Short- and long-term wealth gains from UK takeovers: The case of the financial industry

Abstract

The present study analyzes the short- and long-term performance of UK financial acquiring firms by examining a sample of 40 takeovers over the period 1996-2007. In particular, it investigates i) the short- and long-term stock return performance of these acquiring firms and ii) the relation between their short-term abnormal return around the announcement date of takeovers and their long-term performance. The event study methodology shows that bidders experience significant short-term wealth destruction. In contrast, both the buy-and-hold abnormal returns and bidder's portfolio return approaches indicate positive and significant wealth effects over the long run. Business cycle analysis shows that acquirers obtain significantly higher returns during downward financial market cycles. Furthermore, the results show that the market reaction to the bid announcement better predicts bidders' long-term performance in the case of positive short-term abnormal returns.