorn
& Narula (1996) further explain in their study that the increase fulfils the need for glob-
ally technological capabilities.

R&D has become necessary and one of the most attractive factors in the pharma indus-
try due to the increasing global competition along with the interdependence of technol-
ogy and its on-going development (Cantwell, 1994). Since the health care industry is de-
fined as a high-tech industry, acquisitions can be referred to bilateral technology sourc-
ing. John H. Dunning (1995) suggests that M&As made in this particular industry often
have the purpose of identifying new technologies as well as improving own. Hence, this
allows the acquirer to develop innovation and become more efficient. Strategically,
M&As can come with high risk and uncertainty, though with potentially high earnings.
Nevertheless, some firms also choose M&As for the purpose of learning and widen their
scope in the international business environment (John H. Dunning, 1995).

Particular in the pharma industry Porter (1986) explains that firms performances
are significantly correlated. This means that how they perform in the national market is
profoundly affected by their position and competitiveness in other operating markets.
Hence, it is critical for the firm in this industry to understand and implement the R&D
recourses and capabilities that are associated with the different markets. Also, related to
the pharma industry, R&D is a rather complex variable that can be very expensive for
firms. Additionally, it is time-consuming and uncertain investments. Halliday, Drasdo,
Lumley & Walker (1997) explain in their study of R&D in the pharma industry that the
firms are highly pressured to develop blockbusters as well as medicine contemporary
with achieving economies of scale in a global perspective. Fortunately, the increasing
globalization and interdependence mean that the drug researchers along with the inno-
vation have become more structured and transferable. Hence, firms have bigger incen-
tive and opportunity to utilize M&As. Valle & Gambardella (1993) suggests that firms
can learn from start-ups but more importantly they can learn from competitors with
similar or complementary R&D approaches.

2.3.2 Cross-Border or domestic acquisitions

M&As can be distinguished in national and international deals. More specific it can be
divided into: cross-border or domestic deals. As mentioned not many studies have con-
ducted M&A transactions with a focus on the pharma industry. The majority of the
M&As in the 90s have emerged domestically. Due to globalization as well as integra-
tions of national markets it leads to an increase in cross-border. Moreover, the rise in
competition especially global competition leads to an increase in cross-border transac-
tions. In numbers, according to Sudarsanam (2010) cross-border deals accounted for 52%
of the foreign direct investment (FDI) in 1987. This number increased to 83% in 1999.

As figure 1 shows, between 2000 and 2014 the number of cross-border deals is sta-
ble. Note that during this period economic changes have occurred but have not had any
effect on the cross-border M&As trend. Furthermore, the domestic deals account for a
much larger fraction. Moreover, the deal value is included in the figure.

Figure 1: Cross-border vs. domestic M&A deals in the pharmaceutical industry

1.600.000,00 350
1.400.000,00 300

# of deals

200.000,00 50

- 0
2000 2001 2001 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Average Cross-Border deal value Average DomesKc deal value

# Cross-Border Deals # DomesKc deals

Source: Own contribution

Drug companies focus on becoming more and more global due to important tech-
nology sourcing as well as increase in market power (Lipton, 2006; Burns, Housman, &
Robinson, 2009). According to Cohen & Levinthal (1990) it is again crucial for the phar-
maceutical companies to invest in intangible assets, such as R&D. The better firms can
utilize the market differences to their advantage, the greater advantage they get. The
health care industry is high-tech and very specialized. Thus, R&D is firms way to de-
velop and maintain the broad coverage. Greenfield investment in the health care indus-
try is too expensive, thus cross-border M&As are a way for firms to establish inter-firm
knowledge sharing (Dyer & Singh, 1998). Furthermore, when firms make use of cross-
border M&As it is acknowledge that the target firm has valuable resources and capabili-
ties. This thesis will present suggestions on the R&D of the firms M&A activities and
scientific knowledge, through literature and empirical findings (Cohen & Levinthal,
1989; Lane & Lubatkin, 1998).

Cross-border and domestic deals each have their motives. M&As in the pharma
industry have parallels (Kim & Inkpen, 2005). Domestic deals are often cost saving
through economies of scale where cross-border deals are made for companies to expand
with a further purpose. When a firm becomes too big for its national market, it ration-

ally is expected to focus on expanding globally. Firms can profit from these exploitations
(Cohen & Levinthal, 1990).

Several literatures have concluded a pattern in the M&A activity where cross-
border deals tend to have a positive effect (Doukas & Travlos, 1988). They explain that
exploiting foreign markets can reduce risk due to geographical diversification and even-
tually lead to a higher return. Kang (1993) present is theory regarding FDI and further
states that MNCs are bigger and gain easier access to different countries, thus they are
better at exploiting imperfect markets than domestics corporations, hence MNCs will
generate higher CAR. Though some have also a proven that it has a negative influence
where domestic deals have proved to have a positive influence on the acquirers return.
Moeller & Schlingemann (2005) proves this theory in their study that focuses on deals in
the United States. Relevant to this thesis Aw & Chatterjee (2004) explain in their study
on cross-border acquisition and the post-takeover performance of United Kingdom (UK)
acquirers of domestic UK, US, and EU that the CAR decreases significantly during post-
acquisition. However cross-border deals are exposed to liability of foreignness, such as
cultural differences, regulatory structure, etc. These liabilities are further analyzed in La
Porta, Lopez-de-Silanes, Shleifer, & Vishny (2000) study where they evaluate what im-
pact corporate governance and the legal system have. They specify that investor protec-
tion alongside with an insufficient legal system can cause complications in the difference
in implementation of information. Kim & Inkpen (2005) suggest that firms invest in
cross-border will generate positive return. Moreover firms have bigger incentive to in-
vest in other firms that are similar to the acquirer to avoid liability of foreignness and
expenses that may follow. Hence dealing with cross-border M&As can be more compli-
cated than domestic deals.

Another significant perspective is to look at Dunning (2000) and Kim & Inkpen
(2005) internationalization theories. This theory explains that firms prefer internal trans-
actions before open market, assuming that dealing internally is more beneficial. Moreo-
ver, three critical factors are important to implement the theory. For a firm to pursue this
internationalization theory it should have: internationalization, to increase the firms
capabilities, location, for strategic orientation and technology, to enhance competitive
advantage (Koza & Lewin, 1998). There is a tendency that the government is more en-
couraged to support national firms and more unconcerned towards foreign companies
M&A activity (Boot, 1999). Also, there are fewer incentives for firms to invest or expand
cross-border, since, operationally, domestic firms are doing better. This is also known as
the home field advantage hypothesis. Finally operating and supervising a business
away from home country is rather complex and can be very costly (Kim & Inkpen, 2005).

Based on the relevant literature review it is expected that the results show a posi-
tive abnormal return if the deals are cross-border. The majority of the previous studies
have shown clear indications that cross-border deals create shareholder wealth. The fol-
lowing sub-question is formulated:

SRQ 1: Do cross-border and domestic acquisitions create shareholder wealth in the pharma in-

2.3.3 Method of payment

The method of payment is a more complex variable to analyse. There are several ways to
pay the deal. The thesis distinguishes between three methods of payment. The acquirer
company can choose to pay in cash, which is most common since it is rather simple and
easy for both acquirer and target company to evaluate. When choosing cash, it is paid in
return for the target companys shares. Payment with shares is much more complicated
and requires due diligent assessment of the firm. Share payment is based on a defined
ratio, which means that a certain number of the bidders shares are traded with one
share from the target company. Financial advisors are often used to reduce any form of
irregularities between acquirer and target (Cao & Madura, 2013). Masulis, Wang, & Xie
(2007) further suggests that the method of payment is a direct reflects of the announce-
ment. They explain that there is a relation between the stock markets and the an-
nouncements. Finally, acquirer company can choose a mixed payment, which is defined
as a random combination of; cash, shares, debt, cash assumed, debt assumed.

Some studies Harris & Raviv (1988), Stulz (1988) even show that the abnormal re-
turn differs regarding the method of payment. Executives focus on maintaining power
and influence, which have a sizable influence on an M&A decision-making. It is more
common for executives to choose cash offering rather than issuing more shares. Issuing
new shares will mitigate the companys stock holdings and is very costly.

Mayer, Franks & Harris (1988) present in their study that share-based payment
generate a negative CAR for the shareholders. Moeller, Schlingemann, & Stulz (2004)
suggests in their study regarding acquisitions in the public sector that there is a signifi-
cant positive abnormal return when acquirer pay in cash. This theory is further con-
firmed by Martynova & Renneboog (2009), a study on European M&As. Though, nu-
merous studies have investigated the link between the method of payment and the list-
ing status of target companies. Chang (1998) explains in the study regarding takeovers
of privately held targets and its returns. She compares stock payment and equity offers.

If a target acquisition is financed through stocks there are parallels to the placement of
equity; the reason is that the number of shareholders who own the target company are
limited. Chang (1998) further presents positive abnormal return in privately held tar-
gets that are financed through share offerings. Where cash offerings offer no abnormal

In another study Fuller, Netter, & Stegemoller (2002) analyse that deals that are fi-
nanced through shares have a less negative impact on the prices. They suggest that the
impact may even be positive for private targets. They argue that a liquate reduction is a
direct reflection from the valuation of assets. Finally Chang (1998) reports that when a
company accepts a share offer, it is the effect of the companys progressive performance,
which will have a positive respond in the market. A more industry specified study by
Walter, Yawson, & Yeung (2005) focuses on the banking industry and further explain
that major banks (top-tier banks) tend to deliver a positive abnormal return if there
share payment is involved. This is from an acquirers perspective; seen from a targets
perspective a stock offering is only an obstacle in the deal process (Song, Wei, & Zhou,

Seen in other studies the method of payment often reflects the advisors reputation.
However Bowers & Miller (1990) presents no association between cash or non-cash and
advisor reputation. Francis, Hasan, & Sun (2014) explain in their study on the financial
advisors in cross-border M&As that there is a positive correlation between experienced
advisors with the effect from an announcement when it is a stock offering. Also Travlos
(1987) proves that if the executives overvalue their company they are more likely to offer
shares. Amihud, DeLong, & Saunders (2002) show in their empirical study that there is
significant correlation between the firms structure and what method of payment is cho-
sen. Moreover, they explain in domestic M&As that when deals are dealt in cash, it re-
flects quality. Eventually, this will lead to optimism in the market and thus favourable
reactions. Myers & Majluf (1984) present the same idea that executives act in the interest
of the shareholders. Thus, cash offering will be viewed positively.

In cross-border M&As, it is different, since this may not reflect the quality of the
deal. Officer, Poulsen, & Stegemoller (2009) show those target companies that are de-
manding to provide a higher return for stock offerings. This may be seen due to invest-
ments in intangible assets, research, and development (R&D) or other knowledge as-
pects. These aspects are critical in the pharma industry. All these factors hinder the
shareholders to obtain a true understanding of the acquisitions. Nevertheless, it is diffi-
cult for the shareholders to perceive the fair value and benefit. This is proven in the pri-

vately held targets. With uncertainty from shareholders, stock offering diminishes any
negative asymmetry that may emerge and create an optimistic return on bidders. Seen
from earlier studies, there is a significant correlation between shareholder wealth and
method of payment.

Wansley, Lane, & Yang (1983) concludes in their study on abnormal returns and
type of payment, with a sample of 203 M&As, that CAR increases by 33.54% if cash is
chosen whereas CAR only increases by 17.47% around half as much if the deal is share-

Based on the relevant literature review it is expected that the results show a posi-
tive abnormal return if the deals are paid in cash. Moreover, it is expected none or even
negative abnormal return if the deal is financed through shares and mixed. The majority
of the previous studies have shown clear indications that cash payment creates share-
holder wealth. The following sub-question is formulated:

SRQ 2: Do methods of payment have an impact on the shareholder wealth in the pharma indus-

2.3.4 Deal Value

The deal value in acquisitions is assessing, the price paid by the acquirer. Some re-
searches argue for and against a big deal size. Researchs made by Boston consulting
group (2007) and BusinessWeek (2002), argues for that deals above 1$ billion and 500$
million respectively, destroy shareholder value for the acquiring company. The reason
why are those larger deals entail more difficulties regarding maximizing the synergies
created through M&A transactions. Hambrick (1997) studied the role of the CEO hubris,
and argues for that larger acquisitions have a positive effect on the performance of the
acquiring company. Further they found evidence for losses in the shareholder wealth for
the acquiring company. They claim that greater premiums and larger deals tend to
cause more shareholder losses.

From 2000 to 2014 the M&A deals in the pharma industry fluctuated a lot. Figure 2
show the average value of the deals as well as the number of deals.

Figure 2: Total M&A deals in the pharmaceutical industry

1.000.000,00 450
900.000,00 400
800.000,00 350
700.000,00 300

# of deals

300.000,00 150
200.000,00 100
100.000,00 50
- 0

Average deal value # of deals

Source: Own contribution

One of the main reasons why acquisition has an adverse impact on the shareholder
wealth is that acquiring companies pay substantial premiums above the market value of
the target company (Hambrick, 1997). Notice, that deal value is highest in year 2000 due
to large deals from GSK and Pfizer. Another reason why larger target should have a
negative impact on bidders shareholder wealth is that larger deals tend to be more com-
plex in the process of merging. The complexities of a big merge destroy the synergies
due to high costs linked with the implementation (Loderer & Martin, 1990). In the oppo-
sition Roll (1986) argues for that larger acquisition should have positive effects regard-
ing the return on the bidder firm returns. He further argues that larger targets hold their
stocks less closely and are more liable to hand over their shares, hence acquirer pay low-
er premiums regarding the bidding price (Roll, 1986). Moreover, he argues for that the
acquirer have fewer rivals concerning larger targets, which can lead to at lower premi-
um paid. The argument makes sense because a high price, demand sufficient funds
which can eliminate competition. With same approach Atiase (1985), suggests that on
larger targets, the valuation tends to be more precise, which again leads to a fair valued
premium paid for the target stocks. Atiase (1985) argues for acquiring companies to hire
financial advisors with a good reputation, which should lead to better advice.

Based on the relevant literature review different results are presented. Some argue
for positive and some for negative abnormal returns. Thus, it is complicated to predict
whether the deal value has a positive or negative influence on CAR. The previous stud-

ies show no clear indications of the influence to CAR regardless of the deal value. The
following sub-question is formulated:

SRQ 3: Does the deal value have an impact on the shareholder wealth in the pharma industry?

2.3.5 US or EU

A geographical perspective related to M&As and event studies, in particular, is not con-
ducted frequently. This section aims to investigate if there is a significant difference in
the acquirers location, defined as either EU or US. Previous empirical studies are diffi-
cult to obtain regarding geographical comparison. Hence, this section presents previous
studies where the acquirer is located in EU and US respectively.

Datta & Puia (1995) have tested cross-border acquisitions with acquirers located in
the US. Their findings show on average no impact for acquiring firms shareholders. In
opposition Markides & Ittner (1994) tested international acquisitions and the market
value of US bidding firms. Their findings show on average that cross-border acquisi-
tions create value for the acquiring firm. Concluding on those previous empirical studies
testing for US located companies it complicated to determine whether it is creating or
destructing value. Other previous studies have conducted the M&A activity where ac-
quirer is located in EU. Renneboog & Goergen (2004) have analysed the short-term
wealth effects of European acquirers. The findings show a minor positive result on
cross-border deals for the acquiring company, though the results show greater positive
impact on the targets market value.

Finally Campa & Hernando (2004) finds evidence concluding that acquiring com-
panies in the European market are not affected by acquisitions. Concluding on the pre-
vious studies regarding European acquirers the results deviates, stating that the share-
holder wealth can either be positively or non-affected.

Based on the discussed literature review in previous empirical findings, deviating

results is presented. Some argue for a positive impact on the shareholder wealth where
others argue for no influence, independent of the acquirer is located in EU or US. The
previous findings do not show any clear indication of the influence of the shareholder
wealth, which is going to be in line with the expectations. It is expected that the results
deviate, with few or no significant results. The following sub-question is formulated:

SRQ 4: Do acquiring companies located in EU or US create shareholder wealth in the pharma


2.4 Summary of previous studies

M&A studies are often tested. These studies somewhat give different results regarding
CAR. Some studies find significance that acquirer creates shareholder wealth due to
M&As whereas other studies find significance that acquirer creates negative wealth. Ta-
ble 1 shows a summary of previous studies.

Table 1: Previous studies

Author Study Return

Hassan et al. (2007) Pharma Positive
Fuller et al. (2002) General Positive
Doukas & Travlos (1988) Cross-Border Positive
Moeller & Schlingemann (2005) Cross-Border Negative
Aw & Chatterjee, 2004 Cross-Border Positive
John H Dunning (2000) Cross-Border Positive
Kim & Inkpen (2005) Cross-Border Positive
Moeller, Schlingemann, & Stulz (2004) Cash Payment Positive
Martynova & Renneboog (2009) Cash Payment Positive
Chang (1998) Cash Payment Neutral
Walter, Yawson, & Yeung (2005) Cash Payment Positive
Bowers & Miller (1990) Cash Payment Neutral
Mayer et al. (1988) Share Payment Negative
Boston consulting group (2007) Deal Value Negative
Loderer & Martin (1990) Deal Value Negative
BusinessWeek (2002) Deal Value Negative
Datta & Puia (1995) US Neutral
Markides & Ittner (1994) US Positive
Renneboog & Goergen, 2004 EU Positive
Campa & Hernando, 2004 EU Neutral

Source: Own contribution

3. Event study methodology

This section describes the methodology of event studies and the assumptions at this
moment. Moreover, the efficient market hypothesis, a description of the event window,
estimation period and event day will be explained. Further, the calculation models and
the abnormal return will be discussed. The section also contains descriptions and dis-
cussions of the statistical tests and the cross-sectional regression. Finally, a discussion on
thin trading will be conducted.

3.1 Introduction to the event study methodology

This thesis will be conducting an event study. This event study will measure what ef-
fects if any, a particular event has on the value of a firm. Moreover, an event study can
be divided into five stages. The first stage is to define an event. These definitions can
differ from earnings announcement or M&A activities. The second stage is to define a
period of time or often defined as an event window, which includes the announce-
ment day. The third stage refers to the second stage where a sample must be drawn
from databases with similar announcements. The fourth stage depends on the research
question and is all about adjusting. The sample is here specified and can be narrowed
into geographical, period and industry limitations. When dividing the event study into
five stages, the two last stages look at what effects each event have on a firms stocks.
The fifth stage statistically proves whether the event (announcement) have any signifi-
cant influence on a firms stocks. The final stage includes several statistical tests to
strengthen the clarifications.

In this thesis an event is defined as the announcement of a company to acquire an-

other company. MacKinlay (1997) explains that the efficient market is rational, which
means an announcement will immediately reflect the firms stocks. To obtain an overall
caption of the effect of the event, a three or five-day event window can be chosen, which
means one or three days prior and after the event. This event window works as observa-
tory period for any changes in stock prices. This approach is necessary in order to com-
ply with any leaks of information (rumours) before the announcement. It also respects
the time the market spends to spread rumours. One criticism concerning this approach
is to obtain a precise estimate on the market reaction, these stock prices that are related
have to take place in the given event window. Nevertheless, if the window is too small,
it may not give a reliable caption of the effect. On the contrary, if the window contains
too many days, other aspects may weaken the effect and eventually misinterpretation
regarding the stock prices can occur. Moreover, the stock prices have to be compared to
the normal return before any conclusions can be drawn.

The expected return excluding the event can in another way be defined as the
normal return. There are two ways to calculate the normal return; statistically or eco-
nomically. Abnormal return is defined as the difference in stocks between the estimated
normal return and the actual post return. This thesis implements the market model cf.
appendix I.

Fama, Fisher, Jensen, & Roll (1969) introduced the first event study, where they an-
alyse what new information can do to the stock prices. Until today, their methodology

has become the most standardized tool to measure stock prices and its effect on events
(Binder, 1998).

3.2 Efficient market hypothesis

Fama (1970) describes one of the basic assumptions for doing an event study, which is
the efficient market hypothesis. The theory states that prices are fully reflected by all
available information. A market, where prices always reflect all available information is
called an efficient market. Regarding this thesis, the hypothesis states that an an-
nouncement of an M&A transaction should be incorporated immediately in the contrib-
uting firms stock price. In other words, it is not possible to earn an abnormal profit, be-
cause investors immediately after receiving new relevant information, change invest-
ment strategy.

The Efficient market hypothesis differentiates between three types of market effi-
ciency; weak, semi-strong and strong form (Fama, 1970). The weak form of market effi-
ciency tests that only historical prices are reflected in the stock prices, however, no other
available information can predict the future performance of stocks. The semi-strong
form additionally includes all available public information compared to the weak mar-
ket efficiency, such as deal announcements, stock splits, etc. The strong form contains
both public and private information, where given investors or traders have monopolistic
access to relevant information regarding the price of stocks. The effect of insider infor-
mation is not possible to measure, and therefore, it is assumed that market efficiency in
the semi-strong form holds. The strong form is considered to be a very extreme ap-
proach and is not a true representation of the real world. The random walk model infers
the core of the efficient market hypothesis (Fama, 1970).

Event studies test the consistency of the efficient market hypothesis because they
are based on the fact that announcements should affect the securities price (Fama, 1991).
In other terms, event studies test the market efficiency in the semi-strong form. Fama
(1991) describes event studies as the best way of testing market efficiency as a result of
the return based on the announcement of the event.

The joint hypothesis states that if the efficient market hypothesis is rejected, it
should be because of market inefficiency or if the model used for calculating the abnor-
mal returns is not correctly used. Moreover event studies are testing two hypotheses: the
hypothesis about the event is bringing relevant price information to the market, and the
hypothesis observing market efficiency.

3.3 Event window, date and Estimation period

The event day is the official day of an announcement according to Bloomberg. The event
day is set as t = 0. The period between T0 and T1 is represented as the estimation win-
dow or period. The period between T1 and T2 is denoted as the event window. The
timeline is graphically illustrated in figure 3.

The estimation window is used for estimating the market model, where the event
window is used for calculating the abnormal returns. In this thesis an estimation win-
dow of 200 trading days are chosen, where Bartholdy, Olson, & Peare (2007) argues for
an estimation window between 200 and 250 days, when daily returns are used. The
choice of estimation window in the thesis is following the approach of (MacKinlay,
1997). Longer estimation windows estimate a more exact coefficient of beta. The state-
ment requires beta to be constant through the estimation window (Daves, Ehrhardt, &
Kunkel, 2000). An assumption for the coefficient of beta to be constant is that the stock,
in line with the chosen index, is constant as well, during the estimation period.

Figure 3: Estimation period and event window

Source: Own contribution

In association with the efficient market hypothesis, the announcement should af-
fect the stock prices prompt. Theoretically, a one-day event window is sufficient, but
due to information reaching the public market after closing time, or announcements on a
holiday, a one-day event window is not likely to be adequate. To oblige for potential
complications a three-day event window is chosen cf. figure 3. The three-day event win-
dow in practice apprehends any effect of an announcement (MacKinlay, 1997). This the-
sis will only center on a three-day event window, even though Peterson (1989) argues
for a five-day period.

Regarding event studies and this thesis, it is vital to determine an event day cor-
rectly. The problem with defining the exact event day during an M&A deal is the proba-

bility of information leakage, and several rumors regarding the current transaction,
which will influence the securities price. The announcement day is commonly chosen in
event studies concerning M&A transaction, which is determined in this thesis.

3.4 Abnormal return & Choice of model

Several models can be used to determine and calculate the expected return of stocks.
They are commonly separated into a group of statistical models and economic models
(MacKinlay, 1997). The statistical models include the Constant Mean Return Model and
The Market Model, where the economic models include the Capital Asset Pricing
Model (CAPM) and the Arbitrage Pricing Theory (APT). For both groups of models,
the same statistical assumptions are valid, but the economic models contain more theo-
retical limitations. In accordance to MacKinlay (1997) the economic models provide
more disadvantages than advantages, which lead to a minor choice of economic models
in event studies.

The Constant Mean Return Model,' assumes that mean return of stocks is con-
sistent over time, where The Market Model assumes that the relation between the mar-
ket return and the stock return is stable and linearly.

When eliminating the part of variation related to the market, the variance of the
abnormal returns is reduced. According to MacKinlay (1997) The Market Model is
more adequate compared to The Constant Mean Return Model. The actual benefit of
choosing the market model depends on the R-squared in the regression on the market
model. A high R-squared, increase the explanatory power and reduce the variance, and
increases the gain of the abnormal return (MacKinlay, 1997). The Market Model is im-
plemented in this thesis to calculate abnormal returns.

The Market Model is used for calculating abnormal returns. Parameters in the
model estimate a pre-event period sample using the estimation window with ordinary
least squares (OLS) regression (Binder, 1998). The linear relationship between the return
for a specific stock and the market return is as follows:

!" = ! + ! !" + !" (1)

Including following assumptions:

!" = 0 !" = !!! (2)

Where Rit and Rmt state the return on the specific stock and market portfolio in pe-
riod-t. The period is the estimation period described in section 3.3, concerning both the
stock and the market portfolio. The return is calculated as logarithmic returns, which
increases the normality in the data (J. Y. Campbell, 1996). The zero mean disturbance
term is illustrated as it , where 2i , i and i are parameters regarding the model. To
measure the return on the market portfolio Bartholdy, Olson, & Peare (2007); MacKinlay
(1997) suggest a broad index as the benchmark, which represents the stocks in the sam-
ple. The MSCI AWCI Healthcare is chosen, for the biggest part of the sample, which in-
cluding large and mid cap securities in 23 developed countries and 23 emerging mar-
kets. The benchmark used for the remaining sample is the major indices in the respec-
tive country.

The abnormal returns can be calculated on behalf of the market model. The return
is calculated by the difference between the estimated return based on the estimation pe-
riod, and the actual return. The abnormal return is measured by the formula:

!" = !" ! ! !" (3)

ARit is given as the abnormal return on the stock at time t, where Rit illustrating the
actual return observed for the stock at time t. The parameters i and i , are coefficients,
respectively the intercept and the systematic risk. The linear structure of the model is
specified by those coefficients. The OLS method is used for estimating the parameters.

A conclusion regarding an event, in this case the announcement of an acquisition

cannot be drawn, before the abnormal returns are aggregated in time and through the
securities. The abnormal returns will first be accumulated for each stock, through time.
Afterward, the abnormal returns can be accumulated across the amount of securities
(MacKinlay, 1997). The formula for the cumulative abnormal return in the event win-
dow for a given stock can be drawn as:

! = ! ,!! + ! ,! + ! ,!! (4)

Where AR j,1 is given as the abnormal return the day prior the event day for a par-

ticular stock j . The following AR represents the abnormal returns on the event day, and
the day past the event day respectively. The CAR is a sample of the dependent variable,

which is used in the regression analysis and the parameters tested in the significance
tests, described in the following sections.

3.5 Parametric and non-parametric tests

Various test statistics will be performed on the calculated CAR. Moreover, it is im-
portant according to Bartholdy, Olson, & Peare (2007) to run more than one test since
different tests may give different results and increase the robustness. If the given as-
sumptions do not hold, misspecification may occur in regards to the difference in the
assumed distribution for the hypothesis and the actual distribution. Consequently, this
can lead to an over rejection of the null hypothesis in regards to the chosen significance
level, this is also known as type I error. Nevertheless a type II error can eventually lead
to accepting a false null hypothesis. Ultimately, type I or type II errors appear incorrect
interpretations of the null hypothesis. To eliminate the misspecifications, non-
parametric tests are implemented, which is explained by Brown & Warner (1980) and
have a less restrictive structure than parametric tests. All test statistics are based on a
null hypothesis where the return is equal to zero thus bidders shareholders receive no
abnormal return.

When performing these statistical tests, it is important to be critical to each test

since none of them is each others superior. Running these tests in line with Brown &
Warner (1985), the hypothesis should be defined as:

H0: CARj = 0 (5)

H1: CARj 0 (6)

Assumptions are made regarding the distribution when performing parametric

tests. Four assumptions should hold if the output is reliable. One assumption failing is
enough for the parametric tests to fail and therefor the non-parametric is more powerful.
The assumptions are defined as:



Constant variance (homoscedasticity)

Measured on an interval scale

Moreover, normality is critical and should be tested firstly. Normality test is fur-
ther explained and presented in table 5.

All tests are performed either as parametric or non-parametric tests. Next section will
contain a deeper clarification of both test categories and how they differ.

3.5.1 Parametric tests

Testing for CAR in the event window, parametric tests, based on a standard t-test, are
implemented to see whether the difference between two means is zero. These tests have
shown to be reliable and provide relevant outputs. Though, multiple studies show that
non-normality is a major obstacle and thus Corrado (2011) suggest that if the data is not
normally distributed non-parametric is more appropriate to implement. Using the mar-
ket model to calculate the expected return, this thesis defines the numerator to be the
effect M&A announcement has on the stock prise. According to Bartholdy, Olson, &
Peare (2007) the denominator refers to an estimated variance that is used specifically for
the test statistics, which mean that each parametric tests are exclusive and designed for
obstacles that may emerge for the specific data (Brown & Warner, 1985).

The accumulated abnormal test will look like:

CAR (T! , T! )
!"# T! , T! = ~N 0,1 (7)
var(CAR T! , T! )

var CAR T! , T! = !! var(AR ! )

Binder (1998) and previous studies identify four obstacles regarding abnormal return. It

Correlate across the observations (cross-sectional correlation)

Different variances across the observations
The variance may be bigger in event window than estimation window
Not be independent across periods

In order to address these problems these five parametric cf. appendix III, test are con-
ducted and defined as:

T1: T-test cross sectional dependence (Brown & Warner, 1985)

T2: T-test cross sectional independence (Brown & Warner, 1985)

T2adj: Patells adjustment t-test (Patell, 1976)

T3: T-test with standardized excess return and cross sectional independence
(Brown & Warner, 1985)
T3adj: Variance adjustment t-test cross sectional independence (Patell, 1976)

T4: Induced variance adjustment Cross sectional (Brown & Warner, 1985)

T5: Induced variance adjustment Standardized

(Boehmer, Masumeci, & Poulsen, 1991)

Patell t-test, as well as Boehmer, Masumeci & Poulsen (BMP) t-test, are very uncer-
tain compared to the other tests when the assumption regarding normality is not ful-
filled (Corrado, 2011). Nevertheless Bartholdy, Olson, & Peare (2007) further prove that
BMP t-test in studies that includes the large indices rejects the null hypothesis too often.

3.5.2 Non-parametric tests

Different from the parametric tests, according to Campbell & Wesley (1993) it is not es-
sential for non-parametric tests that the sample is normally distributed. Bartholdy, Ol-
son, & Peare (2007) explain in their event study that the rank and sign test perform more
reliable and better test power than parametric tests even if the assumptions does not
hold. Thus non-parametric tests do not provide poor results. This is proved in Brown &
Warner (1980) and Brown & Warner (1985) with multiple tests on parametric and non-
parametric tests and analyse the performances for each test.

Event studies are in general sensitive when the sample contains outliers.
McWilliams & Siegel (1997) clarify that this usually occurs in relatively small samples. In
this case, non-parametric tests can be used to identify whether or not the results are
based on outliers (DeLong, 2001). Corrado (1989) have then proved that rank test is most
suitable to utilize when samples are small. Since this thesis uses some sub-samples that
are relatively small, the non-parametric tests are critical.

Three non-parametric tests are made cf. appendix III, and defined as:

T6: Sign test (Corrado & Zivney, 1992)

T7: Generalized sign test (Cowan, 1992)

T8: Rank test (Corrado, 1989)

Generalized sign test (Cowan, 1992):

T! = ~N 0,1 (9)
(!! !!! )

This method compares the positive abnormal return from the event window with the
estimated window. This test assumes that there is equal share of positive as well as neg-
ative abnormal return. Hence, this test takes normality into account. Finally, it is power-
ful towards increasing variance since it only looks at whether the abnormal return is
positive or not and excludes the amount of abnormal return (Arnold Richard Cowan,

Rank test (Corrado, 1989):

1 !
N !!!(K !" K!
T! = !
~N(0,1) ( 10 )
1 !! 1 !
K !" K !
L! + L! !!!! N !!!

The rank test allocates each return a rank (!" ) hence, the abnormal return till become
ordinal scaled. The return will be uniform regardless of any asymmetry there may be

Moreover, compared to standard parametric tests the rank test and sign test (non-
parametric) are best specified. This is shown in multiple event studies. The rank test per-
forms better in the null hypothesis and stronger in the alternative hypothesis.

Another way to support the strength of the non-parametric test Arnold Richard
Cowan (1992) describes the generalized sign test to be an alternative test to the rank test.
This method has shown to be a more precise and qualified test if the event window is
longer. Moreover, it occurs to be more superior if returns have high variance or if the
stocks are thinly traded.

3.6 Cross-sectional regression

When it comes to M&As, there are many aspects that influence the shareholder wealth.
It is interesting to test for correlations between abnormal returns and the characteristics
of the given event. Therefor a cross-sectional regression is optimal to test these hypothe-
ses. The most common method to test if the independent variable influences the de-
pendent variable is the ordinary least square (OLS) (Verbeek, 2012).

The cross-sectional is defined as:

y = X + ( 11 )

The formula explains that the dependent variable noted as y multiplied with the
given x-factors. This thesis corresponds to CAR, whereas xs are the different factors. X
is vector stacking where x explains the factors and describe the significance on y.

Binder (1998) explains that the regression analysis simplifies the estimation of the
parameters and abnormal returns. In this study, control variables are defined as varia-
bles that have an effect on the CAR. These variables are chosen to conduct the regres-

Table 2: Regression variables

Variable Definition
Dependent Variable:
CAR of acquirer, with a three-day event
window (-1;+1) and t=0 as announcement
day. CAR is calculated with log return with a
CAR (-1;+1) period of 201 days prior to announcement
date. The national indices as well as the MSCI
AWCI Health Care index have been
implemented as market return.
Deal and Acquirer:

Dummy variable: Determining if the del is

made across countries

Deal size collected from Zephyr in EUR

Deal Value
million. Total deal value

Dummy variable: determining if the deal is

paid in cash

Dummy variable: determining if the deal is

paid in shares

Dummy variable: determining if the deal is

from US, EU or other.

Employees Number of employees prior to the event

Market Value Market value of the firm prior to the event.

Deals tested on calendar year between 1999-

Year (1999-2014)

Source: Own contribution

The regression is performed in EViews and calculated using the OLS method.
Since the data set is cross-sectional, heteroscedasticity may be a problem. To adjust for a
possible bias of the OLS estimated variance, all regressions are corrected using White's

(1980) heteroscedasticity consistent standard errors. The initial full regression model
including all variables is as followed:

! = + ! ! + ! ! + ! ! ! ( 12 )
! + ! ! + ! ! +! ! + ! !
! !

3.7 Thin trading

When measuring the different return models or abnormal returns, it is challenging if the
stocks are not traded on each trading day (Maynes & Rumsey, 1993). Using the market
model to measure the stock return on stocks that are poorly traded may lead to impre-
cise test statistics. Moreover Campbell & Wesley (1993) explain that the standardized
test will too often reject the null hypothesis.

A study made by Arnold R. Cowan & Sergeant (1996) argues that generally in
event studies and trading frequency the return distribution outfaces the trading fre-
quency. Specifically this means that the return increases when the trading frequency
decreases. Though they further substantiate that even though stocks are less frequently
traded the generalized sign and rank tests (non-parametric) still perform well unless the
variance increases. Also Arnold R. Cowan & Sergeant (1996) also suggest adjusting for
thin trading to test statistics. Thus, to comply and avoid these obstacles thinly and me-
dium traded stock should be excluded from the sample. This method is seen in most of
the American studies. Alternatively, the test statistic can be modified. When excluding
the thinly traded stocks, the reliability of the study increases. More specifically Bar-
tholdy, Olson, & Peare (2007) explain that stocks that are traded less than 40% of all days
are categorized as thinly traded. Moreover they define medium traded stocks to be,
transactions on 40% to 80% of all trading days.

Eventually, these stocks are removed from the data sample. Still there may be more
obstacles left in the sample. One is seen when there are no prices on a particular trading
day. Maynes & Rumsey (1993) explain in their study that there are three possible meas-
urements on how to comply with and to ensure the quality of the tests and to minimize
its influence. The three different procedures are described as the uniform return, the
trade-to-trade, and the lumped return procedure. First mentioned the returns are equal-
ly allocated over the non-trading days. The trade-to-trade procedure, which is used in
this study, uses the market model to calculate the expected return.

To calculate the expected return all information regarding stocks and market over
time is used. When the returns for trading days are calculated the returns for market
indices are calculated for the same period. Lastly the lumped return procedure sets
the non-trading days rate equal to zero. This method can be questioned on its reliability.
This approach underestimates the variance, which eventually biases the test statistics
but is simple and easy to calculate. Despite the critiques this procedure are often utilized
to adjust for thin trading since they perform closely to the trade-to-trade procedure but
are less complicated (Bartholdy et al., 2007).

4. Sample Data
The section depicts the process of selecting and sorting data, which constitutes the final
sample of M&A deals used in the statistical tests and cross sectional regression. The sec-
tion embraces a descriptive statistic of the sample and a discussion on the assumptions
for parametric tests. Moreover a short section validating the sources will be showed.

4.1 Data selection process

This thesis consists of data on M&A transactions in the pharma industry within the
timeline between 2000 and 2014 obtained from Zephyrs database. All deals are com-
pleted between January 1, 2000 and December 31, 2014 and have no geographical crite-
ria. In order to obtain the most significant data from Zephyr all deals fulfil these follow-
ing criteria:

All deals are between estimated time periods.

Deal status are announced, completed or confirmed within the time period.
Deal type is exclusively acquisition. Reverse takeovers and bankruptcy acquisi-
tions are not included.
A deal value is established at a minimum of 300 million. This will exclude all
minor acquisition.
Acquirer company as well as target company are all listed companies.
Acquirers method of payment is cash, shares, debt assumed, cash assumed.
The health care industry is defined through the criteria that data are within US
SIC 283. All else are excluded. The chosen SIC code focuses on the drug industry.

Based on these criteria the preliminary sample consists of 367 deals. Eventually 53 deals
are reduced due to their missing ISIN number according to Zephyr. Additionally, 7
deals with wrong country codes are excluded. These wrongly included deals are exclud-
ed since they will mislead the final sample and give incorrect results.

The downloaded deals from Zephyr are used in Datastream in order to retrieve
daily stock prices (from acquirer company) within the event period and leads to a reduc-
tion of 15 deals because they lacked on information on stock prices or simply datastream
cannot provide the necessary information.

Besides, 20 deals are excluded due to overlapping events. Overlapping events are
deals announced on the same day, which may effect and mislead the stock prices and is
therefore excluded from the sample. Further, 4 deals are deleted since their trading days
do not cover the event. As Bartholdy et al. (2007) explain stocks traded less than 40% of
the trading period is removed. However, this thesis excludes both thinly and medium
traded stocks with trading less than 80% of the estimation period. Based on this explana-
tion 15 deals are excluded from the sample. Lastly, 2 deals are removed due to missing
index, and 1 deal is removed since the index is not traded around the event.

In order to benchmark the deals, index returns are retrieved from Datastream.
Since this thesis focuses on the pharma industry, one particular index is used for all ac-
quisitions. These index returns are explained as total return indices. The benchmark in-
dices used are the acquirer countries respective Morgan Stanley Capital International
(MSCI) based on the MSCI AWCI Healthcare Index. The health care index includes large
and mid cap stocks in 46 countries between developed and emerging markets. All stocks
are classified in the health care sector. Alternative indices are chosen to 15 deals in sev-
eral countries since MSCI ACWI Healthcare do not cover. Thus national indices are cho-

Bartholdy et al. (2007) explain, as long as stocks are liquid enough (do not suffer
from thin trading), the index should give a significant reflection of the market.

Table 3 includes the step and search results from the data together with the manu-
ally excluded deals.

Table 3: Sample selection

Zephyr Step result Search result

Time period: 01/01/2000 - 31/12/2014 1,276,756 1,276,756

Current deal status: Announced, Completed 1,047,398 912,19

Deal type: Acquisition 551,266 312,765

Deal value (mil EUR): min=300 41,67 9,651

All stock exchange: 814,813 8,036

Methods of payment: Cash, Cash assumed,

743,057 6,554
Debt assumed, Shares

US SIC (primary codes): 283 - Drugs 31,763 367

Missing target country code 7 360

Missing ISIN number 53 307

Overlapping events 20 287

Missing information on stock prices 15 272

No trading during event 4 268

Thin- and medium trading 15 253

Missing index 2 251

Index not traded around event 1 250

Source: Own contribution from Zephyr

4.2 Descriptive statistics

To define the sample and the subsamples, a descriptive statistics are presented. The
study consists of 250 deals in the pharma industry and the sample is divided into differ-
ent sub-samples. The sample distinguishes between cross-border or domestic deals,
where the sample is almost equally divided including 119 and 131 deals respectively.
The deal value, represents a split in quartiles, including 25% of the deals in the deal val-
ue 1, 2, 3 and 4, where deal value 1 contains the biggest deals.

The method of payment is divided into three main categories: Cash, shares, and
mixed payment. The method of payment, are not equally divided by the three categories
where the biggest part are cash payments. The share payment only includes 41 deals
and can be argued as a smaller sub-sample. Bartholdy et al. (2007) argue for a minimum
of 50 observations to engage enough power in the statistical tests. The sample is finally
divided in geography, where US and EU deals are included. The descriptive statistics
are illustrated in table 4.

The following table contains other statistics to identify the distribution of the sam-
ples and sub-samples. The statistics include the mean, standard deviation, kurtosis, and
skewness. Normal distribution has a skewness of 0, and a kurtosis of 3, which will be
explained in section 4.4.

Table 4: Descriptive statistics

Source: Own contribution

The mean of CAR in table 4 illustrates a positive tendency, except domestic, share-
based payment, deal value 1 and US. The highest mean is represented by cross-border
deals, where the share payment shows the lowest mean. The skewness illustrates that
most of the sub-sample are right skewed, hence positive skewness. The sub-samples
where the means are negative reflect that all are left skewed. Thus they are not symmet-
ric and therefore not normally distributed. The standard deviations are all below one,
which is crucial for type I errors. Sub-samples with standard deviations above one can
contain outliers. The kurtosis is above three for all sub-samples; hence, the samples are
thick tailed. Consequently, this leads to an over rejection of the null hypothesis. The re-
sults of the descriptive statistics show that none of the sub-samples are normal distrib-
uted, which will be discussed in the section regarding the test for normality.

Note, the 32 deals remaining from EU/US is defined as other and not included.

4.3 Validity of sources

The collection of M&A transactions are obtained through Bureau Von Dijks Zephyr,
which is a well-recognised database in the business environment. Zephyr is acknowl-
edged for the reliability of the data about M&A transactions. Thomson Reuters
Datastream is a database used for collecting stock data regarding the acquiring company
including prices on the primary indices used to benchmark. Datastream is often used for
collecting data on listed companies, given that both databases are secondary sources, the
risk of faulty data can appear.

Hence, these risks have a minimal effect on the overall analysis and considered as a
reliable estimator.

4.4 Testing for normality

Various assumptions must hold when conducting test statistics. When performing the
parametric test the assumptions are independency, normality, constant variance and
measurement on an interval scale.

All assumptions must hold, if one fails the non-parametric tests are chosen since
they are more powerful. This study is testing for normality to ensure the most important
and powerful tests, which will secure reliable results and avoid misinterpretations. The
criteria for normality are symmetric, which mean the skewness is zero. Further, it
should have a normal coefficient of kurtosis. Skewness defines to what extend the dis-
tribution asymmetries regarding the mean where kurtosis measures the bell shape of the
tails. If the kurtosis is defined to be more than 3 (peak) it is called leptokurtic, mean-
while, if the distribution is skewed (more then zero), it is an indication to positive skew-
ness. Hence, the distribution is skewed to the right (Brooks, 2014).

Fama (1976) suggests that deals on daily basis deviate more from normal distribu-
tion than monthly when it comes to returns. Moreover, they have a tendency to be fat-
tailed. Campbell & Wesley (1993) find in their study on daily return on NASDAQ that
non-parametric tests often show better results about parametric tests due to the a high
degree of failing normality. Eventually, both studies explain that in general skewness
and kurtosis are sensitive when the sample size is small. Bartholdy et al. (2007) under-

line that when the sample is thinly traded there is a bigger tendency that the sample de-
viates from a normal distribution. Stocks that are less traded have a lower skewness and
smaller kurtosis. Consequently, this can cause an over rejection of the null-hypothesis.

Jarque-Bera is a goodness of fit test that determines whether the samples are nor-
mally distributed or not (Jarque & Bera, 1980). The Jarque-Bera test is calculated with
kurtosis and skewness cf. appendix II, to identify whether or not they deviate from a
normal distribution. The normality is performed with a 5% significance level, and reject-
ed if the p-value is below 5%.

Furthermore table 5 shows that none of the sup-samples, used in this thesis fulfill
the assumption of normality. The table shows that all subsamples are significant with a
p-value below 5%. Hence there is strong evidence that none of the sub-samples are nor-
mally distributed.

Table 5: Normality

Jarque Bera P-value Normal distributed

Total Sample 150,6468 0,0001 NO
Cross-Border 115,3551 0,0001 NO
Domestic 47,7819 0,0001 NO
Cash payment 173,4948 0,0001 NO
Share payment 15,2744 0,0001 NO
Mixed payment 31,2888 0,0001 NO
Deal Value (1) 94,0371 0,0001 NO
Deal Value (2) 19,5093 0,0001 NO
Deal Value (3) 69,9235 0,0001 NO
Deal Value (4) 26,6845 0,0001 NO
US 55,4319 0,0001 NO
EU 350,4783 0,0001 NO

Source: Own contribution

The key issue regarding normality is to understand how much it can deviate from
normality before the parametric tests are dropped. Since the estimated models are made
on a time series data, it is relevant to give an introduction to autocorrelation and hetero-
scedasticity briefly. This thesis does not conduct a test on autocorrelation since a test is
already made on normality where it failed. Autocorrelation is when the residuals corre-
late, hence equivalent to the abnormal return. Autocorrelation is often seen when the
data is based on time. Hence, the data can be linked with different trends. In the case of

autocorrelation, OLS will be biased. Thus, the estimated abnormal return of the event
window will give a wrong result. To test for autocorrelation, LM-test can be used.

The assumption regarding heteroscedasticity occurs when the residuals do not

have a constant variance. Moreover, when the data is based on time-series, there is the
risk that the variance may change over time. To test for heteroscedasticity Whites test
can be implemented.

5. Empirical findings
This section covers the findings of the test statistics regarding the defined M&A charac-
teristics concluded with a summary of findings. It furthermore contains an analysis of
inter-correlation and a cross-sectional regression.

5.1 Tests statistics

The test statistics are made under the null hypothesis of zero abnormal return as stated
in section 3.5 (H0: CARj=0). If the test statistics shows significant results, and therefore
states that abnormal returns are created, the null hypothesis is rejected. Further, the
CAR deviates from a zero return. The CAR in the test statistics is calculated focussing on
the three-day event window. The tests are based on significance levels of 1%, 5% and
10%, respectively.

The t-statistics describe the creation of CAR, where a positive t-statistic means that
shareholder wealth is created only if the results are significant. A negative t-statistic
means that shareholder wealth is destroyed. Discussed in previous sections, the statisti-
cal tests are divided into parametric tests and non-parametric tests. The parametric tests
are stated as T1-T5, including two adjusted tests, which gives a total of seven parametric
tests. Further, the non-parametric tests are stated as T6-T8, with a total of three tests. The
statistical tests differ regarding assumptions relating to the distribution of the sample.
The parametric tests are using the standard t-test, under the assumption of normally
distributed samples. If the sample deviates from the normality the non-parametric tests
are more robust.

As stated in section 4.4, the descriptive statistics show that none of the sub-samples
are normally distributed, therefore the non-parametric tests create stronger evidence

and are more reliable. According to EMH, no significant abnormal returns are expected,
since the market should be efficient in the semi-strong form.

Table 6 shows the tests statistics for the complete sample of 250 deals.

Table 6: Total sample test statistics

Source: Own contribution

In the total sample CAR is positive with 1,00% excess return. The statistics tests for
the total sample show that the ordinary t-test with cross-sectional dependency (T1), the
t-test with a standardized excess return and cross-sectional independence (T3) and the t-
test with induced variance adjustment reject the null hypothesis, at significance levels of
5%, 1% and 10%, respectively. The T1 test concludes that the sample destroys share-
holder value, by rejecting the null hypothesis, where the other statistical tests find that
shareholder wealth is created. The remaining parametric tests are not significant, and
therefore, the null hypothesis is not rejected. On the non-parametric tests, none of the
tests show any significant results. Hence, this study fails to reject the null hypothesis
and fails to find abnormal return.

In conclusion, three out of six parametric tests reject the null hypothesis. All non-
parametric tests fail to reject the null hypothesis. Notice, the sample is not normally dis-
tributed, thus the non-parametric tests outperform the parametric tests. There is no sig-
nificant evidence showing that the deals create shareholder wealth. The total sample
shows no indications on abnormal return.

5.1.1 Cross-Border versus Domestic

This section distinguishes between cross-border and domestic deals.

In table 7, the test statistics of cross-border sub-samples are presented.

Table 7: Cross-Border sample test statistics

Source: Own contribution

The average CAR for the cross-border sub-sample is 2,33%, with a sample size of
119 deals. The parametric tests T1, T3, T4 and T5, rejects the null hypothesis of CAR
with significance levels of 1%, 1%, 5% and 5% respectively. The positive CAR for the
parametric tests is in line with Aw & Chatterjee (2004), Doukas & Travlos (1988), Dun-
ning (2000) and Kim & Inkpen (2005) show significant positive results in CAR in their
respective studies regarding cross-border M&As. In opposition Moeller & Schlingemann
(2005) find significant negative results on CAR in their study. The T2 adjusted and T3
adjusted fails to reject the null hypothesis. The parametric tests show cross-border deals
create an abnormal return. No significant results are found in the non-parametric tests,
and therefore unable to reject the null hypothesis. Thus, it can be concluded that cross-
border deals do not statistically have a significant impact on CAR for the acquiring

In table 8, the test statistics for domestic deals are presented:

Table 8: Domestic sample test statistics

Source: Own contribution

The average CAR for domestic deals shows an average CAR of 0,20% in excess re-
turn, consisting a sample size of 131 deals. The parametric and non-parametric tests do
not show any significant results for domestic deals, and fail to reject the null hypothesis.
Significant results are found in the test statistics for cross-border and the sample indi-
cates to create higher abnormal return compared to the domestic sample.

5.1.2 Method of payment

This section distinguishes between three types of payment methods in the 250 deals,
including Cash, Share and Mixed-payment. The statistical tests are presented respective-

In table 9, the test statistics for cash-based payment are presented.

Table 9: Cash payment sample test statistics

Source: Own contribution

The average CAR for the cash-based sub-sample shows 1,28% excess return, con-
sisting a deals size of 134. The parametric test T1 with cross-sectional dependence and
T3 test with the standardized excess return and cross-sectional interdependence rejects
the null hypothesis with significance levels of 1% and 10%, respectively. The t-statistic
for these tests shows a positive effect on CAR. The remaining parametric tests fail to re-
ject the null hypothesis with a 10% significance level. The conclusively cash-based pay-
ment does not have any statistically significant impact on acquires CAR.

Chang (1998) and Bowers & Miller (1990) previous studies on cash payment also
show a neutral impact on CAR. Moeller, Schlingemann, & Stulz (2004); Martynova &
Renneboog (2009) and Walter, Yawson, & Yeung (2005) show statistically significant
results concluding that cash-based payment has a positive impact on acquire CAR.

In table 10, the test statistics for share-based payment are presented.

Table 10: Share payment test statistics

Source: Own contribution

The average CAR for the share-based sub-sample shows -2,60% in excess return,
consisting a sample size of 41. The sample size is small and may give weak statistical
power. The parametric tests T1 with cross-sectional dependence and the T4 test with
induced variance adjustments, rejects the null hypothesis with significance levels of 10%

and 5%, respectively. The tests show a negative impact on CAR. The remaining para-
metric tests fail to reject the null hypothesis. The non-parametric tests T6 and T7 reject
the null hypothesis with significance levels of 10% and 5%, respectively. The t-statistic
shows that CAR is negative impacted. The remaining T8 rank Corrado test fails to reject
the null hypothesis saying CAR is equal to zero.

Concluding on the share-based sample the test statistics shows statistically signifi-
cant results saying that share-based payment method has an adverse impact on CAR
and the shareholder wealth. In line with the conclusion, several theories conclude that
paying with shares create a negative impact on the shareholder wealth, which is in line
with Martynova & Renneboog (2009) findings.

In table 11, the test statistics for mixed payment are presented. The mixed payment
is defined as a combination of cash, shares, and debt.

Table 11: Mixed payment test statistics

Source: Own contribution

The mixed-based sample shows an average CAR of 2,47% in excess return, consist-
ing 75 deals. The parametric test T1, T3, and T5 rejects the null hypothesis with signifi-
cance levels of 5%, 5% and 10%, respectively. The tests argue for a positive impact on
CAR. The remaining tests fail to reject the null hypothesis. The non-parametric test T6
rejects the null hypothesis, with a 10% significance level. The remaining tests fail to re-
ject the null hypothesis.

Concluding the mixed sub-sample, the statistics show a weak indicator of positive
effects on CAR. Otherwise, the statistics show a neutral impact on the CAR. Hence to
specify the requirements regarding the mixed payment, the comparisons with previous
studies are difficult.

Discussed in the literature review it is expected that the share-based payment will
have a statistically significant negative impact on CAR. In line with the test statistics, the
share-based payment shows to affect the CAR negatively.

5.1.3 Deal Value

This section distinguishes between quartiles of deal values. The statistical tests are pre-
sented from Deal Value 1, including the 25% largest deals, followed up by Deal Value 2,
3 and 4.

The test statistics for Deal Value 1 are presented in Table 12.

Table 12: Deal value 1 test statistics

Source: Own contribution

The Deal Value 1 consisting 62 deals, with an average CAR of -0,74% in excess re-
turn. All the parametric tests and the non-parametric tests are significant at the level of
10%. Hence the tests fail to reject the null hypothesis. The conclusion is that large deals
in the pharma industry do not have any significant impact on CAR.

In table 13, the test statistics for Deal Value 2 are presented.

Table 13: Deal value 2 test statistics

Source: Own contribution

The Deal value 2 includes 63 deals, with an average CAR of 1,28% in excess return.
The test statistics shows a significant result in only the T1 parametric test, at a 1% signif-
icance level, concluding that the null hypothesis is rejected. The t-statistic shows a posi-
tive impact on CAR. The remaining parametric tests and non-parametric tests fail to re-
ject the null hypothesis.

In table 14, the test statistics for Deal Value 3 are presented.

Table 14: Deal value 3 test statistics

Source: Own contribution

The deal value 3 includes 62 deals and has an average CAR of 2,12% in excess re-
turn. The test statistics shows significant results in the T1 test, saying that the null hy-
pothesis is rejected. The remaining tests including parametric and non-parametric tests
fail to reject the null hypothesis. Deals presented in the third quartile do not have any
impact on the shareholder wealth.

In table 15, the test statistics of deal value 4 are presented.

Table 15: Deal value 4 test statistics

Source: Own contribution

The fourth quartile and smallest deals are having a CAR of 1,34% in excess return,
including a sample size of 63. The test statistics shows significant results in T1 and T5,
rejecting the null hypothesis. The tests are significant at the level of 10% and 5%, respec-
tively. The remaining tests fail to reject the null hypothesis, concluding the test statistics
subsequently show no statistically significant results of the deals in the fourth quartile
whether CAR is positively of negatively impacted.

Discussed in the literature review, it is expected that the CAR regarding deal value
can be complicated and be either positively or negatively affected by large deals. The
test statistics are in line with the expectations, showing that all quartiles fail to reject the
null hypothesis.

5.1.4 US or EU

This section distinguishes between EU and US in a geographical perspective focussing

on the location of the acquirer. The section will first examine US followed up by EU.

The table 16 illustrates the test statistics for the US sample.

Table 16: US test statistics

Source: Own contribution

The US sample consists 127 deals, with an average CAR of -0,27%. Explaining the
CAR, the test statistics shows no significant results with a significance level above 10%.
The test statistics fail to reject the null hypothesis, concluding CAR is equal to zero. If the
acquirer is placed US, there is no statistically significant result saying that CAR is nega-
tively or positively impacting the shareholder wealth.

The table 17 illustrates the test statistics for the EU sample.

Table 17: EU test statistics

Source: Own contribution

The EU sample size is 91, with an average CAR of 1,63% in excess return. Explain-
ing the CAR the parametric tests shows significant results in T1, significant at the level
of 1%, and T3, significant at the level of 10%. The tests reject the null hypothesis, with a
t-statistic indicating a positive effect on CAR and the shareholder wealth. The non-
parametric test T6 and T8 shows significant results rejecting the null hypothesis with a
significant level of 10%. The T7 test fails to reject the null hypothesis. The results of the
tests are thus mixed. Even though CAR deviates significantly from zero, it is not possi-
ble to determine whether the effect is positive or negative for the shareholder return,
when the acquirer is EU located.

In line with the discussion and expectations in the literature review, it is expected
that the results show no clear evidence on CARs influence on the shareholder wealth.
The results show no clear evidence on whether CAR is positively or not impacted by the
geographical deal characteristics, which is in line with this thesis expectations.

5.2 Summary of findings

This section summarises the findings in the previous sections. An illustration of the find-
ings is enhanced in table 18.

Table 18: Summary of findings

Variables Parametric test return [-1;1] Non-parametric test return [-1;1]

Total sample Positive (3*/7) -
Cross-Border Positive (4*/7) -
Domestic - -
Cash Payment Positive (2*/7) -
Share Payment Positive (2*/7) Positive (2*/3)
Mixed Payment Positive (3*/7) Positive (1*/3)
Deal value 1 - -
Deal value 2 Positive (1*/7) -
Deal value 3 Positive (1*/7) -
Deal value 4 Positive (2*/7) -
US - -
EU Positive (2*/7) Positive (2*/3)
*: # of tests below a significance level of 10%
Source: Own contribution

Following up on the test statistics, table 18 present an overview. Three of the 12

sample characteristics show significant results in the non-parametric tests. The strongest
indication of CAR deviating from the null hypothsis is the share-based sample and the
EU sample. The share-based sample shows a clear indication of having a negative im-
pact on CAR, with two significant results in the parametric tests and non-parametric
tests respectively.

The EU sample shows significant results in parametric and non-parametric tests.

Though the results differ in the t-statistic, which complicate the predictions on the effect
on CAR. Ignoring the distribution of the samples, the cross-Border deals have a strong
indication of a positive impact on CAR. Moreover, the t-statistics has a level above two
and a significance level of 10%, in all the parametric tests.

Finally, the mixed payment method shows three significant results in the paramet-
ric tests and one significant non-parametric test, though at the significance level 10%.
The mixed payment gives a weak indication that CAR is created when deals are paid
with a combination of shares, debt, and cash. Though the sample does not differentiate
between the combinations, whether it is share/debt, cash/shares, etc.

5.3 Cross-sectional regression analysis

This section contains the cross-sectional regression analysis. In previous sections test
statistics are conducted and based on the specific sub-samples. The cross-sectional re-
gression analysis differs from the previous test statistics by combining all chosen varia-
bles at the same time, whereas test statistics only look at one variable at a time. The re-
gression model is explained in section 3.6.

The dependent variable in the total CAR with the event window defined as [-1;+1].
The independent variables in the regression model are defined as cross-border, cash,
shares, other, and US where all variables are dummies. The deal value is interval scaled
in euros ().

A test for correlation is conducted before the regression analysis. The aim of this is
to test whether there are any correlations between the control variables and the deal
value. If correlation appears the variables cannot be used in the same regression model
at the same time, since inter-correlation will occur. Table 19 shows that, none of the con-
trol variables correlates with each other. Hence, all can be concluded in the regression at
the same time.

Table 19: Correlation



CAR 1,0000 -0,0024 -0,0622 -0,0578
MV -0,0024 1,0000 0,0759 0,0118
EMPLOYEES -0,0622 0,0759 1,0000 0,1785
DV -0,0578 0,0118 0,1785 1,0000

Source: Own contribution

The different models are performed in EViews. Table 20 presents the coefficient
and the std. error for all variables. The p-value is noted with stars and shows whether
the variables are significant or not. Further included in table 20 are the R-Squared and
the adj. R-squared, and explains how specified the models are. The model is better de-
fined if the R-squared is high. Adding more variables the R-squared will increase, where
the adj. r-squared corrects them, hence the adj. R-squared gives a correct explanation of
the models extent to explain the variances.

P-values and the F-statistics are linked, which is also shown in 20. F-statistics ex-
plain if or not all the variables are equal to zero. Verbeek (2012) explains if all variables
are equal to zero thus the model fails to explain the dependent variables since the inde-
pendent variables do not differ from each other.

The expectations in the literature review combined with the result from the test sta-
tistics it is expected that the result of the regression will show a significantly positive
CAR on deals made cross-border compared to domestic deals. Moreover on the method
of payment, it is expected that share-based payment will influence the shareholder
wealth negatively. Also, it is expected that deal value show insignificant results regard-
less of the size of the deal. Hence, CAR can be influenced both in a positive and negative
direction. Finally, it is expected that the geographical deal characteristics show insignifi-
cant results, regardless of the location of the acquirer is in EU or US.

The cross-sectional analysis is built upon the total CAR, which is the dependent
variable that consists of the sample of 250 observations. This cross-sectional analysis will
give a reliable indication on CAR.

Moreover, the model is structured so that specification is added individually to see

what influence it has on CAR. All control variables are added to the regression analysis;

none of the control variables are excluded since none of them are correlated. The last
model in table 20 includes all variables defined in the regression.

Table 20: Cross-sectional regression analysis

Model 1

Model 2

Model 3

Model 4
Dependent variable CAR
Intercept 0,0267 0,0348 0,0228 0,0288
(Std. Error) (0,0274) (0,0272) (0,0295) (0,0292)
Cross-Border 0,0237 0,0190 0,0249 0,0200
(Std. Error) (0,0098**) (0,0099*) (0,0100**) (0,0101**)
Deal Value -0,0001 0,0001 -0,0001 -0,0001
(Std. Error) (0,0001) (0,0001) (0,0001) (0,0001)
Cash Payment -0,0171 -0,0168
(Std. Error) (0,0118) (0,0119)
Share Payment -0,4563 -0,0459
(Std. Error) (0,0157***) (0,0158***)
US 0,0060 0,0073
(Std. Error) (0,0112) (0,0111)
Other 0,0028 0,0030
(Std. Error) (0,0187) (0,0187)
MV -0,0001 0,0001 0,0001 0,0001
(Std. Error) (0,0001) (0,0001) (0,0001) (0,0001)
Employees -0,0001 -0,0001 -0,0001 -0,0001
(Std. Error) (0,0001) (0,0001) (0,0001) (0,0001)
Year Yes Yes Yes Yes
R-square 0,0904 0,1229 0,0921 0,1246
Adj. R-square 0,0152 0,0421 0,0085 0,0355
F-statistic 1,2024 1,5207 1,1016 1,3983
(p-value) (0,2567) (0,0719*) (0,347369) (0,112398)
***: Significant at the 1% level **: Significant at the 5% level *: Significant at the 10% level

Source: Own contribution

Table 20 investigates CAR on different variables. The F-statistics are only signifi-
cant in model 2. Hence, model 2 is the only model where some of the independent vari-
ables are equal to zero. Model 2, containing cross-border, deal value, cash and share
payment as independent variables show significance in share payment, with a coeffi-
cient of -0,4563 and a 1% significance level. Hence paying with shares creates a signifi-
cantly lower CAR than mixed payment in a domestic deal due to the positive intercept.

Further, this also proves that share payment creates a lower CAR than cash payment.
This is proven in the coefficients of the two variables. The rest of the variables in model
2 show that none of the remaining variables are significance enough to explain the per-
formance of CAR. R-square and adj. R-square rather low of 12,29% and 4,21% respec-
tively, hence the explanatory power is bad. Eventually, model 2 can only explain 4,21%
of the variance.

Model 4 includes all variables. Moreover, model 6 has an explanatory power of

3,55% in the adj. R-square, note that the adj. R-square is used since it is mere precise the
R-square, since adding variables can penalize the explanatory power. Model 4 shows a
significant result in cross-border as well as deal value where cross-border has a positive
coefficient of 0,0200 at a 5% significance level. Share payment shows a negative coeffi-
cient of -0,0459 at a 1% significance level. The positive coefficient indicates that cross-
border create positive shareholder wealth than domestic deal, which is also found in the
test statistics. Furthermore, the negative coefficient from share payment indicates that
financing a deal through shares create negative return for shareholders and creates low-
er return than mixed and cash.

6. Summary and conclusion

This thesis investigates 250 deals from the pharma industry from the period 2000-2014.
The deals cover globally with the majority from US where also Great Britain, Ireland,
Germany, Switzerland, Netherlands, France, Belgium, Sweden, Spain, Denmark, Ice-
land, Italy, Russia, and others are involved. The analysis is accomplished through the
event study methodology of abnormal returns and calculation models respectively
(MacKinlay, 1997). After a review of the pharma industry and characteristics of M&As,
there are no doubt that M&A activity contains several possibilities, which makes it a
beneficial managing tool to sustain in a dynamic and complex business environment.
Also, M&As have become frequent to FDI. This thesis supplies to the literature on M&A
characteristics by analyzing 250 deals in the pharma industry. Moreover, the overall
purpose of this thesis is to determine the acquiring companies ability to create share-
holder wealth.

The results from previous empirical studies show evidence of diverse results. Some
of the studies find a positive influence on the shareholder wealth where others find none
or even negative impact on the shareholder wealth. Nevertheless, the majority of the
evidence indicates that there is a positive CAR when acquisitions are cross-border. This

is the result of benefits included when a company acquires cross-border, such as diversi-
fication and increased market power.

Methodologically, this thesis is structured to analyze a short-term event study, to

give a comprehensive result. The sample is divided into 11 characteristics on M&A
deals. Theses characteristics are all based on cross-border or domestic, method of payment,
deal value, and geography. Also with the event study methodology, the abnormal returns
are provided for the use of the market model. CAR is verified with the implementation
of seven parametric tests and three non-parametric tests. Finally, a cross-sectional re-
gression analysis is conducted to further test CAR.

The thesis conducted following results based on the sub research questions stated
in the introduction:

SRQ 1: Do cross-border or domestic acquisitions create shareholder wealth in the pharma indus-

Based on the sub-question, the results show partially significant results and gained
shareholder wealth to the acquirer company when the acquisition is cross-border. The
evidence is based on significant results in a greater part of the parametric tests, knowing
that the non-parametric tests are more powerful due to the distribution of the sample
deviating from a normal distribution. The cross-sectional regression shows that cross-
border deals generate significantly higher returns to shareholders compared to domestic

SRQ 2: Do methods of payment have an impact on the shareholder wealth in the pharma indus-

The method of payment shows dissimilar results when distinguishing between

cash, share and mixed payment method. The cash-based payment shows no major evi-
dence on CAR, with only two parametric tests showing significant results. Also, the
non-parametric tests and cross-sectional regression do not show any significant results,
concluding that CAR is equal to zero. Share-based payment shows strong significantly
lower returns to shareholders compared to mixed payment, when looking at the cross-
sectional regression. With two significant parametric and two non-parametric tests re-
spectively combined with the cross-sectional regression, the conclusion is that CAR is
negatively affected when the deals are paid in shares. Lastly, the mixed-based payment
shows significant results in four tests, concluding that there is a limited evidence of a
positive CAR.

SRQ 3: Does the deal value have an impact on the shareholder wealth in the pharma industry?

The deal value shows almost identical results, saying that CAR is not influenced by
the size of the deal. The strongest evidence is from the deal value 4 containing the small-
est deals, with two significant results and a t-statistic showing positive impact on CAR.
The remaining sub-samples and the cross-sectional regression has no evidence for the
impact on CAR. Hence, the size of the do not differ significantly.

SRQ 4: Do acquiring companies located in EU or US create shareholder wealth in the pharma


The geography on the acquiring company show no significant evidence on ac-

quires located in the US. The EU sub-sample shows four significant tests. The non-
parametric tests outperform the parametric and show deviating results. The CAR can
both be positive and negative impacted when the acquiring companies are located in

Based on the sub-questions and results there are limited evidence for positive re-
turn on deals made in the pharma industry. Executives implementing this strategy can
expect a CAR of approximately 2% for the shareholders. Though this is associated with
uncertainty. The results are only significant at a 5% and 10% level, combined with the
insignificant non-parametric tests it enhances the uncertainty.

On the EMH, the results contradict the theory stating that the market is efficient in
the semi-strong form thus prices are fully reflected by all available information and
therefore it is not possible to earn an abnormal return because investors change invest-
ment strategy immediately after receiving new relevant information.

Based on this an overall conclusion is that there is great uncertainty regarding the
specific characteristics on the M&A deals, where some characteristics have a positive
impact on CAR others do not or even exhibit negative CAR.

Hence, acquirers shareholders in the pharma indsutry can expect a limited proportion of cumula-
tive abnormal return on M&A transactions.

7. Critical discussion
The objective of this thesis is to achieve a complete understanding of the pharma indus-
try and the acquirers shareholder wealth in M&A deals. Due to the extent of this thesis
and the limited access of data, all factors regarding deals and characteristics is not cov-
ered. These limitations are necessary to solve the many aspects M&As contain. The fol-
lowing section will present a critical discussion of the limitations this thesis has had, and
suggestions will be made on potentially further research. Finally, this section will give a
clarification of the authors thoughts regarding this research thesis.

This thesis is based on the ability of the bidders company to create shareholder
wealth, from a short-term perspective. Eventually this means that targets shareholders
are not taken into consideration. Analysing only one determinant of an M&A activity,
context regarding both parties capability to create abnormal return around announce-
ment may be lost. Capron & Pistre (2002) explain that the context referred to may re-
quire a deeper understanding of the bidder company due that the recourses and capabil-
ities transferred between the bidder and target may have a greater influence. An analy-
sis of the target company can be implemented and create a new interpretation of the
shareholder wealth. Moreover it can give an even deeper explanation of the M&A activi-

Another interesting dimension to perform this research can be to look at the share-
holder wealth in the long run. Different from this event study a long-term event study in
line with Raghavendra Rau (1998) will be conducted. The long-term study can be inter-
esting to conduct since it can measure synergies from resources and capabilities between
the two parties. Moreover the performance can be measured for the new entity.

As already noted in study, there are limitations to the methodology used when
conducting an event study. The market efficiency theory contains that stock prices asso-
ciated with the transactions have to appear on the chosen event window, in order to
give a precise a reliable estimation of the market. Hence if a rumour is priced in the
stock, there is no possibility to measure any influences. In addition all movements re-
garding stock prices that appear within the event window are related to the M&A an-
nouncement. This research does not cover and control other possible factors that may
affect the stock price. Another limitation is that acquirer companies have to be listed in
order to be included in such event studies. This opens for further research on emanating
non-listed companies.

Another interesting dimension, but due to the scope of the thesis, is to look at the
financial advisors, their reputation and how they perform. In general the top advisors
have the best reputation, which is associated with high price. Though some studies find
the top advisors does not necessarily create more shareholder wealth than other advi-

The data implemented in this thesis consist only of large deals. Section 5.1.3 show
that CAR is unpredictable regardless of the deal value. Hence CAR can still have an ad-
verse influence on the shareholder wealth even though the deal value is high. The 250
deals explained in section 4.2 cannot represent the whole population for the pharma in-
dustry, since only large deals are implemented in the sample. This may cause biases.
These the findings cannot be interpreted and represent the whole population.

Including random deal values will firstly give a larger sample and secondly make
this research more general. Using only large deals (minimum 300 million) can bias the
findings. The conclusion drawn based on the data used is not representable for the en-
tire population.

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1986), 48(4), 817.

I. Eviews Program Code
E-views code, used for obtaining alpha and beta data i.e. market model

For !i = 1 to 250
smpl @all
matrix(250, 2) beta
series afkast = x!i
series indeks = i!i
vector comp = x!i
vector index = i!i
smpl 1 202$
equation mm.ls afkast c indeks
beta(!i,1) = c(1)$
beta(!i,2) = c(2)$
delete comp index$

II. Formulas

Jarque-Bera formula:
! !!! !
= ! ( ! + !

III. Test statistics
T-test with cross-sectional dependence, (Brown & Warner, 1985)
!! = ~ 1 ,

1 ! !
= !

1 !! 1 !
! = !" = !
! !!! !

!!! !
!!"# =
3 !

T-test with cross-sectional independence, (Brown & Warner, 1985)

1 !
! ! !"
!! = ~(0,1)
1 ! 1 ! 1 !
! 1 !!![ !" !!! !" ]

Adjusted T-test with cross-sectional independence (Patells adjustment), (Brown &

Warner, 1985; Patell, 1976)

1 !
! ! !"
!!! = (0,1)
1 1 1 ! 1 !
! ,! !
! !! !
! 1 !!!(!" ! !" ) (1 + + !! !
! !" !

Standardized excess return cross-sectional independence (Brown & Warner, 1985)

1 !! ! !!
! !!! !" 1 !
!! = = !" ~(0,1)
1 ! !!!

Standardized excess return cross-sectional independence. Adjusting for forecast vari-
ance (Brown & Warner, 1985; Patell, 1976)
!! !
!!! !"
!!! = (0,1)
! ! 2
! 4

Adjusting for event induced variance cross-sectional method (Brown & Warner, 1985)

1 !
!!! !"
1 ! 1 ! !
( 1) !!![!" !!! !" ]

Adjusting for event induced variance standardized cross-sectional method (Bohemer et

al. 1991).

1 ! !
!!! !"
1 ! ! 1 ! !
( 1) !!![!" !!! !" ]

Sign test, (Corrado & Zivney, 1992)

2 !!
! !!!

!! !
1 1
= ( !" )
200 ! !!!