Prior studies Proceeding E Book 4A Turky

296 abnormal return for both target +4.08 and bidders +1.62 shareholders. This evidence is supported by Inoue 2002 which also reported significant 29 positive abnormal return for target +4.37 and bidders +1.51 shareholders, by using a sample of transactions between 1990 and 2002. These evidences show that while abnormal returns to target and bidders are at best close to zero or negative until the mid 80s, both target and bidders ‘ shareholders receive premium from MA since the late 1990s in Japan. Another approach to evaluate the effect of MA is to compare the reported financial performance before and after MA. The results of MA effects on financial performance are mixed. Ravenscraft and Scherer 1989, Herman and Lowenstein 1988 examined earnings performance after takeovers and reported that merged firms have no operating improvements. On the other hand, Smith 1990, Healy et al. 1992 and Cornett and Tehranian 1992 reported an improvement in profitability after merger. The reason for this inconsistency may be due to methodological problems, different sample size and investigation period. However when focusing on Japanese cases, the evidence shows that merging firms ‘ financial performance profitability and growth declines after merger Muramatsu, 1986; Odagiri and Hase,1989. Evidence from prior research shows that although financial improvements after MA are not observed, it seems that both target and bidders ‘ shareholders receive premium in Japan. We will try to contribute to this literature by investigating the relation between stock price reaction at merger announcement and post merger financial performance. 3. Research design 3.1 Sample We collect merger cases of Japanese listed companies that were completed from 1986 to 2004. We used data book published by RECOF Corporation 30 to collect merger cases. Mergers that failed and mergers involving financial institutions bank, security and 29 at 10 significance level 30 RECOF Corporation ed. 2008. Data book about MA on Japanese firms: 1985-2007. RECOF Co. in Japanese 297 insurance were excluded from the sample. This made our sample size to 145 merger cases with a total of 151 target firms. Because of the institutional and environmental change surrounding MA, we infer that motivations for and economic effect of merger among Japanese companies have changed. To test this hypothesis, we divided our sample into 2 periods groups based on the year when merger was conducted. The first sample group consists of mergers completed from 1986 to 1999 and the second sample group consists of mergers completed from 2000 to 2004. Panel A in table 3.1 shows the number of mergers completed each year during our sample period. 73 out of 145 merger cases in our sample were conducted from 1986 to 1999 and 72 cases were conducted from 2000 to 2004. We can see from this figure that the number of merger cases increased rapidly after year 2000. Panel B in table 3.1 shows the industrial distribution of merged firms. Most of the firms merged during 1986 to 1999 belong to commercial business trading and retail, service, ceramics, electronics, machine, and pulp. On the other hand, most firms merged between 2000 and 2004 belong to commercial business, construction, service, nonferrous metal, and machine. [Table 3.1 about here]

3.2 Market reactions to the announcement of mergers

To see whether the economic effect of merger changed, we first investigate stock price reaction to the announcement of mergers. We compute abnormal returns occurring between day -10 and day +10 day 0 is the announcement date by subtracting the daily return of the market index TOPIX from the daily return of each firm. In addition to abnormal returns, we compute cumulative abnormal returns for the three eleven and twenty-one