Page 63 - Azerbaijan State University of Economics

THE JOURNAL OF ECONOMIC SCIENCES: THEORY AND PRACTICE, V.72, # 1, 2015, pp. 61-94

model suggested by MacKinlay (1997), abnormal returns (ARs) and cumulative

abnormal returns (CARs) were computed and tested statistically. Study concludes that

across industry and countries shareholders of target companies have statistically

significant CAR of 19.1%. In previous studies by different researchers typically CAR is

ranging from 15% to 30% percent depending on industry, time period and other factors.

Acquiring companies have negative abnormal returns, with CAR of -7.46%. The

outcome is in line with previous studies of Dodd (1980), Firth (1980), and Eger (1983)

who indicated that acquiring companies obtain statistically significant negative

abnormal returns.

There might be different reasons leading to non-value creation for acquirers. One

of them suggests that during acquisition the target was overvalued by the bidder.

Another reason might be management incentives to expand the firm and gain larger

market share and coverage.

2. Theoretical Framework

2.1. Characteristics of M&A

From the perspective of business structures, there are three types of M&A

transactions: horizontal, vertical and conglomerate (Berk and DeMarzo (2007) and

Arnold (2002)). The types of M&A deals are distinguished by kind of relationship

between target and the bidder.

a. Horizontal Merger - when companies operating in the same line of business

merge their assets. For instance, for when telecommunication company acquires

another telecommunication company. This type of M&A enhances the growth and

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