Stock Price Reaction to Merger Announcements: an Empirical Note on German Markets - Essay Example

Comprehensive data on a range of German companies is assembled and correlated as a means of quantifying the degree of abnormal returns within a given time interval, measured from the date of the merger announcement. Ramifications of these abnormal returns are discussed with respect to ongoing trends in the German market. Introduction Essential to any attempt to understand market movements are fluctuations is the analysis of financial signals. Finance being an issue of perception as much as mathematics, the public response to warning signs and indicators is an integral predictive tool for market analysis in any country.

In this particular case, reaction to - and indicators prior to corporate mergers deserves special attention. The quantification of market response to merger announcements has the obvious potential of transforming the financial landscape; noteworthy questions to discuss in this analysis include whether information asymmetry - in the form of insider trading has a definitive role in the movements of high-level reactionary transactions. Other issues include whether finance regulations generate a sufficient influence to guide market forces in most cases.

The unification of Europe has taken a direction that renders the discussion of German law, and that of other member states in regards to finance – especially relevant. In 2001 the European Parliament decided against a takeover directive with the potential to revolutionize local commerce and international transactions across the continent. The failure of the European takeover directive means that the finance laws of individual nation states, such as Germany will remain preeminent and sovereign within their borders.

(Schmid and Wahrenburg, 2002) Under these conditions, this study will focus upon the reactions of companies within German markets as a model existing independent of any absolute control from a central European body. An analysis of the available data will ascertain the principle motivating factors behind stock price reactions to merger announcements for German companies. This investigation will seek to quantify abnormal market behaviors in the German economy as a result of merger announcements.

The literature reveals differences in the regulatory environment for the German marketplace compare with other countries, such as the United States. The climate of corporate law in Germany allows license for German executives to occasionally give misleading comments pertaining to merger activities, whereas American executives are under more stringent restraints regarding publicized comments. These differences will be weighed against stock price performance data to derive a more thorough picture of the consequences of corporate mergers within the German economy.

For the purposes of this study, mergers or corporate acquisitions will be considered as effectively identical and analyzed for their impact upon stock prices in the German market. When and where will abnormal uptrends in the marketplace occur? And what trends that differ from the normal projected returns commonly occurring can be attributed to corporate mergers? Are the laws of finance in the country under discussion more important in regards to changes in stock price than insider information?

It is likely that a continuum exists whereby corporate laws intersect with the