The implication of a merger announcement on share price : an event case study of Trust Bank New Zealand Limited

Abstract

The purpose of this paper is to examine the behaviour of the share prices on the acquired bank, Trust Bank New Zealand Limited, involved in a merger proposal. Asquith, Burner and Mullins (1983) have identified a number of different techniques available for this type of study. One technique is based on the examination of variances on an ex-post basis, and is a simple extension of the technique used in event studies to detect changes in mean returns on a security. A second technique is ex-ante in nature and involves the examination of variances implied in call option prices. A possible advantage in using the latter technique is that it provides a variance estimate that is based on investor expectations of the future volatility of returns on the stock. Thus, if merger proposal causes a change in the market’s estimate of the volatility of returns on the stock, then an examination of implied variance would allow one to draw inferences regarding both the impact on merger proposals on volatility and investors’ anticipation of the variance of the merger proposals change (Jayaraman & Shastri, 1993).The next section of this paper presents a general description of the data and methodology used in this study. The estimated results will be presented in Section 3, and the paper concludes with a summary.