A SYNOPSIS ON AN EVENT STUDY ON MERGER ANNOUNCEMENTS AND INVESTOR SENTIMENT: THE STOCK MARKET REACTION TO MERGER ANNOUNCEMENTS IN INDIA

DURING THE YEAR 2011

PRESENTED BY: EEBA AFSAR BBM-VI SEM ROLL NO. 097512

INTRODUCTION

In this global era, Merger and Acquisitions has become a common parlance. Companies are choosing Merger and Acquisition as a way to expand faster, capture new market and enter new boundaries A merger is a combination of two companies where one corporation is completely absorbed by the other combination. An event study is a statistical method used to gauge the impact of a corporate event, such as stock splits, earnings announcements and acquisition announcements. Using financial market data, an event study measures the impact of a specific event on the value of a firm.

This event study will test the idea of whether or not it is possible for an investor to earn above normal return with the announcement of a merger. This will therefore be a test of seeing how quickly the stock price of a firm reacts to the particular announcement. This study will be conducted assuming an efficient market

NEED OF THE STUDY:

Mergers & Acquisitions announcement usually attract great attention of the stock market. Hence there is a need to evaluate the impact of merger announcement on the stock returns. Many investors may like to purchase the shares on hearing merger announcements and like to book a profit before exiting the share market. This study examines whether the shareholders of the involved companies can earn any abnormal return. Many new and small investors are entering Indian stock market. This study helps them to know when they can reap abnormal profit, by investing in a company around merger announcements.

OBJECTIVES OF THE STUDY

To study the impact of merger announcements on stock market returns of the companies involved To test the speed with which the M&A announcement information are impounded in the stock returns of the companies. To test the idea of whether or not it is possible for an investor to earn above normal return with the announcement of a merger. To test that whether these fluctuations in normal returns occur on the date of announcement or earlier because of information leakage

LITERATURE REVIEW

Event Studies in Economics and Finance by A. CRAIG MACKINLAY The Wharton School, University of Pennsylvania- The most successful applications of event studies have been in the area of corporate finance. Event studies dominate the empirical research in this area. Important examples include the wealth effects of mergers and acquisitions and the price effects of financing decisions by firms.. Stock price reaction to merger announcements: an empirical note on Indian markets (Investment Management and Financial Innovations, Volume 5, Issue 1, 2008)- This study documented the market behavior around the merger announcement date for 25 stocks listed on the Bombay Stock Exchange in India for the period of 2000-2007. It was found that on an average, both the target and the acquiring companies show an uptrend in the CAAR few days prior to the announcement.

HYPOTHESIS
H01: The shareholders earn abnormal returns on stocks, on and immediately around the date of merger announcements. H11: The shareholders do not earn any abnormal return on stocks, on and immediately around the date of merger announcements H02: The shareholders earn an abnormal return on stocks during the pre announcement period due to information leakage H02: The shareholders do not earn any abnormal returns on stocks during the pre announcement period due to information leakage

RESEARCH METHEDOLOGY

Data: Secondary data of daily stock prices will be used for the study and will be collected from Centre for Monitoring Indian Economy (beacon) database with focus on Merger and Acquisitions activities in India and the BSE website. Methodology :In this study event study methodology is used to ascertain whether there was any abnormal returns associated with Merger and acquisition announcements of the companies involved using the following event windows: event window of 2 days before & 2 days after the merger announcement[-2,2] event window of 10 days before & 10 days after the merger announcement [-10, 10] event window of 10 days before the merger announcement till 1 day before the announcement [-10, -1] and an estimation window of 120 days Research Design: Causal research design

Sample Size: 20 important mergers in the Indian market during the year 2011.

Sampling technique: Simple random sampling technique

will be used. Statistical tools: The following statistical tools will be utilized: Risk and returns will be analyzed using expected return formula & beta value to measure the systematic risk of a security The market model for measuring and estimating normal returns on stock which is: R = a + b R + e where Rit and Rmt are the period-t returns on security i and the market portfolio, respectively, and eit is the zero mean disturbance term. ai, bi, and s are the parameters of the market model. Abnormal returns will calculated as AR(I,t)=R(i,t)-( a + bR(m,t)) T- test will be used to test the hypothesis
it i i mt it 2ei i

LIMITATIONS OF THE STUDY

All the limitations of the tools used are applicable to this study Nonsynchronous trading can introduce a bias.