VIKALPA • VOLUME 38 • NO 3 • JULY - SEPTEMBER 2013 23

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ExecutiveSummary

A Study of Wealth Effects of TakeoverAnnouncements in India on TargetCompany Shareholders

T Mallikarjunappa and Panduranga Nayak

KEY WORDS

Takeover Announcements

Wealth Effect

Stock Price Performance

Target CompanyShareholders

Market Model

Economic Liberalization

The business strategy of inorganic growth is carried out by companies by resorting to

actions which prominently include mergers, takeovers, and strategic alliances. There

is a rapid growth of both mergers and takeovers in India subsequent to the economic

liberalization. The companies consider takeover activity as the quickest means of cor-

porate growth to enhance their size and face the domestic and global competition.

In spite of several decades of vast research, researchers have not come to the final

conclusion on the wealth effect of announcements of takeovers on the shareholders of

participating companies. While some studies justify takeover as a socially productive

activity which creates value for the shareholders, others provide contrary evidences to

show that they destroy value for the shareholders. In India, only some studies have

analysed the impact of M&A announcements on the stock return performance of com-

panies involved and there is lack of evidences on wealth effects on shareholders.

Therefore, this paper assesses the impact of takeover announcement on the stock price

performance of target companies by taking a sample of 227 companies which received

takeover bids during 1998-2007. The stock price reaction is examined for a period of 61

days surrounding the bid announcement day employing standard market model. BSE-

200 index is used as a proxy for the market. The regression co-efficient and the con-

stant terms are estimated over a period of 250 days (-280 to -31) and the statistical

significance of the results of the study is determined by non-standardized and stan-

dardized abnormal return methods. Both raw returns and log returns are examined.

Results of the study show that target company shareholders experience substantial

and statistically significant cumulative average abnormal returns (CAARs) of 27-37

percent — 37 percent when raw returns are employed and 27 percent when log returns

are employed. The conclusions remain unchanged irrespective of the testing proce-

dure used (i.e., non-standardized or standardized abnormal returns method) and even

for several shorter event window periods within a broader event window of 61 days.

The results for target companies are consistent with the evidence of extant research

that major benefits from M&As accrue to target company shareholders.

The practical implication of the study is that there is a large and significantly positive

wealth effect on the target company shareholders in response to the announcement of

takeovers. Takeovers offer an opportunity to shareholders of target companies and

general investors to make profits both in the period before and after the announcement

of the takeover bid.

24

Companies can grow either internally or externally.

Internal growth, which is also called organic

growth, is achieved by opening up of branches,

introducing new products or product lines and the like.

The business strategy of external growth or inorganic

growth is carried out by companies by resorting to ac-

tions which prominently include mergers, takeovers, and

strategic alliances. Mergers and takeovers have become

an important form of geographical expansion across the

world. Cross-border M&A deals have increased from $30

billion in the year 1987 to $583.6 billion in the year 2006,

when only deals valued at over $1 billion are considered.

The number of deals during this period has increased

from 14 to 172 (UNCTAD, 2007, p.6). The increase in the

M&A deals is on account of economic liberalization and

integration of economies world over. Mergers generally

involve the combination of two or more existing compa-

nies into one company, either old or new, whereas take-

overs generally involve acquiring the management control

of an existing company by another company by acquir-

ing controlling interest in that company. In a takeover,

both sets of companies remain separate legal entities

though there is a change in the management control of

the acquired company. The company which acquires the

controlling number of shares in the other company is

called acquiring company or purchasing company and

the company which is controlled by the acquiring com-

pany is called target or acquired company.

There has been a rapid growth in the mergers and acqui-

sitions (M&As) activity in India since the initiation of

economic reforms in 1991 (Beena, 2004, p. 11). Though

both merger and takeover activities have been taking place

simultaneously in India, takeovers have played a signifi-

cant role in corporate expansion, particularly in the last

few decades (Bhoi, 2000, p. 147). The changed economic

scenario has contributed to the growth of takeover activ-

ity in India. The business entities now have to compete

not only with companies in the Indian market but also

with corporate giants in the international market which

are fully equipped with huge capital and superior tech-

nologies. Companies find takeover activity as the quick-

est tool of growth to enhance the balance sheet size (Beena,

2004, p. 22) and face the global competition. The increased

financial strength helps companies to survive and grow.

While takeover activity has undoubtedly increased dras-

tically all over the world, whether this activity has cre-

ated wealth for the acquiring, target, and the combined

firm or the shareholders, is an unresolved question. In

spite of several decades of vast research, there has been

no conclusive evidence on the wealth effect of takeover

announcements on the participating companies’ share-

holders. While some studies justify takeover as a socially

productive activity which creates value for the sharehold-

ers, others provide contrary evidences to show that they

destroy shareholders’ wealth of the participating compa-

nies. Most of the event studies show that mergers create

shareholder value, with most of the gains accruing to the

target company. For instance, review studies like Jensen

and Ruback (1983), Jarrell, Brickley, and Netter (1988),

Bradley, Desai, and Kim (1988), Datta, Narayanan, and

Pinches (1992), Bruner (2002), and Campa and Hernando

(2004) find that target shareholders’ returns are on an

average significantly positive in almost all cases. These

surveys report average cumulative abnormal returns

(CARs) in the range of 20-30 percent. Reviewing the ear-

lier studies, Campa and Hernando (2004) find large CARs

to target company shareholders, but significantly lower

gains for more recent transactions.

The evidences on gains to bidding firms on the announce-

ment of M&As are mixed. These studies find either break-

even (e.g., Andrade, Mitchell, & Stafford, 2001; Campa &

Hernando, 2004; Georgen & Renneboog, 2004) or a small

statistically insignificant gain (e.g., Mandelker, 1974;

Langetieg, 1978; Asquith, 1983; Asquith, Bruner, &

Mullins, 1983) or in some studies negative bidder returns

(e.g., Dodd, 1980; Cornett & Tehranian, 1992; Houston &

Ryngaert, 1994; Fee & Thomas, 2004; Moeller,

Schlingemann, & Stulz, 2005). Bruner (2002) opines that

the pattern of findings about market-based returns to

buyer firm shareholders is more inconsistent. He sum-

marizes the findings of 44 studies of which 20 studies

report negative returns with 13 significantly negative

varying from one to three percent while 24 studies report

positive returns, 17 of which reflect significantly positive

returns. He concludes that in the aggregate, abnormal

returns (ARs) to buyer shareholders from M&A activity

are essentially zero. Goergen and Renneboog (2004), re-

viewing the literature on wealth effects of announcement

of M&A, opine that there was little consensus about the

announcement of wealth effects for the bidding firms and

states that about one-half of the studies report small nega-

tive returns for the acquirers whereas the other one-half

find zero or small positive returns for the acquirer. Campa

and Hernando (2004) review 15 studies and opine that

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VIKALPA • VOLUME 38 • NO 3 • JULY - SEPTEMBER 2013 25

the evidence on returns to buyer firms is less conclusive.

Ten studies reviewed by them report negative ARs and

the negative returns vary between less than one percent

and five percent. In most of the cases, even CARs are sig-

nificantly different from zero. The results in these studies

contrast with those which have found positive returns to

acquiring firms (reported by Jensen & Ruback, 1983;

Jarrell, et al., 1988; Datta, et al., 1992). Seven studies ex-

amined by them report zero or positive returns to

acquirers. They conclude that in the aggregate there is no

strong evidence for either positive or negative CARs to

acquirers.

Even the effect of wealth creation from M&As on the com-

bined firm is not clear. The combination of positive CARs

to the target and break-even returns to the buyer, raise the

question of value creation from mergers. This is because

of size difference between the buyer and the target. Nor-

mally, the size of the buyer is substantially larger than

the target. A large percentage gain to the target share-

holders in such cases could be neutralized by a small

percentage loss to the buyer shareholder (Jensen & Ruback,

1983; Asquith, et al., 1983; Houston & Ryngaert, 1994;

Bruner, 2002; Campa & Hernando, 2004; Goergen &

Renneboog, 2004; Moeller, Schlingemann, & Stulz, 2004;

and Moeller, Schlingemann, & Stulz, 2005). Most of the

studies which look at the combined weighted return for

the target and the buyer firms report positive combined

returns. However, the magnitude of the CARs in these

studies is relatively low and at times negative and value

destroying. Bruner (2002) reports the findings of 20 stud-

ies, almost all of which report positive combined returns,

with 11 of the 20 being significantly positive. His find-

ings indicate that M&As do pay the investors in the com-

bined buyer and target firms. Campa and Hernando

(2004) and Goergen and Renneboog (2004) also subscribe

to the evidence of Bruner (2002). The finding of Bruner

(2002) is consistent with the previous evidence in the lit-

erature (for instances, Jensen & Ruback, 1983; Jarrell, et

al., 1988; Datta, et al., 1992; Cybo-Ottone, & Murgia, 2000)

suggesting that M&As do result in a total increase in the

combined shareholder value of merging firms. The evi-

dence from Fee and Thomas (2004) is also consistent with

the evidence provided by Bruner (2002).

The evidence from India is scarce in this area and the

review of studies conducted abroad indicates that the tar-

get company shareholders gain from the M&As. There-

fore, we would like to examine evidence from an emerging

economy perspective to ascertain whether or not the take-

over announcements create value for the target company

shareholders. We assess the impact of takeovers an-

nouncements on the stock price performance of target

companies by using a sample of 227 companies for a pe-

riod of nine years from April 1998 to June 2007. We fol-

low a standard market model to estimate the abnormal

returns (ARs) for 61 days (i.e., 30 days before, 30 days

after, and the day of the takeover announcement), and

find out the statistical significance of the results by non-

standardized and standardized abnormal returns

method. Our results are based on both raw returns and

log returns.

The results of this study show that takeovers in India

create wealth for the target companies’ shareholders for

an event period of 61 days surrounding the announce-

ment of takeovers. The target companies’ shareholders

realize a cumulative average abnormal return (CAAR) in

the range of 27-37 percent. These conclusions hold good

even for shorter event windows within a broader event

window of 61 days surrounding the takeover announce-

ment. Our findings are analogous with that of vast major-

ity of studies conducted in other countries.

LITERATURE REVIEW

Review of Foreign Studies

Researchers generally employ two ways to address the

impact of M&As on shareholders. The first approach

employs share price data to know gains and losses to

shareholders (i.e., ex ante measure). The second approach

is to analyse the profitability of companies using account-

ing data (i.e., ex post measure). A number of foreign stud-

ies have focused on the short-term wealth effects of M&A

announcements on the stock prices of the target company

shareholders. We consider here only those studies which

assess the impact of takeover announcements on the tar-

get company shareholders. Dodd and Ruback (1977), ex-

amining the tender offers for the period 1958-1976 in the

US, both successful and unsuccessful, report that target

firms earn large positive ARs from tender offers, and most

of these returns occur in the month of the offer. Their evi-

dence indicates that in the month of announcement, tar-

get firm stockholders earn large and significant ARs of

20.58 percent for successful offers and 18.96 percent for

unsuccessful offers. Firth (1980) examines takeover activ-

ity in the UK in the period 1969-1975 and finds that the

26

residuals for the target company shareholders in month

zero are highly significant at 0.281 and 0.312 to offerees

taken over and offerees not taken over, respectively, and

99 percent of the securities recorded gains. Firth concludes

that mergers and takeovers resulted in benefits to the ac-

quired firms’ shareholders and the acquiring companies’

managers, but that losses were suffered by the acquiring

companies’ shareholders.

A review study undertaken by Jensen and Ruback (1983)

in the US indicates that the corporate takeovers generate

positive gains, that target firm shareholders benefit, and

that bidding firm shareholders do not lose. They find that

target firms in successful takeovers experience statisti-

cally significant abnormal stock price changes of 20 per-

cent in mergers and 30 percent in tender offers. Chatterjee

(1986), examining the US merger data, finds that the re-

sources behind financial synergy tend to create more value

than the resources behind operational synergy, and that

unrelated targets significantly outperform the related,

non-horizontal targets. He finds that on average, the tar-

get in an unrelated merger gained 17.48 percent during

five days surrounding the merger announcement as op-

posed to a gain of 12.32 percent for the targets in related,

non-horizontal mergers. Singh and Montgomery (1987)

examine 105 US acquisitions of market value greater than

$100 million during 1975-1980 and show that acquired

firms in related acquisitions have higher returns than

acquired firms in unrelated acquisitions. Bradley, Desai,

and Kim (1988), for a sample of successful tender offers

occurred between 1963 and 1984 in the US, find that tar-

get stockholders have captured the lion’s share of the

gains from tender offers, and that competition among bid-

ding firms increases the returns to targets and decreases

the returns to acquirers. They prove that the targets of

multiple-bidder contests realize greater gains not only at

the expense of the shareholders of acquiring firms but

also from the greater synergistic gains that accompany

these transactions. Jensen (1988), reviewing the earlier

studies, indicates that the market for corporate control is

benefiting shareholders, society, and the corporate form

of organization in the US. He observes that the gains to

selling firms are huge though the buyer firms do not gain

much. Jarrell, Brickley, and Netter (1988) summarize the

results of a review study for 663 successful tender offers

in the US for the period 1962-1985 and observe that pre-

miums to target in successful tender offers averaged 19

percent in 1960s, 35 percent in 1970s, and 30 percent for

1980-1985. They report that during 1960-1985, acquirers

earn a statistically significant excess return and that multi-

ple bidding tend to increase target premiums and reduce

bidder returns.

Franks and Harris (1989) examine the impact of over 1,800

UK takeovers on the wealth of the shareholders between

1955 and 1985 and report that targets gain 25-30 percent

and bidders earn zero or modest gains around the merger

announcement date. Limmack (1991), analysing the UK

data, points out that for the period from bid month to

outcome month, the target company shareholders gain

substantially from the bid, and shareholders of acquiring

company do not lose. For target companies in abandoned

bids, he notes that the gains made during the bid period

remain for a period of at least two years subsequent to the

bid in anticipation of future bids. Datta, et al. (1992) pro-

vide an overview of the literature on wealth creation in

M&As in the US and show that while the target firm’s

shareholders gain significantly from M&As, those of the

bidding firm do not. He also reports that targets benefit

more in tender offers than in mergers.

Cybo-Ottone and Murgia (2000), for a sample of very large

M&A deals in the European banking industry for the pe-

riod 1988-1997, document a significant and highly posi-

tive effect to the target company shareholders for all the

event windows analysed. Bruner (2002) reviews and sum-

marizes the evidence from 14 informal studies and 100

scientific studies from 1974 to 2001 and shows that target

shareholders earn sizable positive market-returns; that

bidders earn zero adjusted returns; and that bidders and

targets combined earn positive adjusted returns. Goergen

and Renneboog (2004) analyse the market reactions to

187 large intra-European M&A deals with a value of at

least USD100 million. They find announcement effects of

9 percent for the target firms compared to a statistically

significant announcement effect of only 0.7 percent for

the bidders. The type of takeover bid has a large impact

on the short-term wealth effects with hostile takeovers

triggering substantially larger price reactions than friendly

operations. Campa and Hernando (2004) look at the value

generated to shareholders by the announcement of 262

M&As involving firms in the European Union over the

period 1998-2000. The study finds that target firm share-

holders receive on average a statistically significant CAR

of 9 percent in a one-month window centred on the an-

nouncement date. Campa and Hernando (2006) look at

the performance record of M&As that took place in the

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VIKALPA • VOLUME 38 • NO 3 • JULY - SEPTEMBER 2013 27

European union financial industry in the period 1998-

2002. They find positive excess returns to the sharehold-

ers of the target company around the date of announce-

ment and essentially zero returns to shareholders of the

acquiring firms around announcement. One year after

the announcement, the excess returns were not signifi-

cantly different from zero for both targets and acquirers.

Warell (2007) analyses the competitive and efficiency

impacts of a large merger which has occurred in the year

2000, in the world iron ore industry and show that the

merger announcement increases the value of the target

firm but not significantly for the acquiring firm. After ad-

justing the analysis to include several information re-

leases about the merger, the author finds that efficiency

improvements were the predominant motives behind the

merger.

Martynova and Renneboog (2008) examine the determi-

nants of M&A activity, and compile the findings for all

five waves since the end of the 19th century for the US, the

UK, Continental Europe, and Asia. They note that the

conclusions of empirical evidence on the profitability of

the takeovers do not entirely converge as to whether take-

overs create or destroy company value. They show that at

the announcement, takeovers trigger substantial value

increases, but most of these gains are captured by the

targets’ shareholders. Lubbers (2008) investigates the

wealth effects of takeovers in the mining industry in Ger-

many between 1896 and 1913. The study observes that

while the owners of the acquired companies were the clear

beneficiaries, those of the acquirers hardly gained sig-

nificantly. For M&A announcements in New Zealand

during the period 1983-2006, Marshall and Anderson

(2009) find evidence that stronger takeover regulation re-

sults in higher announcement returns and premiums for

targets. Using a global M&A data set and examining the

acquisition activity, occurring in 59 countries from Janu-

ary 1989 to December 2005, Croci and Petmezas (2009)

provide evidence supporting the view that the minority

shareholders in target firms’ gain significantly more in

countries with high stock market development than their

counterparts in the less-developed markets.

Review of Indian Studies

During the post-economic liberalization period, the level

of M&A activity has increased in India, based on both

numbers of M&As and the amount involved in these deals.

However, the volume of academic literature on M&As in

general and on the performance of bidders and targets in

particular, has not increased proportionately. We find

only a few stock price studies examining the performance

of the mergers and takeovers in India. Most of these stud-

ies examine the effects of mergers announcements and

not of takeovers. We find only two studies, i.e. Pandey

(2001) and Chakraborty (2010), which examine the im-

pact of takeover announcements on target company share-

holders in the short run. Pandey (2001) studies the stock

price performance of relatively large target firms surround-

ing open offers, between 1997 and 2001, in the context of

change of management. The sample of his study consists

of 16 open offers with value of above ̀ 10 crore. To assess

the impact of open offer announcements on target firms’

stock returns, he conducts event study methodology us-

ing market model and market adjusted model. The model

parameters are estimated by regressing individual daily

stock returns on the market index over the estimation pe-

riod (i.e., -51 days to -150 days). BSE Sensex is used as

market index for the market model. Pandey documents

significant announcement effects associated with the take-

overs in the Indian capital market. The study finds that

the target firm valuations increase in the run-up to an-

nouncement. The target firms’ stock prices earn signifi-

cant 8.7 percent returns between -2 and 0 day, 12.1 percent

between -10 and 0 day and 18.43 percent between -30 to 0

day. These results are consistent with the empirical stud-

ies undertaken elsewhere. Therefore, he strongly argues

that owing to relatively large insiders’ shareholdings,

takeover as governance mechanism is not likely to be ef-

fective, and private value of control may be the driver in

the market for corporate control. Chakraborty (2010), us-

ing the parametric and non-parametric tests, examines

the wealth effects of shareholders of the bidder, target,

and combined firms on the announcement of takeovers

for the period 2001-07. The sample for her study consists

of 67 targets from the financial sector which are listed in

Bombay Stock Exchange (BSE) and BSE listed corporate

bidders of these targets. The findings suggest that the

shareholders of target firms earn significantly positive

ARs on takeover announcements. However, further analy-

sis of her results reveal that the positive returns was the

contribution of only 19 firms, while, for the remaining 48

firms, there was no market reaction on takeover announce-

ments. Chakraborty provides some evidence that bidders

experienced post-event positive wealth effects on take-

over announcements. However, on closer examination,

she finds that this was not true for the majority as the

28

significant findings were the outcome of the reaction of

only two firms. On analysis of the combined returns, posi-

tive results were observed by the author. But this was

again largely because of two pairs of companies generat-

ing significantly positive results. This study concludes

that except for a few cases, which show positive returns,

takeovers in the financial services sector, in general, do

not evoke market reaction.

The evidences of review of studies on the impact of the

announcement of mergers on the stock prices are dis-

cussed below. Dash (2004) examines in detail the long-

run post-merger stock price performance of acquiring

firms in related and unrelated mergers completed in mid-

nineties (1994-1996) for a sample of 10 Indian mergers for

which stock price data are available for three years before

and five years after the mergers. He undertakes the event

study methodology, and employs market model to esti-

mate model parameters. For the five year period from

merger, he finds that the cumulative average abnormal

return (CAAR) is -0.684 percent which is statistically sig-

nificant at 1 percent level, indicating that the sharehold-

ers of bidder firms do suffer wealth decreases as a

consequence of merger. He also reports that the average

abnormal returns (AARs) are positive in the second and

third year succeeding the merger year and negative after

that. Dash notes that the CAAR is negative in the pre-

announcement period, but it is negative and significant

in the announcement period which demonstrates that the

market reacts negatively to the announcement of merger.

The study demonstrates that the shareholders of bidder

firms do suffer from the value destruction or negative syn-

ergy as a consequence of merger. Our observation is that

he examines the long-run post-merger performance of

acquiring firms and not of the target firms. He focuses on

long-term performance of the acquiring firms and not in

the short-run. Moreover, his study is confined to mergers

and does not include takeovers.

Rachappa and Satyanarayana (2007) examine the share

price performance of the acquiring and the acquired com-

panies. Capital Asset Pricing Model (CAPM) is used by

them to estimate the normal returns. The period of their

study is 12 months which consists of four months each

before, during, and after the announcement of the merger.

This study concludes that mergers result in abnormal gain

to the shareholders of the acquiring firm and abnormal

losses to the shareholders of the acquired firm. However,

they observe that the abnormal gains differ at various

stages of the merger process.

We discuss below the three studies published on differ-

ent time periods on the merger between Reliance Indus-

try Limited (RIL) and Reliance Petroleum Limited (RPL).

Kumar (2004) examines empirically the stock price per-

formance of the announcement of merger between RIL

and RPL in 2002, employing market model and market

adjusted model and using daily stock returns data for

an event window of 41 days (-20…0…+20). Results of

Kumar’s study reveal that the ARs for RIL based on both

models show negative gains in different time windows

except a marginal gain for a two-day window in the case

of market model. For the target firm RPL, he finds that the

announcement day return was found to be -0.867 per-

cent, and CAR decreases from -1.74 percent to -13.75 per-

cent during the period t = -10 days to t = +10 days. On the

basis of the findings, Kumar concludes that all benefits

from a merger are not capitalized in the acquiring firm’s

stock price at or before the announcement of the merger.

However, this study does not test the statistical signifi-

cance of the results as only one pair of companies is con-

sidered for the analysis. Mishra and Goel (2005) also

employ market model with an event window of 41 days (-

20…0…+20). Regression parameters were estimated by

them using 180 days data from the period before and af-

ter the announcement of the merger but excluding 20 days

before the announcement of the merger. Their study shows

that positive excess return occurred to the shareholders

of the target company, RPL, and negative excess returns

to the shareholders of the acquiring company, RIL. They

find that in the process of merger, despite the deal ap-

pearing to be favourable to the shareholders of RIL, they

lost, and RPL shareholders gained from the deal. They

also find that the RIL-RPL merger deal generated nega-

tive excess returns for the combined firm. The authors

infer that this deal was led with the ‘empire building’

motive. Reddy and Arun (2008) examine the financial

implications of announcement of RIL-RPL merger on the

shareholders’ wealth for en event window of 41 days (-

20, ..0…+20), employing the market model. Their study

shows that positive excess returns occurred to the share-

holders of the target company, RPL, and negative returns

to the shareholders of the acquiring company, RIL. How-

ever, the results of these three studies cannot be general-

ized as these studies examine results of a single merger

case and consequently do not use any statistical tools for

testing the results. While Kumar (2004) concludes that

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VIKALPA • VOLUME 38 • NO 3 • JULY - SEPTEMBER 2013 29

both the companies experience wealth loss, Mishra and

Goel (2005) and Reddy and Arun (2008) conclude that

shareholders of RIL lose and shareholders of RPL gain.

Mishra and Goel also estimate the CAARs for the com-

bined firm in addition to the acquiring and the target com-

panies. Reddy and Arun (2008) use the model for

computation of wealth effects of merger on shareholders

of the acquiring and target companies, but do not empiri-

cally examine the impact of mergers on the shareholders

of the combined firm.

This paper looks at three studies that have examined the

wealth effects of announcement of bank mergers on the

shareholders of acquiring bank/s, acquired banks, and

combined banks. Selvem, Vanitha, and Raja (2006) study

the reaction of the share prices of ICICI Bank to the an-

nouncement of merger of Bank of Madura with ICICI Bank

for an event window of 31 days (-15..0..+15) using daily

stock prices and employing event study methodology.

They found decrease in the CAR during the period of

merger and the decrease is more pronounced after the

merger. However, this study does not test the statistical

significance of the results for the purpose of generaliza-

tion. Mann and Kohli (2008) empirically evaluate the syn-

ergistic gains from bank mergers by dividing them into

two categories of forced mergers and market-driven merg-

ers. They assess the impact of merger announcement on

the shareholders’ wealth of the acquiring company. A

sample of eight bank mergers, announced between April

1, 1997 and March 31, 2007, were examined by employ-

ing the market model and using event study methodol-

ogy, for an event window of 101 days (50…0…50). The

empirical results indicate that markets have reacted nega-

tively to the announcement of forced mergers while the

reaction has been positive to that of market-driven merg-

ers. The total sample of their study has shown a positive

market reaction to the announcement of bank mergers.

This trend of CAARs for the total sample is almost simi-

lar to the trend of CAARs for the market-driven mergers.

They reason that in the total sample, a significant posi-

tive market reaction of the market-driven mergers has

overshadowed an insignificant negative market reaction

towards the non-market driven mergers. Anand and

Singh (2008) examine the impact of merger announce-

ments on shareholders’ wealth for a sample of five merg-

ers of Indian private sector banks during the period

1999-2005. They find positive and significant shareholder

wealth effects, both for bidder and target banks. The mar-

ket value weighted CAR of the combined bank portfolio

as a result of merger announcement is 4.29 percent in a

three-day period (-1,+1) event window and 9.71 percent

in a 11-day period (-5,+5) event window.

Gupta (2008) examines the stock price performance of

target companies in case of merger announcements in

India during the period, 2003-2007. This study finds sig-

nificant positive returns on the date of the announcement

and the period run-up to the date of announcement. Dur-

ing the 30 days before the merger date, returns were posi-

tive for 20 days compared to negative returns on only 10

days. Gupta opines that the market had prior knowledge

of the impending merger and that market perceives merg-

ers to be value enhancing in the short run. However, after

the announcement of mergers, there was a reversal in the

patterns, as positive returns were seen for a smaller num-

ber of 13 days compared to negative returns on 17 days.

The returns gained prior to the merger were lost immedi-

ately after the announcement. CAARs for the various pe-

riods after the merger announcement are negative and

significant. Ramakrishna (2010) examines the effects of

merger announcements on shareholders wealth in the

Indian context covering a seven-year period, 1996-2002

for a sample size of 34 companies. It is found that the

acquired firm shareholders enjoy significant wealth gains

of 11.6 percent in a 21-day event window period, whereas

the acquiring and combined firm shareholders do not do

so. He also shows mergers that do not see transfer of cor-

porate control give significant wealth gains of 21.1 per-

cent on announcement on the target firm shareholders,

whereas those where such a transfer takes place do not

witness such gains.

Srinivasan and Mishra (2007) analyse the intents of ac-

quiring and target companies in the case of 30 recent M&A

deals involving at least one Indian firm and show that

horizontal acquisitions help retain or gain market lead-

ership. They also find that market entry is a dominant

motive for MNCs acquiring domestic acquirers for the

acquisition, and complementarity of intent between the

two firms is important for leveraging synergies. Kumar

and Rajib (2007a) attempt to ascertain the characteristics

of merging firms in India with the help of a sample of 227

acquirers and 215 target firms during the period, 1993

and 2004. Nayyar (2008) analyses the rapid expansion

in outflows of foreign direct investment from India and

the spurt in foreign acquisitions by Indian firms in the

wider context of international investment from develop-

30

ing countries.

In addition to stock price studies, many studies examine

the financial performance of either acquired firms or com-

bined firms based on accounting/financial data. While

some studies find improvements in financial performance

based on accounting information (e.g., Joshi, 1991; Bhanu,

2005; Kumar & Rajib, 2007b; Reddy & Padma, 2005;

Selvem, Vanitha, & Babu, 2005; Gangadhar & Reddy,

2007; Mann & Kohli, 2008; Ramakrishna, 2008), many

other studies find no significant improvement in the fi-

nancial performance based on accounting information

(e.g., Agarwal & Bhattacharjea, 2006; Beena, 2000;

Pawaskar, 2001; Kumar, 2004; Dash, 2005; Beena, 2004;

Bagchi & Banerjee, 2005; Gourlay, Ravishankar, &

Weyman-Jones, 2006; Mantravadi & Reddy, 2007;

Mallikarjunappa, 2007; Tambi, 2007; Kumar & Rajib,

2007b).

A review of extant literature on M&As reveals that a large

number of foreign studies have examined the short-term

wealth effects of takeover announcements on the share-

holders of target companies and these studies conclude

that wealth gains to target company shareholders is large

and statistically significant ranging around 20-30 per-

cent in most of the studies. However, we observe that re-

search on M&As in the Indian context is not exhaustive.

We find some quality research on wealth effects of M&As

only in the last decade (2001-2010). However, most of

these studies are on the wealth effects of mergers and not

of takeovers. We find only two studies which examine

the wealth effects of takeovers on target companies’ share-

holders. Further, the sample size of these studies is not

very large and period chosen for the study is short. While

Pandey (2001) examines 16 open offers between 1997 and

2001, Chakraborty (2010) uses 67 target companies in the

financial sector for the period 2001-2007. The findings of

these studies cannot be generalized for takeovers as the

sample of the first study is limited and the other study is

related to a specific sector. Moreover, we find no study in

the Indian context that has tested the statistical signifi-

cance of results by standardizing the ARs as in Patell

(1976). Further, we examine the wealth effects of the event

both with and without standardization of the ARs. As

the earlier studies are limited in number, it is not clearly

known whether short-term wealth effects of takeover an-

nouncement to shareholders of target companies in India

are similar to that of the foreign studies. Therefore, there

is a need to ascertain the short-term wealth effects of take-

over announcements in India on the target companies.

We examine a large sample of 227 target companies cov-

ering a period of around nine years from April 1, 1998 to

June 30, 2007.

METHODOLOGY

Data Collection

Researchers over the years have used monthly, weekly,

or daily data to study the impact of price-sensitive infor-

mation on stock prices. However, monthly or weekly data

fails to show the exact time of adjustment of stock prices

to the new information. Therefore, to fulfill the need of the

‘precise evidence’, we use daily adjusted closing stock

prices to compute returns in this study.

According to the requirement of our study, three data sets

are used. The first set of data comprises date of announce-

ment of takeovers by the sample companies which is de-

fined as the ‘event day’. For this purpose, we relied on the

information given in Prowess (2.6 release), a database of

the Centre for Monitoring Indian Economy (CMIE) Pri-

vate Ltd. Prowess data base contains two sets of dates

related to the takeover announcements, i.e., the date of

announcement of takeover to the market (to the stock ex-

change), and the announcement date to media. When date

of announcement of takeovers to the market (stock ex-

change) is not available, we consider the date of announce-

ment of takeover to the media. However, when both the

dates of announcement of takeover to the market and to

the media are available, we choose the one that occurs

first. In other words, whichever announcement occurs

first, is taken as the ‘event day’ in our study.

The second set of data is the daily adjusted closing prices

of the stocks of the selected companies. The third set of

data is the market Index data of BSE-200 index. Though

several other stock price indices are also available to rep-

resent market movement, BSE 200 is preferred over these

indices as it is a broad-based index with 200 stocks.

Sample Selection and Data Source

To study the stock price reactions to the takeover an-

nouncements, the sample of companies is selected on the

basis of the following criteria:

• Takeover announcement dates, to the market or to the

media or both, should be available for the sample com-

panies in “Prowess”.

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• The stocks of the companies should be listed and traded

on the Bombay Stock Exchange and sufficient number

of stock prices should be available for them in the 61-

day ‘event window’ (30 trading days before, 30 trad-

ing days after and the day of announcement, i.e., day

‘0’) and ‘estimation window’ of 250 days (from -280

to -31 trading days, day 0 being the day of announce-

ment). Therefore, only stocks of public limited compa-

nies which are listed on the BSE and having adequate

stock prices for them in the estimation period and event

period are chosen. To include the stock in the sample,

the stock prices should be available for a total of 312

trading days so that we can compute 311 days stock

returns, i.e., 61 days event window returns and 250

estimation period returns.

• The estimation window stock prices (i.e. 250 trading

days) should be available for the companies within a

period of two years immediately preceding the date of

announcement of takeover by the sample companies.

In the case of highly infrequently traded companies,

share price data for 250 trading days may be available

but not within two years before from the date of an-

nouncement. In such cases, those companies are ex-

cluded from the sample.

• Multiple mergers/takeovers should be separated so

that the estimation and event period do not include

other merger/takeover announcements for the same

firm. In other words, there should not be any addi-

tional announcement of merger/takeover for the sam-

ple company both in the estimation and the event

period. However, if a takeover bid is announced for a

company in the period outside the event and estima-

tion window of a specific takeover announcement, it

is included in the sample. In this situation, we can

disentangle the effect of one takeover announcement

from that of the other, as the time gap between the two

announcements is substantial. In such cases, the

names of those companies appear more than once in

the sample.

The date of announcement of takeover to the market or to

the media along with the name of the target company, the

daily adjusted closing prices of the sample companies,

and BSE 200 Index closing prices are collected from the

Prowess (2.6 release). The number of sample target com-

panies, satisfying the first three selection criteria is 236,

which comes down to 227 after excluding the companies

which have announced mergers/takeovers either in the

estimation or in the event period. The companies which

receive takeover bids between April 1, 1998 and June 30,

2007 are considered for sample selection in our study.

Research Design

This study follows event study methodology to assess

the impact of takeovers announcements on the stock re-

turns of target firms. The use of this methodology involves

certain steps which include identifying the date of an-

nouncement of the takeover bid to the market/media, es-

timating the normal (expected/predicted) returns,

measuring ARs, aggregating the ARs across the firms and

across time, and finally, determining the statistical sig-

nificance of the aggregated ARs by following appropri-

ate testing procedure.

In the study of stock price reactions to the announcements

of takeovers, the announcement time of the takeovers is a

critical factor. According to Dodd (1980, p.107), “accu-

rate estimation of the market response to the merger/take-

over requires use of the date of first announcement of the

merger/takeover proposal.” We use the first announce-

ment date of takeover proposal as the event day, as in

Dodd (1980) and subsequent studies, and not the an-

nouncement of the ‘effective date’ of takeover. The an-

nouncement day of the takeovers determines the ‘event

window’ and the ‘estimation window’. Event window is

a period within which ARs are computed. It is the period

over which the cumulative or net effect of the announce-

ment of an event on the stock prices is examined. Event

window is the window which is the event day and some

number of trading days before and after the event day for

which the sample firms’ returns are observed. The date of

announcement of the takeover is called the ‘event day’

and is defined as day ‘0’. In event studies, the estimation

and the event period are taken relative to the designated

event day. The day +1 is the next trading day after the

event day and day -1 is the immediate preceding trading

day. The 61 trading days, i.e., 30 trading days before, 30

trading days succeeding the event day and the event day,

is the ‘event window’ during which the stock price re-

sponses to the event (i.e., takeover announcement) are

examined in our study. The market may start anticipat-

ing the announcement of takeover, or the information re-

garding the announcement of takeover bid may leak well

before these are officially conveyed to the market. The take-

over transaction itself may extend over several weeks. The

negotiation may start before the public announcement.

32

Although M&A talks may take place privately and in se-

crecy, news may leak and the market may start speculat-

ing about the acquisition. Thus, the stock prices may start

responding well before the official announcement of

merger/takeover. Therefore, the responses of the stock

prices are examined for 30 trading days before the event

day. Similarly, sometimes, market may take some time

even after the announcement to fully capture the infor-

mation content of the event, i.e., announcement of the take-

over. Therefore, the responses of the stock prices are

examined for 30 trading days after the event day. Though

the choice of the ‘event window’ of 61 days, i.e., 30 days

before and 30 days after the event day, is subjective, a

period of 30 days before the announcement of takeover is

considered appropriate to capture the effect of informa-

tion circulated about the announcement of takeover or

the anticipation of the event by the market. Similarly, post-

announcement period of 30 trading days are considered

sufficient to absorb fully the information contained in the

announcement of takeover. Further, within this broad

event window, several smaller windows are used to

analyse intensively the wealth effects of the announce-

ment of takeover on the shareholders of target firm.

Computation of excess returns or ARs requires the com-

putation of normal returns which are based on the esti-

mation period. Estimation period is a period which is

used to compute the estimated returns. It is a period out-

side the event window on the basis of which alpha and

beta are estimated using the ordinary least squares (OLS)

regression model. The estimates of the OLS parameters

are based on 250 trading days (i.e. from –281 to -31 days).

Usually the event studies estimate the ARs and cumulate

these returns over a number of days depending upon the

window period. This is to fully capture the effect of an

event on share prices. This consists of the calculation of

average abnormal returns (AARs) and cumulative aver-

age abnormal returns (CAARs). Finally, the results are

tested for determining their statistical significance. Thus,

the study involves the computation of actual returns, ex-

pected returns, ARs, AARs, and CAARs, and subsequently

testing these results.

The Choice of Model

The event study involves the estimation of excess or ARs

which are explained by the firm-specific event (i.e. an-

nouncement of takeovers). Researchers have used differ-

ent variants of the basic residual analysis methodology

to study the effect of an event. In all these studies, they

have calculated ARs as difference between actual and

the expected returns (i.e. actual returns-expected returns).

According to Weston, Chung, and Hoag (2007, p. 218),

“AR is the part of the return on a security on day t that is

not predicted, and therefore, is an estimate of the change

in firm’s share price on that day which is caused by the

event.” AR for the event window is the excess of actual

returns over the predicted returns computed using the

market model. Therefore, the unexpected part of the re-

turns which is caused by the event is the excess return.

The excess returns are also called residual returns or ab-

normal returns (ARs) or prediction errors. The level of

ARs depends upon the return-generating model used to

predict the stock’s expected rate of return, the market fac-

tor and the parameters like alpha and beta. The following

market model of Sharpe (1963) is used in our study to

compute the AR:

ARit= Rit – (αi+ βi Rmt)

In the above model, ARs are computed by deducting the

expected returns computed in the OLS market model re-

gression, from the actual returns on day ‘t’ for security ‘i’.

Some of the studies which have followed the above model

are Dodd and Ruback (1977), Marsh (1979), Dodd (1980),

Dodd and Warner (1983), Wansley, Lane, and Yang (1983,

1987), Dyckman, Philbrick, and Stephan (1984), Collins

and Dent (1984), Brown, and Warner (1980, 1985),

Lewellen, Loderer, and Rosenfeld (1985), Jain (1986),

Chatterjee (1986), Singh, and Montgomery (1987), Brad-

ley, et al. (1988), Bertin, Ghazanfari, and Torabzadeh

(1989), Seth (1990), Limmack (1991), Sudarsanam, et al.

(1996), Cornett, and De (1991), Cornett, and Tehranian

(1992), Briston, Saadouni, Mallin, and Coutts (1992),

Moeller, et al. (2005), Houston, and Ryngaert (1994),

Rhoades (1994), Anand, and Singh (1997), Kothari, and

Warner (1997), Gregory (1997), Cybo-Ottone, and Murgia

(2000), Pandey (2001), Delong (2001), Delong (2003),

Kumar (2004), Dash (2004), Creighton, Gower, and

Richards (2004), Mishra, and Goel (2005), Gupta (2006),

Das, Pattanayak, and Pathak (2007), Abad-Romero, and

Robles-Fernandez (2007). This is a popular model which

incorporates the market risk and a vast majority of re-

searchers use this model in their empirical investigation.

We use raw returns and log returns for evaluation of the

performance of the stocks on the announcement of take-

over.

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Residual Analysis Methodology

Computation of ARs, AARs and CAARs

To assess the abnormal gains/losses to target company

shareholders, the parameters of the market model like al-

pha, and beta based on returns on stocks and market in-

dex in the estimation period are first estimated, and then

expected returns on each stock are calculated based on

the market model. The estimated ARs of each stock are

added and then average ARs are computed for each day

during the event window to calculate AARs. The cumu-

lative AARs of different days during the event window

are designated as the CAARs.

Each security return is divided into two parts. These are

those returns which can be attributed to market move-

ment and those which cannot be attributed to market

movement but to takeover announcement. The stock price

responses to the takeover announcement or the event are

measured by eliminating the market’s influence on stock’s

observed rate of return. The methodology employed for

the purpose is called ‘Residual Analysis Methodology’

since it involves calculation of residuals defined as that

part of stock’s returns which is not explained by move-

ment of the market. These residuals are explained by the

event-related news of a particular company for which

these are calculated. In our analysis, the market model

measures the returns of stocks related to market move-

ment. The market model is based on the fact that the most

important factor affecting a stock’s returns is market fac-

tor and it is captured in the market model in the form of

beta (β). It is a simple model to analyse the risk compo-

nent of stocks in terms of systematic and unsystematic

risks. Thus, the market model relates the return on any

stock or portfolio of securities to the return on the market

in a linear fashion. The actual tests are performed on the

returns in these types of studies. Mathematically, the

market model can be expressed as:

E(Rit) = αi+ βi Rmt+ εit for i = 1,.....n

E (Rit) = Expected return on security ‘i’ in time ‘t’

αi = alpha coefficient of ith security which is the in-

tercept of a straight-line

βi = beta coefficient of ith security or the slope of a

straight line

Rmt = Expected return on BSE 200 Index in period‘t’

εit = Error term with mean zero and a constant vari-

ance during time ‘t’. This term captures the

variations that are not captured by the market

index. The disturbance term captures the effects

of firm-specific takeover announcement. The

error term is assumed to satisfy the ordinary

least square (OLS) regression assumptions.

Thus, the market model divides security returns into two

components — systematic component (βi Rmt) and an un-

systematic component (εit). The systematic component

measures the impact of general market movement, and

unsystematic component, also called error term, measures

the influence of micro event on the rate of return of indi-

vidual security. Thus, the error term is a firm-specific com-

ponent. In this study, takeover announcement is a

firm-specific component. That part of return which is at-

tributable to the announcement of takeover is measured

by error term. According to Dodd (1980), “When a group

of firms experiences the same economic event, such as a

merger proposal, the average disturbance of the group is

interpreted as capturing the economic impact of the event”.

(p.108).

The logarithmic form of the model, which was used by

Fama, Fisher, Jensen, and Roll (1969), is also employed in

this study in addition to the above model to ascertain that

the results do not arise because of use of simple general

equilibrium models. The following model is used in this

study:

Log Rit = αi+ βi loge Lt+ uit

where,

Rit = Price relative of ‘i’th security in time ‘t’

αi = Alpha coefficient of ith security which is the inter-

cept of a straight-line

βi = Beta coefficient of ith security which slope of a

straight line

Lt = BSE-200 Index relatives (in this study) in time ‘t’

uit = an error term with zero mean and a constant vari-

ance during time period ‘t’. This term captures the

variations that are not captured by the market in-

dex. It is assumed that uit satisfies the linear regres-

sion model assumptions

Continuously compounded security returns and index

returns are computed by taking the logarithm of the secu-

rity price relative and market index relative. Thus the

above model helps in finding out the daily expected rate

of return on an individual security by assuming a linear

relationship between security returns and the return on

34

the market. The actual tests are not performed on the daily

prices of securities and stock index but on the natural

logarithms of their price relatives. Though there is no

unanimity whether raw returns or log returns are to be

used in event studies, vast majority of studies use log

transformed returns in estimating the normal return.

However, this study has followed both raw and log re-

turns to estimate the regression model and subsequent

estimation of excess returns, AARs and CAARs.

There is a need to compute the estimates of αi and βi for

computation of the expected returns. The expected returns

on each security is computed using the following model:

E (R) = E(Rit) = αi+ βi Rmt

The expected returns, E(R), are related to the market move-

ments as per the market model used above. The error term,

εit in the market model represents the residual return (ab-

normal return) for the security ‘i’ at time‘t’, which is equal

to the realized return, Rit minus expected rate of return.

The ARs are given by the following model:

ARit = εit = Rit - (αi+ βi Rmt)

where, Rit = Actual returns

These excess returns can be used to test whether indi-

vidual securities have earned ARs or not. This method of

estimating ARs is referred to as “residual analysis”, since

the regression equation represents a normal return and

the residuals εit in the equation represents the ARs (Fuller

and Farrell, Jr., 1987, p.105).

ARs show change in firm value on that day caused by the

announcement of takeover. But very often, individual se-

curity returns are affected by external factors and may

not give an indication of trends in other securities. There-

fore, to avoid the effect of a single or any group of securi-

ties on the ARs, the ARs are averaged across all the securi-

ties in the sample. According to Weston et al. (2007) “the

reason for averaging across the firms is that stock returns

are noisy, but the noise tends to cancel out when aver-

aged across a large number of samples. Therefore, the

more firms in the sample, the better the ability to distin-

guish the effect of an event” (p. 218). The individual secu-

rity ARs are averaged for every day surrounding the event

day, i.e. day -30 to day +30 and the AARs are computed.

If there is no abnormal performance, the AAR value will

be equal to zero.

To compute the AARs, the following model is used:

AARt = For i =1….N; t = -30…0….+30

In the above model,

i = the number of specific security in the study

N = total number of securities

t = the days surrounding the event-day

Since the security’s overall reaction to merger/takeover

announcement will not be captured immediately by the

AARs for one day, the cumulative totals of the AARs are

computed over an event window period. The CAARs are

chosen as a measure of cumulative abnormal perfor-

mance. CAARs are calculated for 30 days each before and

after the event day. CAARs are calculated by adding the

AARs for each time period beginning 30 days before the

event day and ending 30 days after the event day. These

computations show average stock price behaviour dur-

ing the event window period. CAARs show total effect of

the event across all securities for the 61-day event win-

dow. According to Campa and Hernando (2004,), “Short-

term cumulative ARs will reflect changes in the expected

future cash-flows to shareholders resulting from future

synergies in the merged entity or from wealth redistribu-

tion among shareholders.” The model used to compute

CAAR is:

CAAR = t …… t = -30 …0….+30 days

As suggested by Briston et al. (1992) and Campa and

Hernando (2004), CAARs are computed for different event

windows. Briston, et al. (1992, p. 645) state that “the ra-

tionale for splitting the overall event period into sub-peri-

ods is to test whether the ACER (if any) is generated

around the announcement date.” Campa and Hernando

(2004, p.63) state, “ We have used different windows in

our calculation of cumulative abnormal return measures

to obtain some insight into the framework within which

cumulative abnormal returns are on average generated

and to check for the robustness of our results to the speci-

fied window.” If the market is efficient in the semi-strong

form, we can expect excess returns on the day of announce-

ment. In the absence of an unexpected increase in the

wealth of existing shareholders, the expected value of

CAAR should not be significantly different from zero. In

other words, in the absence of abnormal performance, the

expected value of the CAAR equals 0.

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Testing the Statistical Significance of the AARs and CAARs

After computing the AARs and CAARs, statistical sig-

nificance of these computed values are tested at a required

confidence level. The statistical significance of AARs and

CAARs are tested by the following two methods:

First Method (without standardizing the ARs). In this

method the statistical significance of AARs and CAARs

are tested using cross-sectional standard deviation of

ARs. These values are generated from the estimation pe-

riod.

1. Statistical Significance of AARs

The hypothesis is that the cross-sectional AARs are zero.

The statistical significance of AAR for each day‘t’ sur-

rounding the event day is assessed by dividing AARt by

its standard deviation which is denoted by σAARt.

Test statistic =

where,

AARt =

AARt = Average abnormal return on day ‘t’ in the

event window

ARit = Abnormal returns on security ‘i’ on day ‘t’

N = Total number of securities

t = The days surrounding the event-day

σAARt =Standard deviation of AARt

σAARt =

where,

= t = -280 to -31 days

AARt = Average abnormal return on day‘t’ in the esti-

mation period

= Mean of AARs in the estimation period for 250

days, i.e. -280 to -31 trading days before from

the date of announcement of takeover bid

N = Total number days in the estimation period

T = Number of days in the estimation period, which

is equal to 250 days in our model, i.e. -280 to -31

days from the date of announcement of take-

over.

The above model has been employed by Dodd (1980),

Brown and Warner (1985), Kothari and Warner (1997),

Pandey (2001), Goergen and Renneboog (2004),

Creighton, Gower, and Richards (2004), Gong and Firth

(2006), and Mann and Kohli (2008). According to Brown

and Warner (1985) “if the AARs are independent, identi-

cally distributed, and normal, the test statistic is distrib-

uted Student-t under the null hypothesis.” (p.8).

2. Testing the Statistical Significance of CAARs

The hypothesis — that the AARs cumulated over win-

dow period for the participating companies in response

to the takeover announcement are statistically zero — is

tested. The test statistic to assess the statistical signifi-

cance of CAARs is:

Z =

where,

CAAR =

T in the above equation is the number of days (i.e. from -

30 days to +30 days) over which AARs are cumulated in

the event window.

σAARt =

T in the above equation is the number of days in the esti-

mation period. The above model has been used by Brad-

ley, Desai, and Kim (1983), Kothari and Warner (1997),

Georgen and Renneboog (2004), Creighton, Gower, and

Richards (2004) and Gong, and Firth (2006).

Second Method (Standardization of ARs Method)

1. Testing the Standardized Prediction Errors acrossFirms (Average ARs).

In the words of Asquith (1983), “to produce independent

and identically distributed excess returns, the excess re-

turns must be standardized” (p.56). Therefore, these stan-

36

dardized excess returns are tested for determining the

statistical significance by employing standardized pre-

diction error test.

The following model of testing the significance of ARs is

developed by Patell (1983) and used in finance studies by

Dodd and Warner, 1983 (Henderson, 1990, p.299). This

test is known in the finance literature as ‘Patell Standard-

ized Residual (PSR) Test’ (Strong, 1992, p.545). Jain (1986),

Henderson (1990), Cornett and De (1991), Strong (1992),

McWilliams and Siegel (1997), and MacKinlay (1997) dis-

cuss this methodology in their review papers on event

study methodology. Dodd (1980), Lewellen, Loderer, and

Rosenfeld (1985), Bradley, Desai, and Kim (1988), Bertin,

Ghazanfari, and Torabzadeh (1989), Briston, et al. (1992),

Houston and Ryngaert (1994), Cybo-Ottone and Murgia

(2000), Gupta (2006), Delong (2003), Das, et al. (2007),

and Abad-Romero and Robles-Fernandez (2007) are some

of the studies that follow this methodology in testing the

significance of their results. This method of testing the

results is popularly known as the standardized ARs

method.

Under this approach, the ARs are computed for security

‘i’ in the event window following the market model. Patell

(1976) notes that “since the errors are estimated for obser-

vations which are not used in the estimation of αi and βi

, they are not residuals in the strict OLS sense” (p.255).

Therefore, these are called prediction errors rather than

true residuals and should, therefore, be standardized ac-

cording to the following formula (Strong, 1992, p.545):

SPEit =

where

S2i = is the estimated

variance of the residuals

for security ‘i’ during the estimation period from the mar-ket model regression.

Cit = reflects standard

econometric

adjustment for the increase in variance for predictionoutside the EP

Si is standard deviation of prediction error, which is com-

puted as the square root of its forecast variance, S2i.

T= the number of days in the estimation period (i.e., 250

days in our study); and

=

PEit is the prediction error or residuals of stock ‘i’ on day‘t’

SPEit is the standardized prediction error or residuals of

stock ‘i’ on day‘t’

is the average rate of return on the market index forthe estimation period

Rmf is the rate of return on the market index for the day t’

of the event period

Rmt is the rate of return on the market index for day t of the

estimation period

After standardizing the prediction errors of each firm,

these prediction errors are summed up across the firms

each day and their statistical significances are tested on

each day in the event period. In event studies, the number

of observations, T, in each firm’s estimation period may

differ from firm to firm due to differences in data avail-

ability (Patell, 1976, p 256;). According to Patell (1976, p.

256), “if this is denoted by subscript attached to T, each t

statistic has an expected value of zero and a variance

equal to (Ti - 2) / (Ti - 4).” Strong (1992) also subscribes to

the above argument. Summing the standardized ARs for

securities, normalized values can be formed. These nor-

malized values fulfill the assumptions of normal distri-

bution. The following is the formula used:

Z =

In our study, the number of observations, T, in each firm’s

non-forecast period (estimation period) remains the same

across the firms taken in the sample (i.e., 250 days). There-

fore, we compute the test statistic as given by Henderson

(1990, p.299):

Z =

2. Testing the Standardized Cumulative PredictionError (SCPE)

According to Strong (1992, p.546), “the standardized cu-

mulative prediction errors (SCPE) for firm ‘i’ is the sum of

the SPE or standardized ARs between any two days of

A STUDY OF WEALTH EFFECTS OF TAKEOVER ANNOUNCEMENTS IN INDIA ...

VIKALPA • VOLUME 38 • NO 3 • JULY - SEPTEMBER 2013 37

interest, adjusted for the number of days (M) being con-

sidered starting at t1 and ending t2 “

:

SCPEi =

Similar calculations are also made for all firms on day‘t’.

When the number of observations, T, in each firm’s non-

forecast period varies across firms due to the non-avail-

ability of data, the following model is used to compute

the test statistic as stated by Patell (1976, p.257), and Strong

(1992, p. 546):

Z =

In this study, the number of observations, T, for all firms

in the estimation period remains the same (i.e. 250 days).

Therefore, the test statistic for firms, in the study, is the

total of the SCPEi divided by the square root of the num-

ber of sample companies (N) as shown below (Henderson,

1990, p. 300):

Z = , and Z is N (0,1)

RESULTS

The results of the empirical study on the stock price re-

sponse of the target company to the announcement of

takeovers are presented in this section. Both raw and log

returns are used for the computation of ARs.

AARs and CAARs to Target Company Shareholders in

Response to Takeover Announcement using Non-stan-

dardized ARs Method for Testing

Results Based on Raw Returns — Event Window: 61 Days

(-30 to + 30)

The AARs and CAARs along with Z values (Z values

computed by not standardizing the ARs), based on raw

returns, to target company shareholders are presented in

Table 1 for 61-day event window. The wealth effect of

takeover announcement to the target company sharehold-

ers on day 0 is positive and significant at 3.63 percent (Z

value at 5% level, 9.22). The results show that AARs are

positive for 49 days (significant for 21 days), and nega-

tive but insignificant for 12 days. However, AARs are

positive for 28 days in pre-takeover announcement day

and significant for 16 days. In the post-announcement

period, though the AARs are positive for 20 days, they

are significant only for four days. The AARs are positive

and significant continuously from day -11 to +2. This

indicates that much of the information content of the event

is incorporated into the stock prices in the period before

the announcement period. Based on the above analysis,

it is clear that the AARs are not significant on majority of

the days in the event window.

The net or cumulative impact of takeover announcements

on the stock prices are examined by observing the statis-

tical significance of CAARs. The CAARs to the share-

holders of the target company shareholders for the full

event period, based on raw returns, are significant at 36.68

percent (Z value at 5%, is 11.93). CAARs are positive and

significant for 58 days in the 61-day event window. For

the period run-up to and including the announcement

day, target company shareholders realize CAARs of 27.23

percent which are significant at 5 percent (Z value, 12.42).

Major share of the CAARs accrue to the shareholders of

the target company in the period from -30 to 0 day. This

shows that the market has anticipated the event in ad-

vance. Only about 9 percent gains are earned in the post-

announcement period. Gains in the post-takeover period

suggest that the market took some time to fully absorb the

information content of the event. As CAARs computed

on the basis of raw returns are significant for the 61-day

event window (i.e. on day +30) and for majority of the

days in the event window period, we reject the null hy-

pothesis that CAARs to the target company shareholders

in response to the takeover announcement are not signifi-

cantly different from zero.

Results Based on Log Returns —Event Window: 61 days

(-30 to + 30)

Table 2 shows that AARs, computed using log returns, to

the target company shareholders are positive for 47 days

and negative for 14 days for a 61-day event window.

However, they are positive and significant only for 13

days. On the day of announcement, AARs are significant

with 3.31 percent at 5 percent level (Z value, 8.45). AARs

are positive and significant continuously from day -7 to

+2. After that, they are either positive or negative but not

significant except on day 30. The results indicate that

market anticipates the event a few days before the event

38

Table 1: AARs and CAARs to the Target Company Shareholders based on Raw Returns with Z values

Event Day AAR Z Value CAAR Z value Event Day AAR Z Value CAAR Z value

-30 0.0095 2.4017 0.0095 2.4017 1 0.0223 5.6575 0.2946 13.2201

-29 -0.0018 -0.4528 0.0077 1.3781 2 0.0127 3.2311 0.3073 13.5807

-28 0.0089 2.2656 0.0166 2.4333 3 0.0036 0.9196 0.3109 13.5372

-27 -0.0022 -0.5654 0.0144 1.8246 4 0.0079 1.9936 0.3188 13.6794

-26 0.0075 1.8921 0.0218 2.4781 5 0.0039 0.9961 0.3227 13.6541

-25 0.0064 1.6341 0.0283 2.9293 6 0.0038 0.9726 0.3265 13.6282

-24 0.0123 3.1201 0.0406 3.8913 7 -0.0041 -1.0458 0.3224 13.2781

-23 0.0022 0.5529 0.0427 3.8355 8 0.0023 0.5860 0.3247 13.2006

-22 0.0044 1.1182 0.0471 3.9888 9 0.0025 0.6341 0.3272 13.1348

-21 0.0077 1.9572 0.0548 4.4031 10 0.0010 0.2485 0.3282 13.0124

-20 0.0054 1.3660 0.0602 4.6100 11 0.0012 0.3025 0.3294 12.9033

-19 0.0055 1.3973 0.0657 4.8171 12 0.0006 0.1419 0.3299 12.7740

-18 0.0008 0.2080 0.0665 4.6858 13 0.0022 0.5631 0.3321 12.7129

-17 0.0078 1.9722 0.0743 5.0425 14 0.0045 1.1360 0.3366 12.7402

-16 0.0027 0.6969 0.0771 5.0514 15 -0.0022 -0.5564 0.3344 12.5189

-15 0.0082 2.0875 0.0853 5.4129 16 -0.0009 -0.2251 0.3335 12.3522

-14 0.0045 1.1410 0.0898 5.5280 17 0.0032 0.8151 0.3367 12.3405

-13 0.0019 0.4923 0.0917 5.4883 18 -0.0032 -0.8192 0.3335 12.0969

-12 0.0040 1.0147 0.0957 5.5747 19 0.0018 0.4636 0.3353 12.0409

-11 0.0084 2.1333 0.1041 5.9106 20 -0.0012 -0.2920 0.3342 11.8813

-10 0.0083 2.1007 0.1124 6.2265 21 -0.0021 -0.5324 0.3321 11.6927

-9 0.0082 2.0724 0.1205 6.5252 22 -0.0004 -0.0924 0.3317 11.5692

-8 0.0087 2.2073 0.1292 6.8420 23 -0.0063 -1.6105 0.3254 11.2424

-7 0.0111 2.8219 0.1404 7.2740 24 -0.0007 -0.1789 0.3247 11.1156

-6 0.0129 3.2710 0.1532 7.7812 25 0.0002 0.0390 0.3248 11.0211

-5 0.0109 2.7797 0.1642 8.1753 26 -0.0006 -0.1577 0.3242 10.9031

-4 0.0146 3.7105 0.1788 8.7365 27 0.0023 0.5957 0.3266 10.8869

-3 0.0154 3.9039 0.1942 9.3169 28 0.0019 0.4735 0.3284 10.8559

-2 0.0167 4.2424 0.2109 9.9426 29 0.0018 0.4460 0.3302 10.8226

-1 0.0251 6.3601 0.2359 10.9367 30 0.0367 9.3072 0.3668 11.9252

0 0.0363 9.2241 0.2723 12.4156

day and information content of the event is almost com-

plete within two days of the announcement of the take-

over. However, we observe that the AARs are not

significant for most of the days in the event window.

The net effect of takeover announcements on the stock

prices are examined by observing the statistical signifi-

cance of CAARs. The CAARs, computed using raw re-

turns, to the target company shareholders are 27.40

percent for the 61-day event window, which are signifi-

cant at 5 percent. Further, CAARs are significant for 57

days in the 61-day event window. It is clear that major

gains accrue to the target company shareholders from

day -30 to day 0. The CAARs for this period are positive

and significant 22.53 percent (Z value at 5%, 10.33). An-

other implication of the results is that the market is slow

in incorporating the future benefits of takeover into the

stock prices, as some gains may accrue to the sharehold-

ers of target companies in the post-takeover announce-

ment period. CAARs are significant and show more or

less increasing trend from day -25 to day +7 and show

almost a constant trend, with slight variations from that

point onwards till the day +30 when it reaches the high-

est value. As CAARs, computed on the basis of log re-

turns, are significant for the 61-day event window (i.e.,

on day +30) and on majority of the days in the event win-

dow, the null hypothesis that CAARs to the target com-

pany shareholders in response to the takeover

A STUDY OF WEALTH EFFECTS OF TAKEOVER ANNOUNCEMENTS IN INDIA ...

VIKALPA • VOLUME 38 • NO 3 • JULY - SEPTEMBER 2013 39

announcement are not significantly different from zero,

is rejected.

CAARs to Target Company Shareholders under Differ-

ent Event Windows in Response to Takeover Announce-

ment using Non-Standardized ARs for Testing

The CAARs that accrue to the target company sharehold-

ers under different event windows in response to take-

over announcement (Z values computed by not

standardizing the ARs for testing) based on both raw re-

turns and log returns are presented in Table 3. The CAARs

are positive and significant for all the event windows

both for raw and log returns. On the day of announce-

ment, the shareholders of the target company realize posi-

tive and significant CAARs under both raw and log re-

turns (3.36% and 3.31%, respectively). Target company

shareholders earn CAARs with a minimum of 3.63 per-

cent for one-day event window (day 0) to a maximum of

36.68 percent for 61- day event window (-30 to +30) using

raw returns. In the case of log returns, the wealth effect on

target firm vary with CAARs ranging from 3.31 percent

for one-day event window (day 0) to 27.40 percent for 61-

day event window (-30 to +30). Based on the analysis

above, we reject the null hypothesis that CAARs to the

target company shareholders in response to the takeover

announcement are equal to zero.

Table 2: AARs and CAARs to the Target Company Shareholders based on Log Returns with Z values

Event Day AAR Z Value CAAR Z value Event Day AAR Z Value CAAR Z value

-30 0.0081 2.0787 0.0081 2.0787 1 0.0199 5.0877 0.2453 11.0698

-29 -0.0032 -0.8182 0.0049 0.8913 2 0.0111 2.8394 0.2564 11.3951

-28 0.0067 1.6998 0.0116 1.7091 3 0.0025 0.6462 0.2589 11.3371

-27 -0.0039 -0.9918 0.0077 0.9842 4 0.0069 1.7726 0.2658 11.4736

-26 0.0061 1.5587 0.0138 1.5774 5 0.0032 0.8221 0.2691 11.4501

-25 0.0051 1.2948 0.0189 1.9685 6 0.0031 0.8018 0.2722 11.4261

-24 0.0112 2.8539 0.0301 2.9012 7 -0.0050 -1.2667 0.2672 11.0693

-23 0.0009 0.2208 0.0309 2.7919 8 0.0017 0.4238 0.2689 10.9943

-22 0.0032 0.8202 0.0341 2.9056 9 0.0018 0.4717 0.2708 10.9306

-21 0.0064 1.6366 0.0405 3.2740 10 0.0005 0.1176 0.2712 10.8148

-20 0.0041 1.0426 0.0446 3.4360 11 0.0007 0.1794 0.2719 10.7130

-19 0.0042 1.0763 0.0488 3.6004 12 0.0000 0.0127 0.2720 10.5896

-18 -0.0004 -0.1107 0.0484 3.4285 13 0.0017 0.4242 0.2736 10.5325

-17 0.0063 1.6128 0.0547 3.7348 14 0.0037 0.9356 0.2773 10.5543

-16 0.0016 0.3980 0.0563 3.7109 15 -0.0028 -0.7066 0.2745 10.3348

-15 0.0070 1.7747 0.0632 4.0368 16 -0.0017 -0.4312 0.2728 10.1613

-14 0.0033 0.8523 0.0666 4.1229 17 0.0026 0.6688 0.2755 10.1515

-13 0.0007 0.1866 0.0673 4.0508 18 -0.0037 -0.9454 0.2718 9.9123

-12 0.0024 0.6084 0.0697 4.0823 19 0.0013 0.3202 0.2730 9.8580

-11 0.0069 1.7493 0.0765 4.3701 20 -0.0017 -0.4247 0.2713 9.7014

-10 0.0073 1.8584 0.0838 4.6703 21 -0.0025 -0.6457 0.2688 9.5181

-9 0.0065 1.6565 0.0903 4.9161 22 -0.0009 -0.2243 0.2679 9.3970

-8 0.0075 1.9169 0.0978 5.2077 23 -0.0068 -1.7375 0.2611 9.0732

-7 0.0097 2.4652 0.1075 5.6013 24 -0.0013 -0.3208 0.2599 8.9471

-6 0.0113 2.8854 0.1188 6.0652 25 -0.0006 -0.1487 0.2593 8.8470

-5 0.0091 2.3199 0.1279 6.4024 26 -0.0012 -0.3180 0.2580 8.7269

-4 0.0130 3.3188 0.1409 6.9214 27 0.0018 0.4481 0.2598 8.7102

-3 0.0138 3.5109 0.1546 7.4602 28 0.0012 0.3126 0.2610 8.6767

-2 0.0150 3.8383 0.1696 8.0432 29 0.0013 0.3371 0.2623 8.6476

-1 0.0226 5.7730 0.1923 8.9620 30 0.0117 2.9873 0.2740 8.9589

0 0.0331 8.4460 0.2253 10.3332

40

Abnormal Returns to Target Company Shareholders in

Response to Takeover Announcement using Standard-

ized Abnormal Returns Method for Testing

Results Based on Raw Returns —Event Window: 61 Days

(-30 to + 30)

The AARs and CAARs along with Z values (Z values

computed by standardizing the ARs), based on raw re-

turns, to target company shareholders are presented in

Table 4 for 61-day event window. The Table shows that

AARs are positive for 49 days (significant for 24 days),

and negative but insignificant for 12 days. However,

AARs in the pre-and post-takeover announcement pe-

riod are positive for 28 days (significant for 20 days) and

20 days (significant only for four days), respectively. This

indicates that much of the information content of the event

is absorbed in the stock prices in the period before the

announcement period. The target company shareholders

experience significant AARs of 3.63 percent on the day of

takeover announcement. Even under standardized test-

ing method, AARs are not significant on majority of the

days in the event window.

The CAARs to the target company shareholders for the

full event period, based on raw returns, are significant at

36.68 percent (Z value at 5%, 14.08). For the period run-

up to and including the announcement day, target com-

pany shareholders earn positive and significant CAARs

of 27.23 percent (Z value, 15.83). Substantial CAARs ac-

crue to the shareholders of target companies in the period

from -30 to 0 day. Only about 9 percent gains are earned

after the announcement period. The results indicate that

market anticipates the event to take place and stock prices

incorporate most of the information content of the event

at and before the event day. CAARs are positive and sig-

nificant for 60 days in the 61-day event window. As the

CAARs are significant for the 61-day event window (i.e.

on day +30), and also on majority of the days in the event

window, the null hypothesis that CAARs to the target

company shareholders in response to the takeover an-

nouncement are not significantly different from zero is

rejected.

Results Based on Log Returns— Event Window: 61 Days

(-30 to + 30)

Table 3: CAARs to Target Company Shareholders

Event Window Raw Returns Log Returns

CAAR Z Value CAAR Z Value

61 days (-30 to +30) 0.3668 11.9252 0.2740 8.9589

51 days (-25 to +25) 0.3030 10.7728 0.2455 8.7766

41 days (-20 to +20) 0.2794 11.0768 0.2308 9.2030

31 days (-15 to +15) 0.2574 11.7360 0.2182 10.0079

21 days (-10 to +10) 0.2241 12.4138 0.1947 10.8465

11 days (-5 to +5) 0.1694 12.9706 0.1503 11.5704

9 days (-4 to + 4) 0.1546 13.0809 0.1380 11.7442

7 days (-3 to + 3) 0.1321 12.6764 0.1180 11.3923

5 days (-2 to + 2) 0.1131 12.8418 0.1018 11.6205

3 days (-1 to + 1) 0.0837 12.2639 0.0756 11.1467

1 days (0 day) 0.0363 9.2241 0.0331 8.4460

31 days (-30 to 0) 0.2723 12.4156 0.2253 10.3332

26 days (-25 to 0) 0.2504 12.4702 0.2115 10.5914

21 days (-20 to 0) 0.2174 12.0463 0.1848 10.2954

16 days (-15 to 0) 0.1952 12.3907 0.1691 10.7946

11 days (-11 to 0) 0.1682 12.8727 0.1489 11.4596

6 days (-5 to 0) 0.1190 12.3376 0.1066 11.1145

5 days (-4 to 0) 0.1081 12.2720 0.0975 11.1378

4 days (-3 to 0) 0.0935 11.8653 0.0845 10.7930

3 days (-2 to 0) 0.0781 11.4469 0.0708 10.4357

2 days (-1 to 0) 0.0614 11.0197 0.0558 10.0670

A STUDY OF WEALTH EFFECTS OF TAKEOVER ANNOUNCEMENTS IN INDIA ...

VIKALPA • VOLUME 38 • NO 3 • JULY - SEPTEMBER 2013 41

Table 5 shows that AARs, computed using log returns, to

the target company shareholders for 61-day event win-

dow are positive for 47 days but significant only for 20

days, and negative for 14 days but not significant for all

these days. However, they are positive and significant for

20 days. On the day of announcement, AARs to the target

company shareholders are significant at 3.31 percent (Z

value, 10.65). AARs are positive and significant continu-

ously from day -7 to +2. This implies that takeovers are

anticipated a few days before the event day and the infor-

mation content of the event is almost complete within

two days of the announcement of the takeover. We note

that the AARs are insignificant for most of the days in the

61-day event window.

The CAARs of 27.40 percent gained by the target com-

pany shareholders, computed using log returns, are sig-

nificant (Z value, 11.62) even when the results are tested

by standardizing ARs. Further, CAARs are significant

for 59 days in the 61-day event window. The effect of

takeover announcement in the pre-announcement period

is large with CAARs of 22.53 percent which is statisti-

cally significant at 5 percent level. Major gains accrue to

the target company shareholders in the period from day -

30 to day 0. The implication of this result is that market

anticipates the event to happen and information content

of the event is impounded in the stock prices before the

event day. However, another 5 percent CAARs are real-

ized by the shareholders in the days subsequent to the

Table 4: AARs and CAARs to Target Company Shareholders based on Raw Returns with Z values

Event Day AAR Z Value CAAR Z value Event Day AAR Z Value CAAR Z value

-30 0.0095 2.7460 0.0095 2.7460 1 0.0223 5.9346 0.2946 16.6359

-29 -0.0018 -0.1037 0.0077 1.8684 2 0.0127 3.1412 0.3073 16.9287

-28 0.0089 2.1783 0.0166 2.7832 3 0.0036 1.3258 0.3109 16.9053

-27 -0.0022 -0.4680 0.0144 2.1763 4 0.0079 2.2715 0.3188 17.0460

-26 0.0075 2.3471 0.0218 2.9962 5 0.0039 1.7778 0.3227 17.1039

-25 0.0064 2.5670 0.0283 3.7832 6 0.0038 1.3027 0.3265 17.0853

-24 0.0123 2.7480 0.0406 4.5412 7 -0.0041 -0.6594 0.3224 16.7521

-23 0.0022 1.1350 0.0427 4.6492 8 0.0023 0.3460 0.3247 16.5913

-22 0.0044 1.4011 0.0471 4.8503 9 0.0025 1.0854 0.3272 16.5542

-21 0.0077 2.1824 0.0548 5.2915 10 0.0010 0.7321 0.3282 16.4654

-20 0.0054 2.3908 0.0602 5.7661 11 0.0012 0.6165 0.3294 16.3633

-19 0.0055 1.0042 0.0657 5.8105 12 0.0006 0.5654 0.3299 16.2582

-18 0.0008 0.3779 0.0665 5.6874 13 0.0022 0.4942 0.3321 16.1469

-17 0.0078 0.9413 0.0743 5.7320 14 0.0045 0.5711 0.3366 16.0516

-16 0.0027 1.5868 0.0771 5.9474 15 -0.0022 -0.5481 0.3344 15.7953

-15 0.0082 3.8936 0.0853 6.7319 16 -0.0009 0.1000 0.3335 15.6410

-14 0.0045 0.6543 0.0898 6.6896 17 0.0032 0.8174 0.3367 15.5952

-13 0.0019 0.4806 0.0917 6.6144 18 -0.0032 -0.6174 0.3335 15.3470

-12 0.0040 1.9008 0.0957 6.8741 19 0.0018 0.1563 0.3353 15.2149

-11 0.0084 4.1315 0.1041 7.6239 20 -0.0012 -0.7700 0.3342 14.9572

-10 0.0083 2.7014 0.1124 8.0296 21 -0.0021 -0.3858 0.3321 14.7592

-9 0.0082 3.0534 0.1205 8.4960 22 -0.0004 0.1264 0.3317 14.6366

-8 0.0087 2.3462 0.1292 8.7984 23 -0.0063 -1.7174 0.3254 14.2668

-7 0.0111 3.4974 0.1404 9.3271 24 -0.0007 -0.0134 0.3247 14.1347

-6 0.0129 4.4296 0.1532 10.0246 25 0.0002 -0.3697 0.3248 13.9585

-5 0.0109 2.9001 0.1642 10.3987 26 -0.0006 -0.2966 0.3242 13.7962

-4 0.0146 4.2419 0.1788 11.0206 27 0.0023 0.6265 0.3266 13.7590

-3 0.0154 4.2173 0.1942 11.6190 28 0.0019 0.4302 0.3284 13.6979

-2 0.0167 6.0509 0.2109 12.5406 29 0.0018 0.4047 0.3302 13.6356

-1 0.0251 8.9795 0.2359 13.9692 30 0.0367 4.3099 0.3668 14.0752

0 0.0363 11.6597 0.2723 15.8362

42

announcement of the takeover. This may be either on ac-

count of the fact that market is slow in absorbing the in-

formation content of the event or is reacting to the

subsequent information it receives about the event in due

course. As the CAARs are significant for the 61-day event

window (i.e., on day +30) and also for majority of the

days in the event window, we reject the null hypothesis

that CAARs to the target company shareholders are not

significantly different from zero.

CAARs to Target Company Shareholders under Differ-

ent Event Windows in Response to Takeover Announce-

ment using Standardized Abnormal Returns for Testing

The results of wealth effects of takeover announcement

on the target company shareholders computed for a num-

ber of event windows are presented in Table 6. The CAARs,

based on the raw returns and also log returns, are posi-

tive and significant for all the event windows. CAARs,

based on raw returns, vary from 3.63 percent (Z value at

5%, 11.66) for one-day event window (day 0) to 36.68 per-

cent (Z value at 5%, 14.08) for 61-day event window (-30

to +30). Similarly, for log returns, CAARs vary from 3.31

percent (Z value at 5%, 10.86) for one-day event window

(day 0) to 27.4 percent (Z value at 5%, 11.66) for 61-day

event window (-30 to +30). As shareholders realize

CAARs which are positive and significant for all the event

windows, the null hypothesis that CAARs to target com-

Table 5: AARs and CAARs to Target Company Shareholders based on Log Returns with Z values

Event Day AAR Z Value CAAR Z value Event Day AAR Z Value CAAR Z value

-30 0.0081 2.4057 0.0081 2.4057 1 0.0199 5.2416 0.2453 14.5232

-29 -0.0032 -0.4650 0.0049 1.3658 2 0.0111 2.6342 0.2564 14.7690

-28 0.0067 1.7288 0.0116 2.1329 3 0.0025 1.0783 0.2589 14.7388

-27 -0.0039 -0.8682 0.0077 1.4045 4 0.0069 2.0246 0.2658 14.8756

-26 0.0061 2.0116 0.0138 2.1735 5 0.0032 1.5333 0.2691 14.9281

-25 0.0051 2.1904 0.0189 2.8959 6 0.0031 1.0600 0.2722 14.9027

-24 0.0112 2.4192 0.0301 3.6134 7 -0.0050 -0.8394 0.2672 14.5665

-23 0.0009 0.7909 0.0309 3.6652 8 0.0017 0.1888 0.2689 14.4093

-22 0.0032 1.0283 0.0341 3.8051 9 0.0018 0.8972 0.2708 14.3727

-21 0.0064 1.8390 0.0405 4.2028 10 0.0005 0.5662 0.2712 14.2865

-20 0.0041 2.0385 0.0446 4.6339 11 0.0007 0.5068 0.2719 14.1952

-19 0.0042 0.6909 0.0488 4.6399 12 0.0000 0.4456 0.2720 14.0984

-18 -0.0004 0.0650 0.0484 4.4763 13 0.0017 0.3528 0.2736 13.9915

-17 0.0063 0.5569 0.0547 4.4652 14 0.0037 0.4032 0.2773 13.8965

-16 0.0016 1.3245 0.0563 4.6625 15 -0.0028 -0.6574 0.2745 13.6458

-15 0.0070 3.5494 0.0632 5.4192 16 -0.0017 -0.0751 0.2728 13.4887

-14 0.0033 0.3955 0.0666 5.3552 17 0.0026 0.6723 0.2755 13.4464

-13 0.0007 0.2093 0.0673 5.2546 18 -0.0037 -0.7475 0.2718 13.1996

-12 0.0024 1.4127 0.0697 5.4450 19 0.0013 0.0065 0.2730 13.0678

-11 0.0069 3.7294 0.0765 6.1574 20 -0.0017 -0.8587 0.2713 12.8165

-10 0.0073 2.3954 0.0838 6.5420 21 -0.0025 -0.4710 0.2688 12.6260

-9 0.0065 2.6771 0.0903 6.9735 22 -0.0009 -0.0052 0.2679 12.5056

-8 0.0075 1.9915 0.0978 7.2436 23 -0.0068 -1.8176 0.2611 12.1371

-7 0.0097 3.0734 0.1075 7.7308 24 -0.0013 -0.1433 0.2599 12.0066

-6 0.0113 3.9442 0.1188 8.3789 25 -0.0006 -0.5045 0.2593 11.8301

-5 0.0091 2.4095 0.1279 8.6980 26 -0.0012 -0.4238 0.2580 11.6687

-4 0.0130 3.7926 0.1409 9.2796 27 0.0018 0.4946 0.2598 11.6338

-3 0.0138 3.7259 0.1546 9.8304 28 0.0012 0.2547 0.2610 11.5686

-2 0.0150 5.4729 0.1696 10.6957 29 0.0013 0.2988 0.2623 11.5112

-1 0.0226 8.1922 0.1923 12.0409 30 0.0117 1.8982 0.2740 11.6642

0 0.0331 10.6512 0.2253 13.7957

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VIKALPA • VOLUME 38 • NO 3 • JULY - SEPTEMBER 2013 43

pany shareholders in response to the takeover announce-

ments are statistically equal to zero is rejected. Thus, both

under raw returns and log returns a major portion of

CAARs to target company shareholders are being real-

ized at or before the announcement date suggesting that

either there was a leakage of information to the market

before the event day or that the market anticipated the

takeover announcement. Interestingly, a small part of

CAARs is realized by the target shareholders in the post-

takeover announcement period indicating that the mar-

ket took some time to absorb fully the information content

of the event.

This study has examined the stock price response to the

announcement of takeovers on the target company share-

holders and found that CAARs to target companies are

positive and significant in all cases. The CAARs realized

by target company shareholders are positive and signifi-

cant at 36.68 percent for raw returns. The target company

shareholders experience positive and significant CAARs

of 27.40 percent when log returns are used. A vast major-

ity of studies which study the wealth effect of M&A an-

nouncement report large and significant cumulative

average ARs to the target companies. These results are

consistent with the conclusion of the earlier studies (dis-

cussed earlier) that target company shareholders get large

premiums. For all the event windows considered in the

study within a broad event window of 61 days, the target

company shareholders realize large and significant

CAARs. Our result of 36.68 percent for raw returns and

27.40 percent for log returns are comparable with the re-

sults summarized in review articles: Jensen and Ruback

(1983), Jarrell, et al. (1988), Datta, et al. (1992), and Bruner

(2002). In their comprehensive summary article, Jensen

and Ruback (1983) report approximately 30 percent posi-

tive average gains to the target shareholders in success-

ful takeovers and 35 percent in the case of unsuccessful

takeovers (p.11). Summarizing the results for 663 tender

offers between 1962 and 1985, Jarrell, et al. (1988) report

that gains to targets in successful takeover bids averaged

19 percent in the 1960s, which increased to 35 percent in

the 1970s. For the period 1980 to 1985, the gains slightly

decreased to 30 percent (p.51). The analysis of the empiri-

cal estimates examined in Datta, et al. (1992) indicates

that the shareholder gains for target firms in the month of

M&As announcement is approximately 22 percent (p.75).

Table 6: CAARs to Acquiring Company Shareholders

Event Window Raw Returns Log Returns

CAAR Z Value CAAR Z Value

61 days (-30 to +30) 0.3668 14.0752 0.2740 11.6642

51 days (-25 to +25) 0.3030 13.6886 0.2455 11.7159

41 days (-20 to +20) 0.2794 16.8444 0.2308 12.2187

31 days (-15 to +15) 0.2574 15.1039 0.2182 13.3792

21 days (-10 to +10) 0.2241 15.5666 0.1947 13.9532

11 days (-5 to +5) 0.1694 15.8295 0.1503 14.3743

9 days (-4 to + 4) 0.1546 15.9408 0.1380 14.5513

7 days (-3 to + 3) 0.1321 15.6134 0.1180 14.2578

5 days (-2 to + 2) 0.1131 15.9951 0.1018 14.6794

3 days (-1 to + 1) 0.0837 15.3425 0.0756 14.1785

1 day (0 day) 0.0363 11.6597 0.0331 10.8603

31 days (-30 to 0) 0.2723 15.8362 0.2253 13.7957

26 days (-25 to 0) 0.2504 15.9781 0.2115 14.1108

21 days (-20 to 0) 0.2174 15.5893 0.1848 13.8614

16 days (-15 to 0) 0.1952 16.2845 0.1691 14.6883

11 days (-10 to 0) 0.1682 16.3049 0.1489 14.8568

6 days (-5 to 0) 0.1190 15.5336 0.1066 14.2546

5 days (-4 to 0) 0.1081 15.7193 0.0975 11.0577

4 days (-3 to 0) 0.0935 15.4537 0.0845 14.2964

3 days (-2 to 0) 0.0781 15.4096 0.0708 14.3146

2 days (-1 to 0) 0.0614 14.5942 0.0558 13.5858

44

Bruner (2002) also reports CAARs in the range of 20-30

percent (p.51). Campa and Hernando (2004) after

analysing 13 recent studies, report large CAARs to the

shareholders of target companies although they qualify

their conclusions that these are significantly lower for

transactions which have taken place more recently (p.50,

64). The results of our study are consistent with the opin-

ion expressed by Campa and Hernando (2004) on the

review of studies that “CAARs are also detected in the

days prior to the announcement date, suggesting that the

market anticipates information on the deals” (p. 50). The

results of CAARs in the days following the announce-

ment also substantiate findings by Campa and Hernando

(2004) that “larger the event window the greater the mar-

ginal increase in the amount and significance of CAARs”

(p.50). However, Campa and Hernando (2004), in their

empirical study, find significant 9 percent CAARs to the

targets on the announcement of M&As for the event win-

dow of 61 days, i.e. day -30 to +30 (p.64). This estimate is

lower than that of this study. In the review of literature,

they report large CAARs to target company shareholders

which range between 20 percent and 30 percent (p. 50). A

study by Bradley, Desai, and Kim (1988) for a sample of

236 successful tender bids, finds a gain of 19 percent to

the target shareholders for the period 1963 to 1968, 35

percent for the period 1968-1980, and 35 percent for the

period 1981-1984. These gains slightly decreased between

the period 1963 and 1984 to 32 percent (p.11). Cybo-Ottone

and Murgia (2000) report around 12 percent CAARs to

the targets for a two-day event window (-1, +0) and 15-16

percent for a 41-day (-20, +20) event window (p.843, 844).

Even though the results of this study are lower than those

of their results for the two-day event window, they are

comparable with the 41-day window of this study. The

results of 6 percent for the two-day event window (-1, 0)

are also slightly lower than Cornett and Tehranian (1992),

who found 8 percent average gains (p. 231). Further, the

results of CAARs to target company shareholders

(27.40%) for 61 days (-30, +30) are higher than that of

Georgen and Renneboog (2004), who report an AR of 9

percent (p.19). Dodd and Ruaback (1977) find a signifi-

cant 20.53 percent cumulative monthly average abnor-

mal gain for target firms where tender offer is successful

and a significant 18.96 percent in tender bids which are

not successful for the announcement month (p.363). Bra-

dley et al. (1983) reveal that target company shareholders

experience cumulative ARs of 40.20 percent for the event

window of one month before to one month after the event,

and 39.29 percent for the two-month event window of

one month before to the event month (p.193).

Comparing the results of this study with those of the other

Indian studies, it is found that target company sharehold-

ers experience large and statistically significant ARs of

3.63 percent and 3.31 percent on the day of announce-

ment of takeovers (day 0) based on raw returns and log

returns, respectively. The gains to target company share-

holders for different event windows are: 7.81 percent be-

tween -2 and 0 day, 16.82 percent between -10 and 0 day,

and 27.23 percent between -30 to 0 day based on raw

returns. Similarly, the shareholders gain significant

CAARs of 7.08 percent between -2 and 0 day, 14.89 per-

cent between -10 and 0 day, and 22.53 percent between -

30 and 0 day based on log returns. In the

post-announcement period (+1 to +30), target companies

earn small but significant CARs of 9.45 percent and 4.87

percent based on raw returns and log returns, respec-

tively. The results for pre-announcement period are com-

parable with the results obtained by Pandey (2001) who

examines the impact of takeover announcements on the

target company shareholders and reports that the target

firms’ stock prices earn significant returns of 3.49 percent

on day 0, 8.7 percent returns between -2 and 0 day, 12.1

percent between -10 and 0 day, and 18.43 percent between

-30 and 0 day based on market and risk adjusted model.

Further, Pandey also shows that the gains to the share-

holders of target companies’ are 4.69 percent on day 0,

10.54 percent between -2 and 0 day, 16.81 percent be-

tween day -10 to day 0, and 30.02 percent between day -

30 and day 0 based on the market-adjusted model. These

ARs are both positive and statistically significant. One of

his notable observation is that ARs in the run-up to open

offer announcements are about 30 percent of which about

10 percent is in the last three days. However, the ARs in

the five days after the announcement were negative and

insignificant, in his study. Chakraborty (2010), who ex-

amines the stock price responses of target companies to

takeover announcements in the financial service sector

in India, also reports positive and significant CARs of

5.98 percent 10.11 percent , and 2.32 percent for event

windows between -20 and -2, -20 and +20, and –1 to +1,

respectively. But the same does not hold for the post-event

period +2 to +20 during which the results are positive but

insignificant at 1.79 percent . The magnitude of gains to

target companies as reported in Chakraborty (2010) for

the pre-takeover announcement period are smaller com-

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VIKALPA • VOLUME 38 • NO 3 • JULY - SEPTEMBER 2013 45

pared to the results of this study and also that of Pandey

(2001). This may be on account of the study of financial

service sector companies by Chakraborty (2010). The find-

ings of this study suggest that the shareholders of target

firms earn significantly positive ARs on takeover an-

nouncements. However, on the basis of a closer analysis

of the results, the author reveals that the positive returns

was the contribution of only 19 firms while for the re-

maining 48 firms, there is no market reaction on takeover

announcements. Based on the analysis, Chakraborty con-

cludes that except for a few cases, which show positive

returns, takeovers in the financial services sector in gen-

eral do not evoke market reaction. The findings of this

study, similar to that of Pandey (2001) and Chakraborty

(2010), suggest that a major portion of CAARs to target

company shareholders are being realized at or before the

announcement date. Our evidence indicates that either

there was a leakage of information to the market before

the event day or that the market anticipated the takeover

announcement event to take place. The results also sug-

gest that large stock holding by the promoters or the man-

agement may be the reason for large gains to the

shareholders of target companies, as opined by Pandey

(2001). This is because in the closely held companies, any

resistance by the management of a target company to the

takeover proposal, results in failure of the open offer and

hostile takeover is unimaginable and impractical. Pandey

(2001) ascribes the significant positive value of takeovers

for targets on and before announcement to the private

value of corporate control and not to the improvement of

firm’s future performance. While this study has not ex-

amined this issue, Chakraborty has explored whether the

significant target returns are due to private value of cor-

porate control. But she finds no valid reason as even in

firms with no significant ARs in response to takeover

announcement, the pattern of shareholding was similar

to that of firms which experienced ARs before the take-

over announcements.

This study finds that a small part of CAARs is realized by

the target shareholders in the post-takeover announce-

ment period indicating that the market took some time to

absorb fully the information content of the event. The find-

ing for the post-takeover announcement period is also

consistent with Pandey (2001) and Chakraborty (2010).

However, this study finds small but statistically signifi-

cant CAARs in the post-announcement period. While

Pandey finds negative and statistically insignificant re-

turns for the period after announcement (-2.97% for an

event window of +1 to +5 days), Chakraborty finds posi-

tive but statistically not significant gains for the above-

mentioned period (+ 1.79% for an event window of +2 to

+20).

CONCLUSION

This paper examines the stock price responses of target

companies to the announcement of takeovers in India for

nine years from April 1, 1998 to June 30, 2007 using a

sample of 227 companies. The ARs, AARs, and CAARs

are computed for a 61-day window period employing the

standard market model. Regression parameters of the

market model (αi and βi) are computed taking an estima-

tion period of 250 days (-280 to -31 days) preceding the

date of announcement of takeovers. Further, the results

are analysed for many smaller event window periods

within a broader event window of 61 days. The results,

are based on both raw returns and log returns. The re-

sults, both before standardizing and after standardizing

the ARs of the individual target companies are tested.

Results of this study indicate that takeovers in India cre-

ate wealth for the target company shareholders. They earn

a cumulative average abnormal return of 27-37 percent

for an event window of 61 days surrounding the an-

nouncement of takeovers. The gains to the shareholders

are 37 percent when raw returns are used and 27 percent

when log returns are used. The conclusion does not vary

across methods (i.e. for raw returns or log returns). Simi-

larly, irrespective of the testing procedure used (i.e. non-

standardized or standardized AR method), the

conclusions remain unchanged. The findings are analo-

gous with that of the vast majority of studies conducted

in other countries and a few studies conducted in India.

The results for several smaller window periods within

the broader event window of 61 days also show that share-

holders of target companies earn large and statistically

significant CAARs. An important observation of this

study is that both under raw returns and log returns, a

major portion of CAARs to target company shareholders

is realized at or before the announcement date suggest-

ing that either there was a leakage of information to the

market before the event day or the market anticipated the

takeover announcement. Interestingly, a small part of

CAARs is realized by the target shareholders in the post-

takeover announcement period indicating that the mar-

ket took some time to absorb fully the information content

of the event. Therefore, we conclude that wealth gains

46

accrue to the target company shareholders and also that

the Indian market does not exhibit semi-strong form effi-

ciency.

The practical implication of the study is that there is a

large and significantly positive wealth effect on the target

company shareholders in response to the announcement

of takeovers. This indicates that takeovers are being per-

ceived by the capital markets as important tools for im-

proving the performance of target shareholders by

changing the target company management. It is also im-

plied from the study that the Indian capital market is not

semi-strong form efficient as the target company share-

holders experience positive and significant CAARs even

after the event day. The conclusion of this study provides

input to both the acquiring and the target company share-

holders. The acquiring company tends to overbid for ac-

quiring the target company and in the process benefits

the target company shareholders at the cost of acquiring

company shareholders. Therefore, the management of the

acquiring company should be cautious. Similarly, the take-

overs offer an opportunity to shareholders of target com-

panies and general investors to make profits both in the

period before and after the announcement of the takeover

bid by going long on the target company stocks.

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T Mallikarjunappa is a Professor in the Post Graduate De-partment of Business Administration and Research,Mangalore University, Karnataka, India. He has served asthe Dean, Faculty of Commerce and the Finance Officer ofMangalore University. He has published 105 research papers.His research interests are security analysis and portfoliotheory, efficient market theory, capital market theory, de-rivatives, mergers and acquisitions, capital structure and divi-dend theories. He is on the editorial board of AIMS InternationalJournal of Management and Journal of Management and PublicPolicy. He has reviewed papers for AIMS International Journalof Management, Asian Academy Management Journal of Account-ing and Finance, and Vikalpa.

e-mail: tmmallik@yahoo.com

Panduranga Nayak is Associate Professor of Commerce inSri Venkataramana Swamy College, Bantwal, Karnataka. Hewas awarded Ph.D. degree by the Mangalore University forhis doctoral thesis entitled “Corporate Mergers and Acquisi-tions in India: An Evaluation of Financial Performance”. Heteaches Direct and Indirect Taxation and Financial Account-ing. He has published two research articles (jointly with otherauthors) in the refereed international journals. His areas ofinterests are mergers and acquisitions, financial accounting,and taxation.

e-mail: pnayak62@yahoo.com

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VIKALPA • VOLUME 38 • NO 3 • JULY - SEPTEMBER 2013 51

R E S E A R C H

includes research articles thatfocus on the analysis and

resolution of managerial andacademic issues based on

analytical and empirical or caseresearch

ExecutiveSummary

A Balanced Approach towardsMarket Orientation

Gurjeet Kaur, R D Sharma, and Nitasha Seli

KEY WORDS

Internal Market Orientation

External MarketOrientation

Market Research

Competitive Advantage

Indian Banking

There has been a lot of research on implementation of the concept and examination of the

link between market orientation and business performance. In these offerings, scales such as

MARKOR, introduced by Kohli, Jaworski, and Kumar (1993), and MKTOR, introduced by

Narver and Slater (1990) have been frequently employed without further investigation.

Analogous to this academic endeavour, few marketing researchers have raised doubts re-

garding the reliability and validity of the extant scales and have also shown concern to-

wards the definition of the concept.

Apropos, the present study has been planned to examine the degree of market orientation

from management perspective and also to develop a scale for measuring market orientation

in the selected public and private sector banks, viz., State Bank of India (SBI), Punjab Na-

tional Bank (PNB), and The Jammu and Kashmir Bank Pvt. Ltd. (JKB). The study finds:

• Significant difference between the responses of management with respect to Internal

Market Orientation (IMO) and External Market Orientation (EMO). The management of

all the three major banks, viz., PNB, SBI, and JKB is more optimistic with regard to the

three dimensions of EMO than that of IMO.

• Significant impact of internal market orientation on the overall market orientation as

compared to external market orientation.

• Positive and significant relationship between internal customers’ and external custom-

ers’ satisfaction; internal customers’ satisfaction and business performance, and external

customers’ satisfaction and business performance.

For improving market orientation in the banking sector, managers are suggested to take the

following initiatives:

• Initiate crucial steps towards developing a healthy work environment – delineating

employee expectations; discussing goal achievement, tracking performance and feed-

back; and devising an appropriate mechanism for follow-up and employee appraisal.

Employees should be made the root cause identifiers and solvers whereas managers

must be problem eradicators.

• Ensure parallel inter- and intra-departmental communication. An open door policy can

be encouraged to communicate through various formal and informal channels so that

inter-departmental work teams can perform efficiently.

• Conduct internal market research once a year to generate information pertaining to the

job requirements of internal customers.

• Retain its employees through the successful implementation of internal marketing strat-

egies which in turn demands proper understanding of employees’ work-related needs,

feelings, emotions and intellect, proper treatment as an individual, open and free com-

munication with the management, and establishing and managing effective long-term

employee-management relationships.