The Effect Of Mergers And Acquisitions Announcements On Stock Prices Of Companies Listed At The Nairobi Securities Exchange

Abstract

Mergers and acquisitions continue to be a trend in the financial field in Kenya. The study aims to find out the effect of mergers and acquisitions announcements on stock prices of companies listed at the NSE. The NSE comprises of 63 companies and the sample contains 8 companies that have merged between 2014 and 2019 across 7 Sectors. They are; Britam in the insurance sector, Longhorn Publishers in the commercial industry, Centum in the investment industry, Total in the energy industry, Equity Group Holdings in the banking sector, NCBA in the banking sector, EABL in the manufacturing sector, Flame Tree Group in manufacturing and allied sector. The different sectors were to ensure that the results have a general feel of the effect of mergers and acquisitions in the market and not to any unique industry that may have some form of character that may lead to specific results. The study used secondary data from an online site known as EMIS- Emerging Markets Information Service that had all the stock prices and merger dates from the NSE. The research design used was the Event Study Methodology that looked at a 50-day estimation period and a 2-month event window ie -30, +30. The long event window was to cater for any prior leakages and anticipations prior the announcement and to capture the reactions of conservative shareholders who tend to hold to see if there is additional information over a few weeks to react. The results showed that 6 out of the 8 companies had small positive abnormal returns while 2 out of the 8 companies had small negative abnormal returns. The overall cumulative average abnormal return was 11.9% which was deemed insignificant with a T-test. The t-test provided that there were no significant changes to the share prices pre-merger and post-merger and thus answering the research question. From the graphical representation, the study noted that most of the companies had very volatile abnormal returns pre-merger as compared to post-merger, an indication that there were a lot of trading activities pre-merger. This signifies a lot of anticipation reactions by investors that may be an indication of semi strong form efficiency at the NSE. The study encourages companies to carefully consider M&A transactions before participating in them since evidence proves that there has not been a lot of value creation for the shareholders. The study recommends that the policymakers need to formulate and implement policies that can handle positive speculative trading. The study also encourages NSE to build a culture among its companies in training on how to push the demand and supply ethically. The study also recommends that investors should not shy off from investing from companies that have merger and acquisitions prospects since the evidence shows the market fundamentals remain unaffected and positive abnormal returns can be enjoyed by the shareholders during the event windows