Results of examining financial performances

302 were computed by aggregating target and acquiring firm‘s financial data. Post merger performance indexes are shown in row b and e. Row c and f show the impact of merger on financial performance merger effect which is computed by subtracting premerger performance index from post merger ones. To control for economy wide and industry factors, these indexes are adjusted by industrial average ratio. Result in row c indicates that mergers conducted during 1987 to 1999 did not cause any economic impact on financial performance. On the other hand, row f reports that mergers conducted from 2000 to 2004 have negatively impacted ROE and sales growth rate. Row g reports whether the impact of merger on financial performance are different in the two periods. Positive numbers in profitability ROA, ROE, and OCF and Sales growth rate mean that mergers conducted in 1986 to 1999 have more positive financial effects than the mergers conducted in 2000 to 2004. Opposite to these performance measure based on financial statement, Tobin ‘s q improved during 2000 to 2004 period. [Table 4.3 about here]

4.3 Results of examining the relation between market reactions and performance changes

Table 4.4 shows the results of the chi square test which examined the relation between market reactions and financial performance changes. We use each firm‘s cumulative abnormal return for 3 and 11 days as a surrogate for market reaction and classified the sample based on its sign positive or negative. The top left cell with ―14‖ means that 14 firms had negative cumulative abnormal return and ROA declined after merger. Panel A shows that during the 1986 to 1999 period, we did not find evidence to support the relation between market reaction and financial performance changes. When we 303 focus on mergers conducted during 2000 to 2004 panel B, we find evidence to support negative relation between cumulative abnormal return and ROE. A possible explanation for this result is that more than 3 years will be needed for financial performance to improve after merger. [Table 4.4 about here]

5. Conclusion

The purpose of this paper is to investigate whether the economic effects of merger have changed. By comparing the stock price reaction and financial performance of 73 merger cases conducted from 1986 to1999 and 72 merger cases conducted from 2000 to 2004, we investigate whether the effects of merger have changed between the two periods. We also try to investigating the relation between stock price reaction at merger announcement and post merger financial performance. Our main findings are summarized as follows. First, contrary to positive cumulative abnormal returns for both acquiring and target firms during 2000 to 2004, cumulative abnormal returns for acquiring and target firms during 1984 to 1999 were at best zero or negative. Second, we did not find evidence to support that mergers conducted during 1986 to 1999 caused any effect on financial performance. However, mergers conducted during 2000 to 2004 caused negative impact on ROE and sales growth rate. Third, we did not find evidence to support any specific relation between market reaction and financial performance changes during the 1986 to 1999 period. On the other hand, when we focus on mergers conducted during 2000 to 2004, we find evidence to support negative relation between cumulative abnormal return and ROE. A possible explanation for this result might be that more than 3 years will be needed for financial performance to improve after merger or financial performance did not improve as marked expected.