The impact of merger on stockholder risk

Date
1991
Advisor
Aydoğan, Kürşat
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Bilkent University
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Language
English
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Thesis
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Abstract

The main purpose of this study is to investigate empirically the impact of merger on stockholder risk. Mergers between LSE firms during the period 1983~1986 are examined. The literature provides three major hypotheses concerning merger and risk. These are tested to see whether the magnitude and the direction of change in risk following mergers is compatible with what is hypothesized. To gai further insight, the discrepancy between the systemati risk of the merged firm and that predicted by CAPM modelled using several market variables.Market model employed to estimate three measures of risk: Systemati unsystematic, total. n Given the limitations of the sample and research design, mergers are found to be associated with an increase in systematic risk over what is hypothesized. The absolute difference of premerger systematic risks of acquiring and acquired firms and financial leverage of the merged firm are found to explain the discrepancy between the actual and hypothesized level. On the contrary to systematic r-isk, unsystematic risk has not changed relative to premerger value of the acquiring company. The findings show that on average market takes a riskier view of the merged firm than its components and risk reduction may not be a valid rationale for mergers. Stockholders must question the mergers justified on the basis of risk reduction alone, since they can achieve the same reduction in unsystematic risk by portfolio diversification and mergers do not provide any benefits in terms of systematic risk reduction.

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Keywords
Merger, Acquiring firm, P/E game, Portfolio еffесt, Risk reducing effect, Unsystematic risk, Market Model, OLS
Citation
Published Version (Please cite this version)