DO EMERGING MARKETS EVALUATE M&AS CORRECTLY? : EVIDENCE FROM INDIA

Paper Number :WP/06/2021
Publication Date :Dec. 1, 2021

We examine whether emerging markets capture the value impact of corporate events using data on acquisitions by Indian Firms. We measure market reaction to acquisition announcements using Cumulative Abnormal Returns (CAR) around acquisition announcements and measure the longer-term performance using matched sample buy and hold abnormal returns (BHAR) and return on assets (ROA). Our data period spans the sixteen-year from 2001 to 2016 a period encompassing the early liberalization period in India, the years of the financial crisis, and a post crisis recovery period. Acquisition activity, both domestic and cross-border increased over the period. Markets react positively to acquisition announcements for both domestic and cross-border deals, with positive and significant Cumulative Abnormal Returns (CAR). We find no evidence of post-announcement drift or reversal in either BHAR or ROA. These results suggest that Indian markets are accurately able to judge the benefits of acquisition transactions without a subsequent market correction. Cross-sectionally, firms with a long-term view, as proxied by their governance metrics gain from acquisitions over the long-term. We find that the crisis had a negative impact on acquisitions by Indian firms. Acquisition activity recovered after the crisis but returns to acquirers are no longer significant.