Market reactions to the announcement of mergers

298 trading days window centered on the date of the announcement of mergers. 31 If shareholders perceive merger as value creating deteriorating activity, then positive negative abnormal returns will expected to be observed. The main purpose of the paper is to see whether there are any difference in the economic effect of merger conducted in the period from 1986 to 1999 and the period from 2000 to 2004. 32 If we observe significant mean difference between these two periods, it means that economic effects of merger have changed. Stock price for each firm and market index TOPIX are collected from the Stock Price Data CD-ROM TOYOKEIZAI Inc. and the daily Japan financial newspaper.

3.3 Merger effects on financial performance

Next, we investigate financial performance changes from pre to post merger. We use six performance indexes based on financial statement data: return on asset ROA, return on equity ROE, operating cash flow OCF, sales growth rate, cost of goods sold to sales ratio, and labor cost to sales ratio. These ratios are computed as follows.   . year Tobins q ts Total asse ty ue of equi Market val bilities Total lia Tobins q Sales t Labor ratio t to sales Labor Sales ods sold Cost of go tio o sales ra ods sold t Cost of go prior year Sales for ar current ye Sales for th rate Sales grow e ts averag Total asse tization on and am o Depreciati incom e Operating OCF age ital aver Equity cap Net incom e ROE e ts averag Total asse d incom e nd dividen Interest a gain Investm ent incom e Operating ROA 100 cos cos 1                    31 The cumulative abnormal returns are calculated by adding the abnormal returns for the three eleven and twenty-one days. 32 The null hypothesis is that the mean difference of the cumulative abnormal returns for the acquiring target firms between mergers in the period from 1986 to 1999 and in the period from 2000 to 2004 equal zero. 299 Because accounting income is affected by accounting policy choice, Healy et al. 1992 argued to use operating cash flow OCF. For this reason we use OCF to measure profitability besides accounting income ROA and ROE. We also use sales growth rate, cost of goods sold to sales ratio, and labor cost to sales ratio as a measure for growth and efficiency cost reduction. To compare with post merger performance, we develop pre merger performance measure by aggregating targets‘ financial data to acquiring firms‘ one. Comparing the post merger performance with this benchmark provides a measure of the change in performance. But, as Healy et al. 1992 notes, some of the difference between pre and post merger could be also due to economy wide and industry factors. To control for these factors, we use industry-adjusted performance measure. This is calculated by subtracting the industry average from the sample firm‘s performance measure. After computing the industry-adjusted performances for each merger case, pre merger years -3 to -1 performance mean are subtracted from the post merger years +1 to +3 performance mean. To see whether the observed numbers are statistically significant, we conduct a parametric test t-test. We also calculate T obin‘s q at the end of each accounting period during years 0 to +γ. Tobin‘s q at year 0 will be replaced as 100. Also, the q ratio for years +1 to +γ will be replaced accordingly. Based on these numbers, post merger years +1 to +3 mean of Tobin‘s q ratio would be computed. The change in q ratio would be obtained by subtracting 100 from the mean. We compute mean difference of these performance changes both for mergers conducted in the period from 1986 to 1999 and mergers conducted in the period from 2000 to 2004. 33 If we observe significant mean difference, and conduct the parametric test t-test, this implies that merger effects have changed between these two periods. 33 The null hypothesis is that the mean difference of the merger effects between mergers in the period from 1986 to 1999 and in the period from 2000 to 2004 equal zero.