Merger effects on financial performance

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. 300 Firms‘ financial data are obtained from NEEDS financial database Nikkei Digital Media, Inc.. Table 3.2 shows the means and standard deviations of financial performance before subtracting the industry average. [Table 3.2 about here]

3.4 Relation between market reactions and financial performance changes

Finally, we investigate the relation between market reactions and financial performance changes. Our aim here is to see whether there is a significant relation between positive negative cumulative abnormal return and positive negative financial performance change. We classify the sample for each group into β×β matrix base on stock price reaction and financial performance change. We use each firm‘s cumulative abnormal return as a surrogate for market reaction and separate the sample based on its sign positive or negative. Changes in ROA, ROE, OCF, and Tobin‘s q after merger is used as a measure for financial performance change. These measures are also divided into two groups based on its sign positive or negative. Chi square test is conducted to see the relation between market reaction and firm performance. 34 4. Results 4.1 Results of examining market reactions Table 4.1 shows the results of stock price reactions of acquiring firms. Panel A reports abnormal returns for 11 days from day -5 to day +5, and Panel B shows cumulative abnormal returns for 3, 11, and 21 days, respectively. For acquiring firms in the 1986 to 1999 period, abnormal returns for second and third day after the announcement day +2 and +3 and cumulative abnormal returns for 11 days are significantly negative the t-statistics shown in table are parentheses. On the whole, 34 The null hypothesis is that the market reaction and financial performance changes are independent. 301 these results imply that market regard mergers conducted in 1986 to 1999 period as value deteriorating. The signs of abnormal returns for acquiring firms in the 2000 to 2004 period are mixed. Statistically significant positive abnormal returns were observed for day -1 and 0 and negative abnormal return was observed on day +2. Cumulative abnormal return is significantly positive at 10 level. This result is different from the first sample group in that market regarded mergers as value creating. Mean differences of each period ‘s cumulative abnormal returns for 3 and 11 days are significant at 5 and 10 level. Compared to negative cumulative abnormal returns in the 1984 to 1999 period, those in the 2000 to 2004 period are positive. This implies that investors show more favorable reactions to mergers in the later period than the former ones. [Table 4.1 about here] Table 4.2 shows the results of stock price reactions of target firms. In the 1984 to 1999 period, abnormal returns and cumulative abnormal returns of target firms are not statistically significant. On the other hand, for mergers in the period from 2000 to 2004, positive abnormal returns from day -2 to day 0 and negative abnormal return for day +2 are significant. Cumulative abnormal returns for 3 and 21 days are significantly positive at 1 and 10 levels. This result implies that the market as a hole see mergers as value creating. Mean differences of each period ‘s cumulative abnormal returns for 3 days are significant at 1 level. Compared to negative cumulative abnormal returns in the 1984 to 1999 period, those in the 2000 to 2004 period are positive. This implies that target firms shareholders show more favorable reactions to mergers in the later period than the former period. [Table 4.2 about here]

4.2 Results of examining financial performances

Table 4.3 shows the effect of merger on financial performance and the difference of those between the two periods. Row a and d show premerger performance indexes which