CI Essay Example | Topics and Well Written Essays - 3750 words

CI - Essay Example Another impact of this study of effects of merger events is the impact it has on the competitiveness of the post merger firm in terms of profitability and efficiency. The competitiveness is a critical aspect to be considered by investors and managers before deciding on whether a merger is an appropriate financial decision to make. The way stock markets react to events around a merger and specifically the announcement of a merger can be used to reasonably predict the future financial and operational performance of firm in a financial market so long as it is efficient. This research looked at the stock performance of some of the listed stocks before a merger announcement and after the announcement. The daily stock prices were noted and analyzed statistically to highlight the changes in return and correlated with the stated event and other similar competing firms’ stock prices. It was generally noted that the announcement of a merger generally resulted in certain changes in the p rices of stock. Review of literature points out that there is a negative correlation between the stock returns and hence the value of the firm after an announcement of a merger. This could be explained using hypothesis put forward by behavioral finance scholars. This particular empirical study further reinforces the studies in which the post merger firm values as indicated by the stock prices using the cumulative average abnormal returns CAARs reduce with the announcement of a merger, just a few days of the announcement and well after the announcement has reached the public. Introduction Economists and financial analysts are sometimes faced with the challenge of figuring out the magnitude of the effect an economic event has on the underlying value of firms. This implies that they have to measure the impact based on a particular cause or event. To achieve this the event study methods have developed that assist in the construction of effective models that easily predict the value of a firm based on an event. This is basically an event study that employs residual analysis to evaluate and analyze how a market behaves to an announcement of a merger. A company merger would mean that a company would inherently have more capital size, increased in operations and more diversification. This however does not always result in improved profitability as it could be hindered by excessive costs of acquisition and regulation obstacles. In previous studies it has been noted that an event such as the announcement of a merger had a positive market reaction. This can be investigated using abnormal stock returns noted during such events. As earlier stated the announcement of a merger and or acquisition shall be regarded as the event for the purposes of this study. This research paper has the following objectives: (a) to investigate whether news or any other publicly available information can influence the price patterns of the acquirer and (b) to examine the impact a merger announc ement has on the stock prices of the acquired. The research shall be carried out by comparing the stock prices and daily returns before the merger announcement and immediately after the merger announcement using the daily closing stock prices. This particular paper is organized into four sections. The first section shall review the literature on previous research on event studies related to mergers