For the following article from the Journal of Finance & Accounting:
Explain the methodology, gap and key conclusions.
AN EXAMINATION OF THE LONG RUN PERFORMANCE OF UK ACQUIRING FIRMS
A study of acquisitions has shown negative returns for acquiring company shareholders. To address this statement a comprehensive data set of large takeovers in UK over a period from 1984 - 1992 is analyzed. The problem of benchmarking though poses difficulty in measuring results. There is also dispute over which asset pricing model is to be used. The following models have been used in the past. These are:
- Market model
- Market-adjusted returns
- Size decline-adjusted returns
- Multi-factor models
The study employs the basic capital asset pricing model (CAPM), risk and size adjusted model, simple size-adjusted model and the three factor model. All these models find their reference in the literature
One fo the serious concern for any study of the long term effects of a particular event is the recent evidence that long-horizon abnormal security returns can be seriously mis-specified.
The first major study of UK takeovers used a market model with parameters estimated demonstrated a negative CAAR. Using similar model, a larger sample of over 1000 acquirers was studied which also demonstrated negative results in the 24 months period following completion of acquisitions. According to a researcher, Limmack three benchmarks could be used to compute abnormal returns:
- Conventional market model
- Market model using London Business School beta and alpha values
The long run performance of UK acquiring firms for article critiques are examined.