Effects Of Mergers And Acquisitions On Stock Returns Of Insurance Companies In Kenya

Abstract

Many firms engage in mergers and acquisitions to achieve synergy, gain tax advantages, increase liquidity, gain access to funds and above all achieve growth and diversification. Numerous mergers have taken place in the Kenyan insurance industry. The objective of this study was to investigate the effects of mergers and acquisitions on the stock returns of insurance companies in Kenya. The target population of the study was the 55 licensed insurance companies in Kenya while the sample was based on the 7 insurance companies that engaged in mergers and acquisitions between January 2012 and December 2015. The study adopted a descriptive research design and an event study methodology to determine the effect of a merger announcement on the stock returns of insurance companies. The event window was 60 days that is 30days before and after the merger. Data was collected using secondary sources and analysis was done using the SPSS statistical package. ANOVA test was applied on the variables at 5% significance level. Findings on regression analysis revealed that the coefficients of determination differed across the window periods. The coefficient of determination R was 0.0177 and 0.233 in the pre and post-merger period. This is an indication that merger and acquisition announcements triggered a change in the stock returns by 17.7% and 23.3% in the pre and post-merger period respectively. The findings revealed that a merger and acquisition announcement triggers a significant change in the stock returns in the post-merger period in comparison to the premerger period. The study recommends that the management of insurance companies in Kenya should effectively leverage on mergers and acquisitions to enhance share returns of their companies and thus achieve the shareholder objective of wealth maximization. The Competition Authority of Kenya should also formulate sound polices, rules and regulations in relation to merger and acquisition of firms in Kenya.