Page 77 - Azerbaijan State University of Economics

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

on companies and whether target will be subsequently divested or integrated within

the acquirer‘s structure. Event studies compute cumulative abnormal returns (CAR),

where the abnormal return for each day is added from the n day before. For instance,

if abnormal return for the day t-1 is -2%, to is 3%, and t+1 are 5% the CARs would be

-2%, 1%, and 6% (Ross et al, 2005).

Andrade, Mitchell and Stafford (2011) et al, studied if there was the evidence

that mergers and acquisitions create value by using event study. According to

Sirower (1997), M&A transactions are not profitable for the shareholders of the

acquiring firm averaging zero or even slightly negative returns, even with the

existence of supposed synergies (Andrade et al. 2001, Bradley et al. 1988, Jensen

and Ruback 1983).

Empirical studies reveal that deals create value, with the lion‘s share of the gains

going to target‘s shareholders while acquirer‘s having small losses in some cases

(Jensen & Ruback, 1983; Jensen, 1988; Harrison, Oler,& Allen, 2005).

A reasonable explanation could be that since markets are highly competitive,

bidders pay very big premiums for target companies not to miss the opportunity of

acquisition. As a consequence, when the market receives the news about M&A

announcement stock price of target companies increase at rocket pace. In this case

market receives negative signal concerning the decision of the bidder and stock

prices are immediately decreasing in prices reflecting market‘s lower expectation.

On the other hand, after examining sample of Canadian companies from 1994 to

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