The Impact of Merger-Related Regulations on the Shareholders of Acquiring Firms

TLDR

Traditional policy event studies estimate regulatory impacts by aggregating security residuals from models such as CAPM, but efficiency concerns arise from their characteristics, prompting an alternative GLS‑based approach that conditions on regulatory change. The study examines the economic impact of merger‑related regulatory changes in securities laws, the tax code, disclosure rules, and accounting principles that occurred between 1966 and 1970. The authors analyze the Williams Amendments, the 1969 Tax Reform Act, APB Opinions 16 and 17, and SEC segment disclosure rules by estimating shareholder returns for firms engaged in acquisitions during the regulatory change period using a GLS model that conditions on the presence of regulatory change. The GLS‑based framework enables efficient hypothesis testing and better use of available data.

Abstract

In this paper we examine the economic impact of a group of mergerrelated regulatory changes in the securities laws, the tax code, disclosure rules, and accounting principles which occurred during 1966-70. The specific regulations we consider are the Williams Amendments to the securities laws, the 1969 Tax Reform Act, Accounting Principles Board (APB) Opinions 16 and 17, and the SEC's segment disclosure rules. The impact of these changes is estimated by examining rates of to shareholders of firms that were engaged in acquisitions programs during the period of regulatory change. A widely used procedure for estimating the economic impact of events such as regulatory changes is the aggregation of security residuals from a fair return model such as the market model or CAPM.1 We take an alternative approach which conditions the return-generating process on the presence of regulatory change and employs generalized least squares (GLS) estimation. This approach provides a framework for testing a wide range of hypotheses and offers several advantages in making efficient use of available data. The concern with efficiency arises from three characteristics typically associated with policy event studies: