Wealth of Merger and Acquisition on Acquiring Firms in Brazil

Introduction

The goal of mergers and acquisitions is to add value to firms and to increase wealth of shareholders. One way to assess if the mergers and acquisitions (M&A) can create value is to examine abnormal returns around the announcement day of the M&A deal. Event study methodology is commonly used to estimate the abnormal returns which measure the gain or loss of related firms involved in the M&A deals. Prior studies for developed markets report that target firms gain significantly (e.g., Dos Santos, Errunza, & Darius, 2003; Jarrell & Poulsen, 1989; Jensen & Ruback, 1983) and acquiring firms remain unclear in terms of wealth effects (e.g., Bradley, Desai, & Kim, 1988; Jarrel, Brickley, & Netter, 1988; Morck, Shleifer, & Vishny, 1990). Among emerging markets, the BRIC nations of Brazil, Russia, India, and China are hotspots for M&A activity. Those four nations account for 60% of all emerging market deal activities. In Asian emerging markets, Chinese and Indian acquiring firms on average gain significantly (e.g., Ma, Pagán, & Chu, 2009, 2010). However, studies on wealth effects of Brazilian acquiring firms are relatively few comparing with the extensive array of M&A studies in major emerging markets such as China and India.

In this paper we analyze a sample of mergers and acquisitions announced and completed during the January 1, 2010 to December 31, 2014 period. We aim to investigate how the Brazil stock market reacts to the announcement of M&A deals by examining abnormal returns of the acquiring firms on days within event window. Existing studies use standard ordinary least square (OLS) market model to estimate expected normal returns, but rarely check for normality of observations (stock returns) in estimation window. This paper applies a different approach to examine wealth effects of M&A on the acquiring firms. To examine if the key assumption of using standard OLS model is met, we conduct a normality test for the daily stock returns on acquiring firm and corresponding market index in each deal. We then use the standard OLS market model and two different robust regressions to examine the reliability and consistency of the statistical results. While most prior studies use samples either exclude deals in financial industry or including all deals, we form the sample deals in three different groups: a group including all deals, a group including deals in non-financial industry, and a group including deals in financial industry only. We examine the differences of the results using the three set of samples.

When comparing the results of the three different regressions, we find that the mean differences between the standard OLS and the robust regressions are statistically significant. The standard OLS market model produces smallest average negative abnormal returns than those of the two robust tests.

We find that no significant abnormal gain or loss in selected windows when all sample deals are included in calculating abnormal returns. When dividing the sample into two subsamples, deals in financial service industry and deals in non-financial industries, we find that positive abnormal returns appear in almost all selected windows in financial service industry and negative abnormal returns appear in almost all selected windows in non-financial industries.

We structure the paper as follows. We first review the relevant literature and develop hypotheses. We then provide a description of data and methodology and analysis of results. Final section discusses main findings and managerial implications.