Effect of Merger Announcements on the Share Return of Insurance Companies Listed at the Nairobi Securities Exchange

Abstract

The announcement of mergers and acquisitions can affect the market’s reaction. As a result, the share prices can fluctuate during the M&A time period. The return of the sales is one of indicators to measure shareholder value. The capital adequacy requirement in insurance sector has triggered need for mergers and acquisition to meet the capital requirement and as a business expansion strategy. Insurance companies are currently under pressure to meet the required capital base as a result of new capital adequacy introduced by the finance Act of 2015 in Kenya. As some insurance companies sought mergers and acquisition to raise more capital by listing at the NSE. This raises concerns on effect of announcement of merger and acquisition in share returns among quoted insurance firms in Kenya. The objective of the study was to find out the effect of mergers announcements on the share returns of insurance companies trading at the Nairobi stock exchange market. The study was anchored on efficient Market Hypothesis theory, signaling theory and the free cashflow theory. The study adopted an Event study research design applicable when examining effect of occurrence of an event say announcement of M&A on dependent variable. Event study research design was suitable in determining effect of announcement of merger and acquisition on share returns in quoted insurance firms in NSE. The target study population was six insurance firms trading at the Nairobi Stock Exchange which have undergone mergers and acquisitions. The study used secondary data on share price/share returns of the merged and acquired listed insurance companies before and after the mergers and acquisitions. The study used the test of difference of sample mean to determine the difference in means of share returns of the firms prior and post merger. This was done to assess the influence of mergers announcement on the share returns of insurance firms trading at NSE. The study concluded that merger and acquisitions announcement has no statistical significant impact on the share returns of quoted insurance companies. Mergers and acquisition event announcement lead to change in daily share returns with much resulting into decrease in share earnings. Announcement of a merger and acquisition triggers a change in stock returns around the event date. Findings for this study reveal that shareholders had insignificant reactions on announcements of mergers and acquisitions which show inefficiency in the NSE capital market. The means of the share returns before and after the announcements were statistically similar as the statistical t test accepted the null hypothesis. The p value was greater than the alpha value hence adopting the null hypothesis. The conclusion of the study was based on the inefficiencies of the stock market that did not consider the impact of the announcements for M & A in establishing the prices of the affected shares.