The Information Content of Mergers and Acquisition Announcement for Listed Companies at Nairobi Securities Exchange

Abstract

Merger and Acquisitions of relatively large targets are more likely to achieve sizeable operating and financial synergies and economies of scale than small acquisitions, therefore leading to stronger post-acquisition operating performance. However, merger and acquisition failures are not uncommon. These failures may harm the companies, tarnish their credibility in the market, and ruin the confidence of their shareholders. The objective of the study was to examine the information content of mergers and acquisition announcement at NSE for the listed companies. The study used descriptive research design. The population of this research consisted of all the companies that had undergone mergers and acquisition. Both stratified and purposive sampling techniques were used to design and select a representative sample size of five firms in financial and industrial sectors. In order to find out the impact of mergers and Acquisition on stock market researchers used the Standard Risk Adjusted Event study Methodology. From the findings, information content of mergers and acquisition positively affect shareholders’ wealth. Results indicated that generally, there was an increase in the volumes of shares traded when mergers and acquisitions were announced. This was especially so in the days around the mergers and acquisitions. On the mergers and acquisitions date, there were positive average returns which were significant at 0.05% level for the sampled companies. There was an increase in volumes of shares traded after the mergers and acquisitions as compared to those before the mergers and acquisitions. The study concluded that the abnormal returns around the declaration date of a mergers and acquisitions are explained by the information environment of the firm and that firms that mergers and acquisitions their stock tend to experience a reduced level of reversion in their earnings growth relative to a matched set of firms. Mergers and acquisitions provide a unique investment opportunity to shareholders and hence it is crucial to explore all possible methods to improve the overall performance of this investment. Other market conditions could have arisen, which had effects on the general activity of shares in the market and on the returns, hence the study recommends a need to make use of a market model.