1 Research Hypotheses
Hypotheses play a pivotal role in guiding research, particularly in the complex arena of mergers and acquisitions (M&A) (Campa. 2014). In this context, the formulation of hypotheses is essential to shed light on the multifaceted impact of uncertainty on M&A activity. This uncertainty can arise from various sources, including economic instability, political turmoil, regulatory changes, and global events. One crucial hypothesis avenue is understanding how uncertainty influences the volume of M&A activity. Researchers might delve into macroeconomic factors, such as GDP fluctuations and inflation rates, to determine how these variables affect the frequency and scale of M&A deals. Additionally, hypotheses could explore geopolitical factors, investigating whether international tensions impact cross-border M&A transactions. Regulatory changes are another dimension, where researchers might examine how shifts in antitrust laws or tax regulations influence M&A activity. Beyond volume, it’s also vital to comprehend how uncertainty affects the short-term performance of M&A transactions. Hypotheses in this realm could probe post-merger integration, financial performance, and shareholder value. By systematically testing these hypotheses, researchers aim to provide valuable insights into how economic and geopolitical global instability shapes the behavior and outcomes of M&A deals. Ultimately, this knowledge contributes to more informed decision-making for corporate strategists, policymakers, and investors in an ever-changing global landscape while enabling the development of robust risk mitigation strategies for M&A transactions (Ismail, 2019).
In light of these considerations, a first hypothesis is that:
(H1): During periods of high uncertainty, M&A activity will decrease.
Additionally, the performance of short-term mergers and acquisitions may be influenced by uncertain market conditions and variable economic fundamentals. According to Chiarella and Gatti (2014), there is a consistent sceptical reaction from the short-term market when deals are begun during periods of high volatility, as opposed to periods with lesser uncertainty. Consequently, the subsequent hypothesis might be stated as follows:
(H): M&A transactions announced during periods of uncertainty will exhibit significantly different short-term performance compared to those undertaken in more stable periods.
These two study hypotheses facilitate the examination of the relationships between mergers and acquisitions (M&A) activity and the economy, as well as the short-term success of mergers and acquisitions for major shareholders.
The research hypotheses were evaluated using an event study methodology as well as simple and multivariate ordinary least squares (OLS) regression models.
2.2. Analysis of Event Study: Cumulative Abnormal Returns
Multiple approaches can be utilised to evaluate the creation of value derived from mergers and acquisitions (M&A). The studymethodologies encompass event studies, accounting studies, surveys of executives, and clinical research (Bruner, 2001). The event study methodology is commonly employed in scholarly investigations.
The technique in question has been widely employed in prior empirical studies to evaluate the extent of market responses surrounding significant corporate developments. The methodology was initially developed by Fama et al. (1969) and has subsequently garnered significant contributions from Brown and Warner (1980 and 1985). The event study approach is highly recognised in academia for its empirical methodology, which enables the direct quantification of investor value and the integration of future cash flow projections. However, it is important to note that when employing the event research approach, certain pertinent assumptions must be taken into consideration. Market efficiency is considered to be the most crucial factor. According to Fama’s (1970) efficient market hypothesis (EMH), asset prices in efficient markets accurately incorporate all relevant information. Hence, it may be inferred that stock prices promptly assimilate any newly acquired knowledge that is accessible to all participants in the market. Therefore, it is expected that acquisition announcements will be accompanied by anomalous gains in stock prices if the deal is deemed to be value-creative, and conversely, abnormal declines in stock prices if the transaction is value-destroying. Furthermore, the assessment of M&A value creation using event studies necessitates the consideration of two supplementary assumptions(Golubov, Petmezas, & Travlos, 2013). This study examines the market reaction of publicly traded bidding companies during the timeframe around the disclosure of a transaction, placing specific emphasis on irregular daily returns in stock prices. These returns are often regarded as a reliable measure of performance for companies involved in mergers.
The computation of abnormal returns is performed via the following expression:
The equation (1) represents the calculation of ARit, which is the excess return of asset i at time t. It is obtained by subtracting the expected return of asset i at time t, denoted as E(Rit), from the actual return of asset i at time t,
ARit = Rit – E(Rit)
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