Empirical analysis of the Brazilian stock market reaction to the announcements of mergers and acquisitions occurred between 1994 and 2001

Abstract

Based on the assumptions that the market quickly absorbs all relevant information, and that the market is the best evaluator of the result of a business combination, this article has analyzed the abnormal return of stocks when mergers and acquisitions are announced. It aims thus to test the hypothesis of stockholders' value creation and the hypothesis of market efficiency, its semi-strong form. Thirty-two processes of mergers and acquisitions that happened in the brazilian capital market have been analyzed using the methodology of event study, and abnormal returns were calculated by the model of returns adjusted to the market in the logarithmic form. It has been concluded that those processes did not generally bring abnormal returns to their stockholders, that is, they did not result in value creation. This entails the rejection of the first hypothesis, but the market has behaved in an efficient way, according to the semi-strong form. Besides, indications were found that the market reacts negatively when pricing stocks of acquiring and acquired companies, and positively when pricing stocks of merging companies.