Run-up, toeholds, and agency effects in mergers and acquisitions: evidence from an emerging market

This paper analyses some particular characteristics of merger and acquisition (M&A) transactions in an emerging market (Portugal) using a sample of 52 M&A targets between 1989 and 2001. Our evidence shows that the run-up effect in the Portuguese market is of a significantly larger magnitude (as a proportion of total abnormal returns for targets) than the one shown in studies for well developed capital markets (UK and US). In fact, the cumulative run-up target stock price abnormal increase in this emerging market is on average 13% in the 40 days before the M&A announcement, which corresponds to almost sixty percent of the entire cumulative abnormal return of 23% enjoyed by target shareholders around the announcement date (-40,+40). The presence of acquirers’ toeholds in targets is positively related to the relative magnitude of such run-up effect, while hostility and the presence of large shareholders in the target have a negative impact. Evidence is also presented that abnormal returns for both bidders and targets are substantially lower in bearish markets as compared to bullish markets, with acquirers experiencing sizeable negative abnormal returns in bear markets but significantly positive ones in bull periods. Overall, our results caution for the existence of particularities of M&A transactions in emerging markets in comparison to well developed markets, and point to a number of research directions that are relevant both to emerging and developed markets.