ASB-4909-0 Finance Dissertation 201920

Abstract

investors use various methods to evaluate normal and abnormal returns and to determine the associated risks. This paper has presented four models of mean-adjusted return, market model, CAPM and Fama & French 3 (1993) 3 factor model which are commonly used equilibrium models in event studies. This paper has argued that all four models have their own strengths and weaknesses. The mean-adjusted model is considered less preferable by investors in M&As due to its lack of inclusion of market-wide factors and risk factors (Perepeczo, 2007). Market model is argued to be more favourable among all models as it better addresses market-wide and risk factors and is widely accepted in short return windows (Fama, 1998). CAPM model is a complex asset pricing model which has the tendency to generate larger standard of deviation of error in the statistical tests which makes the results under this model less significant (Strong, 1992). Lastly, Fama & French (1993) 3 factor model is an extension of the CAPM model but the model does not clearly specify the factors which cause variations in the size and book-to-market factors, making it less preferred by investors in M&As. Thus, it can be said that market model seems to be preferred by investors in M&As deals, however, a combination of various models may better help in gaining the required synergies during M&As.