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Technical Efficiency and Stock Market Reaction to Horizontal Mergers

Author

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  • Yanna Wu

    (PricewaterhouseCooper LLP)

  • Subhash C. Ray

    (University of Connecticut)

Abstract

This study examines the relationship between stock market reaction to horizontal merger announcements and technical efficiency levels of the participating firms. The analysis is based on data pertaining to eighty mergers between firms in the U.S. manufacturing industry during the 1990s. We employ Data Envelopment Analysis (DEA) to measure technical efficiency, which capture the firms. competence to produce the maximum output given certain productive resources. Abnormal returns related to the merger announcements provide the investor.s re-evaluation on the future performance of the participating firms. In order to avoid the problem of nonnormality, heteroskedasticity in the regression analysis, bootstrap method is employed for estimations and inferences. We found that there is a significant relationship between technical efficiency and market response. The market apparently welcomes the merger as an arrangement to improve resource utilizations.

Suggested Citation

  • Yanna Wu & Subhash C. Ray, 2005. "Technical Efficiency and Stock Market Reaction to Horizontal Mergers," Working papers 2005-05, University of Connecticut, Department of Economics.
    • Handle: RePEc:uct:uconnp:2005-05
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    References listed on IDEAS

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    1. Kreps,David M. & Wallis,Kenneth F. (ed.), 1997. "Advances in Economics and Econometrics: Theory and Applications," Cambridge Books, Cambridge University Press, number 9780521589819.
    2. Ray,Subhash C., 2012. "Data Envelopment Analysis," Cambridge Books, Cambridge University Press, number 9781107405264.
    3. Fama, Eugene F, 1991. "Efficient Capital Markets: II," Journal of Finance, American Finance Association, vol. 46(5), pages 1575-1617, December.
    4. Kreps,David M. & Wallis,Kenneth F. (ed.), 1997. "Advances in Economics and Econometrics: Theory and Applications," Cambridge Books, Cambridge University Press, number 9780521589833.
    5. Scherer, F M, 1988. "Corporate Takeovers: The Efficiency Arguments," Journal of Economic Perspectives, American Economic Association, vol. 2(1), pages 69-82, Winter.
    6. Joel L. Horowitz, 1996. "Bootstrap Methods in Econometrics: Theory and Numerical Performance," Econometrics 9602009, University Library of Munich, Germany, revised 05 Mar 1996.
    7. A. Craig MacKinlay, 1997. "Event Studies in Economics and Finance," Journal of Economic Literature, American Economic Association, vol. 35(1), pages 13-39, March.
    8. Halpern, Paul, 1983. "Corporate Acquisitions: A Theory of Special Cases? A Review of Event Studies Applied to Acquisitions," Journal of Finance, American Finance Association, vol. 38(2), pages 297-317, May.
    9. Kreps,David M. & Wallis,Kenneth F. (ed.), 1997. "Advances in Economics and Econometrics: Theory and Applications," Cambridge Books, Cambridge University Press, number 9780521589826.
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    Cited by:

    1. Kevin Amess & Sourafel Girma, 2009. "Do Stock Markets Value Efficiency?," Scottish Journal of Political Economy, Scottish Economic Society, vol. 56(3), pages 321-331, July.
    2. Syed Manzur Quader & Mohammad Nayeem Abdullah, 2020. "How financial market in Bangladesh appraises efficiency?," Economic Change and Restructuring, Springer, vol. 53(3), pages 475-494, August.

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    More about this item

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General

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