Drivers of the Impact of Mergers and Acquisitions on Stock Market Returns of Listed Firms in Eastern Africa Securities Markets

Abstract

The objective of this study is to determine drivers of the impact of M&A on stock market returns of listed firms in Eastern Africa securities markets. Specifically, the study sought to determine the impact of firm characteristics, deal characteristics, operating performance and board characteristics in the short run and long run on pre and post M&A stock market returns. This study was guided by free cash flow theory, misvaluation theory, signaling theory, liquidity hypothesis, diversification theory and hubris theory. Event study approach was employed to determine impact of M&A on stock market returns in the short run and long run. In the short run, impact of M&A on stock market returns was determined using the market model approach for a period of twenty (20) days before the M&A and twenty (20) days after the M&A whereas in the long run pre and post M&A stock market returns was computed using the Carhart four factor model for a period of ten (10) years, that is, five (5) years before and five (5) years following the activity. The study employed quantitative research design. The study population was defined as all the listed firms involved in mergers and acquisitions activities between year 1998 and 2015 in the three Eastern Africa countries that include Kenya, Uganda and Tanzania. In total thirty (30) firms and twenty five (25) firms were studied in the short run and in the long run respectively. The study employed secondary data which was extracted from the audited annual financial statements of individual firms, Nairobi Securities Exchange and Capital Market Authority of Kenya library. Descriptive statistics including measures of central tendency; mean, maximum, minimum and measures of variation and standard deviation were generated and interpreted. Diagnostic tests were carried out. Cross sectional regression was employed in the short run while panel data regression technique was used in the long run. F-test was used to determine the significance of the overall model. To determine the significance of the individual variables, t-test was used. From the event study, it was observed that the initial reaction to M&A was positive; however, in the long run M&A stock market return was negative. The study concluded that firm characteristics namely; firm size and Tobin Q had a positive significant impact on pre and post M&A stock market returns in the short run. The long run analysis showed that firm size maintained its positive significant impact; however, Tobin Q was significantly negative. It was also found out that deal characteristics; that is, method of payment, target status and deal value had a significant impact on pre and post M&A stock market returns in the short run. Further, the results depicted a negative significant relationship between operating performance and pre and post M&A stock market returns both in the short run and in the long run displaying the hubris nature of the management across listed firms in Eastern Africa securities markets. Finally, the study found out that board size had a significant positive impact on M&A stock market returns in the short run; however, in the long run a significant inverse relationship was reported. The study concluded that firm size, Tobin Q, method of payment, target status, deal value, operating performance and board xxvi size are useful in explaining variations in M&A stock market returns in the short run. However, in the long run, the findings shows that motive behind M&A explains only a small percentage of impact of M&A on stock market returns in firms listed in Eastern Africa securities markets. Most importantly, the study brings in new evidence that management in M&A firms in Eastern Africa are not influenced by hubris while making M&A investment decisions. This is depicted by the positive and significant impact of firm size on M&A stock market returns. The study recommends that managers should endeavour to maximize shareholders return while making M&A investment decisions.