Stock market reaction to the announcement of mergers and acquisitions in the US telecommunications industry

Abstract

The objective of this study is to analyze the stock market reaction to the recent stream of merger announcements by US telecommunications service providers. The study offers mergers characteristics, classification and an analysis of the motives for the telecom service providers to merge. In order to show the valuation effect of the merger announcements, short-term and intermediate-term cumulative abnormal returns are calculated for bidders and targets for individual mergers and for different groups of mergers. Overall, the authors find that mergers announced by long distance companies are perceived much riskier than those announced by local companies. They also find that there are different stock market reactions for mergers announced by long distance bidders for long distance, cable, and local targets. Some qualitative explanations of these findings are proposed.