A critical evaluation of event study approach using M&A events in the Indian banking industry

Abstract

The present study seeks to critically evaluate the most extensively used technique – Event Study methodology – employed to capture the returns generated from M&A events on the wealth status of shareholders. Notwithstanding the popularity of the technique,authors in this paper argue that conceptual bases on which the methodology is founded is flawed. In the light of the extensive limitations attributable to Event Study methodology,there exists an urgent need to suggest improvement in the conceptual framework of the traditional method capable of lending application to capture the wealth effects of M&A events. The authors believe that application of such a modified approach will be much more salvageable as the results derived therefrom will command greater credibility as well as reliability. In order to highlight the inherent limitation of the Event Study approach,the authors have used the sample of Indian Banking M&A events retrieved from the M&A data available at etintelligence.com. Given the conceptual flaws of the Event Study approach,the authors argue that researchers must exercise great caution while commenting on the t-statistic observed for CAR (Cumulative Abnormal Returns) values as the statistical insignificance could be arising more out of the conceptual deficiency of the Event Study approach than pointing towards the neutral impact of an M&A event on the wealth status of the shareholders.