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Technical Efficiency and Stock Market Reaction to Horizontal Mergers

  • Yanna Wu

    (PricewaterhouseCooper LLP)

  • Subhash C. Ray

    (University of Connecticut)

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.

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File URL: http://web2.uconn.edu/economics/working/2005-05.pdf
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Paper provided by University of Connecticut, Department of Economics in its series Working papers with number 2005-05.

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Length: 41 pages
Date of creation: Mar 2005
Date of revision:
Handle: RePEc:uct:uconnp:2005-05
Contact details of provider: Postal: University of Connecticut 365 Fairfield Way, Unit 1063 Storrs, CT 06269-1063
Phone: (860) 486-4889
Fax: (860) 486-4463
Web page: http://www.econ.uconn.edu/

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  1. Fama, Eugene F, 1991. " Efficient Capital Markets: II," Journal of Finance, American Finance Association, vol. 46(5), pages 1575-617, December.
  2. Joel L. Horowitz, 1996. "Bootstrap Methods in Econometrics: Theory and Numerical Performance," Econometrics 9602009, EconWPA, revised 05 Mar 1996.
  3. 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.
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