Industry Peers Stock Liquidity and M&A in Emerging Markets

In this work we investigate the impact of mergers and acquisitions announcements on the stock liquidity of industry peers of both the target and the acquirer. In the course of this paper, transactions are considered in which the main activities of both companies are focused on emerging capital markets. The study sample includes data on 1032 M&A transactions announced from 01/01/2010 to 01/01/2021 and consists of 36,475 target industry peers and 32,803 acquirer industry peers. The industries taken into the analysis are: Oil and Gas, Metals and Mining, Retail, Health Care, Information Technology, Utilities, Real Estate, Industrials, Telecommunications. To test our hypotheses, we use the methodologies of event study and regression analysis. For robustness, the paper proposes several methodologies for measuring liquidity and comparing the impact. The results reveal an improvement in the liquidity of peer companies: we see a decrease in the bid-ask spreads of industry peers and an increase in their trading volumes following the merger announcements. These liquidity improvements also translate into significant cumulative abnormal returns (CARs) to the peer firms, which are increasing in the level of initial illiquidity of the firms’ shares. The effects hold for various liquidity measures proving the robustness of our results, they are higher for target industry peers, are stronger for the trading volume values, and are greater when the target and acquirer are operating in the same industry. Additionally, we find that the impact is stronger for both target and acquirer peers sharing the same geographic region as the firms participating in the deal, for industry peers from the service-provision sector, and for longer event windows around the merger or acquisition announcement.