Roll Et Al. - Market Response To European Regulation of Business Combinations

Market Response to European Regulation of Business Combinations
Author(s): Nihat Aktas, Eric de Bodt, Richard Roll

Source: The Journal of Financial and Quantitative Analysis, Vol. 39, No. 4 (Dec., 2004), pp. 731
-757
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OF FINANCIAL
JOURNAL ANDQUANTITATIVE
ANALYSIS VOL.39, NO. 4, DECEMBER
2004
2004, SCHOOLOF BUSINESSADMINISTRATION,
COPYRIGHT OF WASHINGTON,
UNIVERSITY WA98195
SEATTLE,
MarketResponse to EuropeanRegulationof
BusinessCombinations
NihatAktas, Ericde Bodt, and RichardRoll*
Abstract
Acquisitions, mergers,and other business agreementsface increasingregulatoryscrutiny,
even when they involve firmsdomiciled outside the territoryof regulatoryauthorities.Re-
cent examples include mergersbetween Americanfirmsthat were approvedby American
regulatorsbutblockedby Europeanregulators.Regulatoryreciprocityseems a likely future
trend. There are obvious consequences for the successful completion of futurebusiness
combinations.This paperexplains the regulatoryproceduresof the EuropeanCommission
with respect to business combinations,documentsthe price reactions of subject firms on
dates from the initial announcementto the final regulatorydecision, and studies whether
Europeanregulatorstend to shield Europeanfirms from foreign competition. Our main
results are: i) the marketclearly reacts to Europeanregulatoryinterventioneven when the
subject firmsare non-European,ii) the probabilityof interventionis not relatedto the na-
tionalityof the bidder,however,iii) when interventiondoes occur,the marketanticipatesit
will be more costly when the bidderis non-European,so protectionismcannot be rejected
outright,and iv) regulatoryinterventionsare anticipatedby investors, so they affect the
initial announcementreturns.
I. Introduction
The summer of 2001 witnessed an unprecedented event in the history of busi-
ness combinations. Two American companies, General Electric and Honeywell,
obtained approval to merge from all American regulatory agencies, but regulators
in Europe blocked the merger. There have been few, if any, events that point so
vividly to global market integration. Two decades ago, Europeans would have
scarcely noticed mergers beyond their borders, but now are paying close attention
and have erected a system of severe sanctions against non-European firms that
might be tempted to defy their regulatory edicts. Sanctions include fines and/or
exclusion of offending companies from European markets.
*Aktas, aktas@fin.ucl.ac.be, Universit6 Catholique de Louvain, 1 place des Doyens, 1348

Louvain-la-Neuve,Belgium; de Bodt, edebodt@hp-sc.univ-lille2.fr,Universit6de Lille 2-Esa, 1 place
D6liot - BP381, 59020 Lille C~dex, France; Roll, rroll@anderson.ucla.edu,The Anderson School,
UCLA, Los Angeles, CA 90095. We thank Eugene Fama, Michel Levasseur,Stephen Ross, partic-
ipants at the UCLA Business Forecast,the 2002 EFMA Conference, the 2002 EFA Conference, the
2002 London Business School finance seminar, and JonathanKarpoff (the editor), for constructive
comments and suggestions.
731
732 Journalof Financialand QuantitativeAnalysis
Europeanchallenges to the GE/Honeywellmergerwere followed closely in

the Americanfinancialpress and, because of its size and especially the outcome,
it is probablyone of the best-knownevents of its kind to date. It is, however,far
from the first. Two other widely publicized cases were the Boeing/McDonnell
Douglas merger of 1997, which was finally approvedafter a number of con-
cessions by the companies involved (see Aktas et al. (2001)), and the proposed
EMI/TimeWarnerdeal of 2000, which was scuttled(see The WallStreetJournal
(2000)).
In total, from the beginning of their activities in September 1990 through
July 2002, the regulatoryauthoritiesof the EuropeanCommission (EC) exam-
ined 2,055 proposedbusiness combinationsof all types (mergers,acquisitions,
joint ventures, and agreementsto share assets). A complete list is available at
http://europa.eu.int/comm/competition/mergers/cases/. Publicregulationof M&A
has long attractedthe attentionof the academic community. Most of the litera-
ture finds little evidence that antitrustactivities foster competition. Why does it
exist? Bittlingmayerand Hazlett (2000), focusing on the Microsoft case, sug-
gest threepossibilities: privateadvantagesfrom antitrustregulation,bureaucratic
self-interest, and political extraction. EC activities provide a useful context to
test for one type of privateadvantage:protectinglocal firms from international
competition.
This is a key question.If fundamentallyprotectionist,the adoptionof merger
regulationsby severaljurisdictionscould become a serious barrierto efficiency
enhancingglobal business combinations.Imaginetwo mergingfirmsdoing busi-
ness in, for instance,five regions. If regulatorytheoriesand actions were roughly
independentacross regions, even a modest probabilityof blockage by any single
regionalregulatorcould translateinto a very large probabilityof blockage by at
least one.
Bris andCabolis (2002) identify42 countriesthathave enactedmergerlaws.
Theyreferto the WilkinsonSword/Gillettecase, where 14 differentagencies were
involved. A recent example involves Microsoft, which last year settled an an-
titrust case broughtby U.S. authoritieswithout making any egregious conces-
sions. On February12, 2003, the financial press reportedthat Microsoft com-
petitors,includingNokia, Sun Microsystems,and AOL Time Warner,had filed a
260-page anti-competitioncomplaintwith the EC, which, accordingto Microsoft,
" ... containsthe same
argumentsthatwere madeby our competitorsin the U.S.
proceedings."Some commentedthat Microsoft faces a higher hurdlein Europe
thanit leaped over in the U.S., because" ... the EC is looking for a way to distin-
guish itself fromthe U.S." in regulatorymatters.If true,this appearsto be exactly
the type of jeopardyengenderedby multiple regulatoryjurisdictions. If protec-
tionism is a widespreadmotivationfor mergerregulation,blockagecould be even
more likely due to retaliationof one regulatorybody againstanother.
A studyof interventionby Europeanregulators,who havebeen highly active
over the past decade, should be informativewith respectto the long-termconse-
quences of this looming possibility. Ourgoals areto providea systematicaccount
of the stock market'sresponse to Europeanregulatoryactivities and to test for
the existence of protectionism.We also study a more generalissue: do investors
anticipateregulatoryintervention,i.e., are returnsobservedarounda mergeran-
Aktas,de Bodt, and Roll 733
nouncementinfluencedby anticipationof regulatorycosts? If so, announcement

returnswill not capturethe complete economic value of the merger.
We have collected a virtually complete record of EC regulatory actions
through2000 involving publicly tradedcompanies, along with stock price and
volume responses in the respective local marketsaroundaction announcement
dates. One thing is clear immediately:althoughthe extentof Europeanregulation
was not widely appreciatedby the U.S. public priorto the GE/Honeywellevent,
stock marketsseemed to understandit very well. Thereare strongprice reactions
to Europeanregulatoryannouncements.The specifics, to be describedin detail in
the paper,are fascinating. Ourresults contrastwith those of Brady and Feinberg
(2000), who are working with a sample of 27 firms for which they do not find
significantstock price reactionsaroundEuropeanregulatoryinterventions(what
they call "case specific effects").
The data reveal that mergerswith greaterpromise of value creation attract
closer scrutiny from EC regulators,which is consistent with their stated anti-
monopoly objective. Non-Europeanfirms are not scrutinizedmore often than
Europeanfirms, which is also evidence againstprotectionism. But when a firm
is subjectedto an in-depth investigation,the marketanticipatesa much higher
cost when the bidder is non-European. This is consistent with a protectionist
effect of Europeanregulatoryactivities and could arise from more stringentat-
titudes against foreign bidders or from less effective lobbying by foreigners,or
both. Overall,the empiricalevidence aboutpossible protectionismis mixed. Pro-
tectionismcannotbe dismissed outrightbut furtherresearchwill be necessaryto
clarify the truemotives of Europeanregulators.
We find also thatinvestorsanticipateregulatoryactivities. Initialannounce-
mentreturnsshouldbe interpretedas the wealth effect of the combinationless the
anticipatedcost of regulatoryintervention. The interactionis complex because
more valuablemergersattractcloser scrutinyby the EC regulators,thus raising
the interventionprobabilityand lowering the observedreturn,which reducesthe
probability,and so on.
Our work offers some enhancementsto existing empirical methods. Our
event study takes simultaneousaccountof non-normalityand autocorrelationof
abnormalreturns,of event-inducedvariance(Boehmeret al. (1991)) and of event
clustering.To studydeterminantsof regulatoryintervention,we adoptan ordered
probitmodel. This controls for endogeneitybetween a merger'swealth creation
(investors' reactions) and the probabilityof intervention(regulators'reactions).
We use both linear and truncatedregressionswhen studyingdeterminantsof re-
turns.AlthoughEckbo et al. (1990) advocatedthe truncatedmethodfor studying
voluntarycorporateevents to reducepotentialself-selectivitybias, it has not been
used frequentlyin subsequentempiricalwork.
The paperis organizedas follows. Section II provides a brief literaturere-
view. Section III describesEuropeanregulatoryprocedureswith respect to busi-
ness combinations.Section IV describesthe datain detail, andSection V presents
an event study for a comprehensivesample and for sub-samplescategorizedby
size, country,andotherpertinentattributesof individualcases. Section VI studies
the determinantsof the probabilityof regulatoryinterventionand the impact of
anticipatedregulatoryactivitieson returns.Section VII presentssome robustness

checks, and Section VIII summarizesand concludes.
II. Literature
Jensen and Ruback (1983), Mulherin and Boone (2000), and Andrade,
Mitchell, and Stafford(2001) provideextensive reviews of M&A research. The
main findings of this literatureare as follows. Targetfirm abnormalreturnsare
stronglypositive and statisticallysignificant.Bidderfirmreturnsareclose to zero.
Combinedbidderandtargetreturnsare slightlypositive (thoughthereis some dis-
pute aboutthis). Ourresults show the same generalpicturefor M&A in Europe
duringthe 1990s, but with a somewhatlower level of abnormalreturnsfor targets
(see Section V.C).
Some papers,such as Bradleyet al. (1988) and Schwert(1996), (2000), an-
alyze the determinantsof abnormalreturns.These include the type of operation
(takeover,merger,joint venture),the mode of payment (cash, equity), the level
of competitionamongbidders,the past performanceof the bidderand the target,
and the correspondenceof theirbusiness lines. Such evidence has been bolstered
by multinationalstudies (Eckboand Langohr(1989) or Frankset al. (1988)). We
use these well-establishedresults as a guide for selecting candidatedeterminants
of wealth creation.
Previousstudies of regulationare directlypertinentto our work here. Some
key contributionsare Ellert (1976), Eckbo (1983), (1985), and (1992), Stillman
(1983), Eckbo and Wier (1985), Slovin et al. (1991), and Bittlingmayer(1992).
The generalfindingseems to be thatregulatoryactivitieshave,if anything,limited
or reducedcompetition(see, in particular,Eckbo (1983) and Slovin et al. (1991)).
While the usual stated goal of M&A regulationis to forestall monopoly power,
evidence supportingthe existence of such power is problematic(see also Song
and Walking(2000)).
Analyzingthe U.S. case againstMicrosoft,BittlingmayerandHazlett(2000),
reach a typical conclusion: "The financial marketsreveal compelling evidence
againstthejoint hypothesisthatMicrosoftconductis anticompetitiveandantitrust
policy enforcementproducesnet efficiency gains." Ironically,at the time of this
writing, Microsoft is in a serious antitrustinvestigationby Europeanregulators,
even thoughit has alreadyresolvedvirtuallyidenticalchargeslevied by American
regulators. In light of these facts, protectionismoffers an interestingalternative
explanationof regulatoryactivity.
III. EuropeanControlof Combinations:

A BriefSummary
The EC's interventionsagainst business combinationsare governedby re-
cent regulations,the first coming into effect in 1990. These regulationsspecify
the size and type of combinationsubjectto EC jurisdictionand the proceduresto
be followed in the event of an intervention.This section describesthe legal con-
text andsummarizessome importantdifferencesbetweenEuropeanandAmerican
procedures.
A. TheScope of Intervention
An importantnovelty introducedby RegulationEC n' 4064/89 (passed in
1989 and first implementedin 1990) is the one shop principle. In general, pan-
Europeanregulationsabout business agreementsand dominantposition abuses
allow for concurrentenforcementof nationalregulations.But EC regulationtakes
exclusive precedencefor mergersand acquisitionsof European"dimension."Ac-
cordingto Article 12 of n 4064/89, a combinationis consideredto be of Euro-
pean dimensionwhen the two following conditionsaremet: The total world-wide
gross sales of all concernedfirms exceed 5 billion euros; and the Europeanindi-
vidual gross sales of at least two of the concernedfirmsexceed 250 million euros,
unless every concernedfirmmakes at least two-thirdsof its gross sales in a single
memberstate. Alterationsmade in 1997 to the basic regulationfurtherlowered
the thresholds,so the currentcriteriasweep underEC purview most significant
business combinations. They imply that national regulationsby the individual
memberstates have been relegatedto a role of secondaryimportance.
B. Juridical
Competence
The EC's ratherexclusive authoritymight explainthe favorablereceptionof
the regulationsby majorEuropeanfirms, simply because they shortenthe length
of anti-trustprocedures.The EC's decisions are final and need the approvalof no
higherjudicial authority.Indeed, there is no appeal other than to a "tribunalde
premiereinstance"(a countrycourt) or to the EU court. This allows the EC to
negotiateremedialactions from a strongposition;the firmsinvolvedusually wish
to avoid a prolongedcourt appeal of uncertainoutcome (Wincklerand Brunet
(1998), p. 14).
There is one importantdifference between Europeanand American com-
bination control systems. The American system stipulates that the authorities
(Departmentof Justice and FederalTradeCommission)must obtainthe consent
of a judge for every ban, whereasthe EC on its own authoritycan block what it
considersan objectionablecombination.
C. Procedures
A proposedbusiness combinationmust advise the Commissionno laterthan
one week after a deal agreement(the public announcementof a takeover,an ex-
change offer, or acquisitionof control). There are some noteworthydifferences
from Americanprocedures,including: notificationto the EC can be given only
after the official signing of a deal agreementand Europeanregulatorsare sup-
posed to maintainfull confidentialityabout all informationreceived following a
notification.Confidentialityis obligatoryuntil the authoritiesdecide to block the
combinationor allow it to proceed, and a combinationcannot be completedbe-
fore the initial notificationand, to take effect, it must be declaredacceptableafter
the investigation.
As Article 10 of Regulation 4064/89 specifies, the EC has one month to
complete its preliminaryanalysis (time runs from the moment it receives com-
plete information).This periodis called Phase I. It culminatesin a decision based
mainly on the informationcontainedin the notification.Fourdecisions are possi-

ble: i) the combinationdoes not constitutea combinationof Europeandimension
and hence is not subjectto review (Article 6.1.a of Regulation4064/89); ii) the
combinationis compatiblewith the rules of the Common Market(Article 6.1.b
of Regulation4064/89) and is thereforeapproved;iii) althoughthe combination
is basically compatiblewith the rules of the Common Market,the combination
will be permittedonly if certainconditionsare met (Article6.1.b is of Regulation
4064/89, and Article 1.5.a of Regulation1310/97); and iv) doubtsare cast on the
proposed combination. A more detailed analysis will be undertaken. This ex-
tendedinvestigationis called Phase II (Article6.1.c of Regulation4064/89). The
criteriathatbringthis denouementhave neverbeen clarified.
Once the detailed(PhaseII) investigationis underway,the EC has fouraddi-
tional monthsto complete its investigationand to rule on the compatibilityof the
combinationwith Europeanlaw. At the end of the (up to) four-monthperiod,the
EC may issue three possible rulings aboutthe proposedcombination:approval;
approvalsubjectto certainconditions;and unacceptable.If the combinationhas
alreadybeen consummated,the EC can order the separationof the firms or of
the groupedassets, the end of common control, or any action that could restore
competition.
The last two outcomes supposedlyreflect doubtsthe EC has concerningthe
compatibilityof the combinationwith competition. In such an event, the EC
must communicateits objections to the parties involved and provide them the
opportunityto presenttheirpoints of view. As stressedby (Wincklerand Brunet
(1998), p. 65), "such a communicationof grievancesplays an importantpartin
the procedure,since the Commissioncan base its finaldecision only on objections
for which the interestedparties were given the opportunityto put forwardtheir
observations."The interestedpartieshave the right to examine the case file and
can demanda hearing.
Leparmentier(2001) discusses differencesin the objectivesof Americanand
Europeanregulations.Europeanregulatorsare supposedto examineonly the po-
tentialcreationof a dominantposition. Americanregulators(FTC and DOJ) look
at efficiency as well as the broaderinterestsof consumers.Such fundamentaldif-
ferences arousetrepidationthatglobal businesscombinationscould become more
and more difficultif regulatoryauthoritiesfail to harmonizetheir approaches.
IV. Data
of the EC)
GeneralforCompetition
A. Actionsbythe DGC(Directorate
Table 1 provides summaryinformationabout proposed combinationsthat

notifiedthe EC since the inceptionof regulationsin 1990 throughthe latest month
in our data sample (December2000). The entries afterthe last column show the
numberof outcomes by type of decision. As of December 2000, the DGC had
taken 78 proposedmergersand acquisitionsthroughPhase II. Among them, 15
were approvedoutright,47 were approvedsubjectto variousconditions, and 13
were declared incompatiblewith EU conditions and were thereforeforbidden.
Aktas, de Bodt, and Roll 737
Another three cases were resolved differently (by referralto an individualEC

memberstate or by restorationof effective competition).
TABLE1
EuropeanCommission(EC)RegulatoryOutcomesforProposedBusiness Combinations
Years
'90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 Total
No. of cases notifyingthe EC 12 63 60 58 95 110 131 172 235 292 345 1573
Cases withdrawn-PhaseI 3 1 6 4 5 9 5 7 8 48
Termination afterPhaseI 7 55 57 54 86 102 118 131 229 260 328 1427
OutsideECjurisdiction 2 5 9 4 5 9 6 4 6 1 1 52
Approvedwithoutconditions 5 47 43 49 78 90 109 118 207 236 293 1275
Approvedsubjectto conditions 3 4 2 3 2 12 19 28 73
Otherdecisions afterPhaseIa 1 1 1 3 7 4 4 6 27
PhaseII proceedingsinitiated 6 4 4 6 7 6 11 12 20 19 95
Cases withdrawn-PhaseII 1 1 4 5 6 17
DecisionafterPhase II 5 4 3 5 7 7 11 9 10 17 78
Approved 1 1 1 2 2 1 1 3 0 3 15
Approvedsubjectto conditions 3 3 2 2 3 3 7 4 8 12 47
Prohibited 1 1 2 3 1 2 1 2 13
Otherdecisions of Phase Ilb 2 1 0 3
Otherdecisionsc 1 2 2 4 1 3 4 6 14 13 5 55
Numberof proposedbusiness combinationsthathave notifiedECregulatoryauthoritieseach year since the inceptionof
the legal requirementin 1990 throughthe latest monthin our data sample (December2000). Entriesin the last column
give the totalnumberof outcomes by type of decision. PhaseI terminationcases end aftera one-monthinvestigation
period.Phase IIcases are subjectedto an in-depthinvestigation,whichcan take up to fouradditionalmonths.
apartialor fullreferralto an individualECmemberstate.
bPartialreferralto an individualECmemberstate or restoration of effectivecompetition.
cPreviousdecision revoked,impositionof fines, or relieffrompriorsuspension.
Source:DGC,"Merger TaskForce"
B. MarketPrice,VolumeData,and DealFeatures
Stock price and volume data were obtained from Datastreamaccessed at
the Universit6de Lille 2. For announcementdates, four separatesources were
checked: Reuters, Bloomberg (throughDexia bank), the SDC Database edited
by Thomson Financial and, depending on the country,the financial press (Les
Echos, Financial Times, and The WallStreet Journal). The SDC Database and
the financialpress have also been used to collect supplementaryinformationsuch
as the size of the deal, the means of payment, the type of combination,and the
presenceof rumorsin the monthsprecedingthe combination.
Much informationis available at http://www.europa.eu.int/comm/competi-
tion, the official DGC Web site, includingstatisticson interventionsby the DGC,
currentlegislative amendments,and final decision reports(some are download-
able in *.pdf). Among the interestinginformationin these reportsare diagnostics
providedby the DGC, which allows one to classify combinationsinto four cat-
egories: i) firms that do not operate in the same industrysector; ii) firms that
operatein the same sector but not in the same geographicalarea; iii) firms that
operatein the same sector and in the same geographicalarea,but have only lim-
ited sales volume in thatarea;and iv) firmsthatoperatein the same sector,in the
same geographicalarea, and have significant sales volume. Because we do not
have sectorconcentrationmeasuressuch as the Herfindahlindex, this information
is particularlyvaluable. Only firms that operate in category iv representa risk

that the combinationwill increase sector concentrationas evaluatedby the DGC
experts.
Because the firmsinvolvedwere tradedon variousnationalexchanges,it was
necessary to collect local marketinformationabout each exchange and to select
a marketindex (which will be employed in the usual way to constructabnormal
returns).The countriesinvolved,the stock marketindexes selected, and the local
currenciesare listed in Table2. We also collected currencyexchangerates,short-
terminterestrates (we use the U.K. Cash Deposit U.S.$ one-monthratefor some
robustnesschecks), and the MSCI WorldPrice Indexdatafrom Datastream.
2
TABLE
and
Timing,FinalDecisions, of ProposedCombinations
Domiciles
PanelA. Yearof Notification

90 91 92 93 94 95 96 97 98 99 00 Total
12 44 37 40 53 66 59 86 105 150 222 874
PanelB. FinalDecision
Prohibition ApprovalSubjectto Conditions OutrightApproval Referral Total
9 102 759 4 874

PanelC. HomeCountryLocalMarketIndex,and Currency
Country N Index Currencya
Australia 5 S&PASX200 Dollar
Austria 8 WeinerBoerse Index Schilling*
Belgium 24 BrusselsallShares Franc*
Bermuda 2 MSCIWorldPriceIndex Dollar
Canada 21 Toronto300 Dollar
Denmark 11 CopenhagenSE Kr6ne
Finland 24 HEX Markka*
France 221 CAC40 Franc*
Germany 267 DAXKursPriceIndex Mark*
Greece 2 DJ EuroStoxxPriceIndex Euro
HongKong 1 HangSeng Dollar
Ireland 2 IrelandSE Punt*
Italy 74 MilanComit Lira*
Japan 35 NIKKEI 225 Yen
Luxembourg 1 Luxembourg SE 13 Franc*
Netherlands 88 CBSAllShare Guilder*
Norway 11 OsloSE General Kr6ne
Portugal 3 DJ EuroStoxxPriceIndex Euro
Singapore 1 SingaporeDBS50 PriceIndex Dollar
SouthAfrica 7 JSE Industrial Rand
Spain 26 MadridSE General Peseta*
Sweden 61 weightedallshares
Affarsvarlden Kr6ne
Switzerland 57 Swiss MarketIndex Franc
U.K. 250 FTSE100 Pound
U.S. 334 S&P500 Dollar
Total 1535
InTable2, the panels breakdownthe sample by (A)year of notification of the proposedcombinationto the EC,(B) final
regulatorydecision type, and (C) countryof domicile. Panels A and B pertainto combinationswhile panel C reports
individualfirmsin the combinations.Panel C also gives the local indexused in the studyand local currencythat
market
was convertedintoU.S. dollarsat the spot exchange rate.
aSince January1, 1999, eurolandcountriesindicatedby an * have maintainedfixed exchange rates withthe euro(and
hence witheach other)
C. Firmsand Cases withAvailableData

It usuallytakesquitea while afteran interventionfor the EC to file an official
reporton its Web site. Consequently,we were obliged to restrictour analysis to
notificationsfrom 1990 through2000 inclusive; later cases were mostly incom-

plete. The total numberof notified combinationsduringthis period was 1,573
(see Table 1).
Of these 1,573 notifications,1,560 final decisions, comprisedof 1,505 major
decisions and 55 other decisions (see notes in Table 1), were reachedby the end
of 2000. We study only the majordecisions. Many proposedbusiness combina-
tions involve small or closely held firms with no readily availablemarketprice
information,so they could not be included in this study. In 874 of the 1,505
majordecisions, at least one of the subjectfirmswas listed on a nationalstock ex-
change. Table2 providesa breakdownby year of notification,final decision, and
home countryfor these 1,535 individuallisted firms. But our tests requirealso
that both the bidder and the targetbe listed, leaving 443 combinationsand 886
firms. Of the 443 combinations,68 are public offerings,64 are mergers,and 311
areacquisitions;169 involve a bidderdomiciledoutsidethe Europeancommunity.
Ourfinal sample varies slightly from analysis to analysis dependingon two
factors: the calendardate and the set of explanatoryvariables. The date matters
because sometimesfirmsaredelistedpriorto the finalregulatorydecision. Hence,
they must be droppedfrom the calculations.The explanatoryvariablesare some-
times not available; e.g., the deal value and the means of payment. We report
the actualsize of the analyzedsample in each table. We note when the inclusion
of some variablehas a significantimpact on the compositionof the sample (e.g.,
changingthe compositionamongpublic offerings,mergers,and acquisitions).
V. MarketResponseto EC RegulatoryActions
This section reportsobservedabnormalreturnsaroundthe initial announce-
ment date of the combinationand aroundseveralregulatorydecision dates, pro-
vides tests for the relevanceof the home countryof the bidder,and assesses the
initial announcementreturnas a predictorof the final regulatoryoutcome.
A. Methods
The acceptedmethodfor isolating the impactof a particularevent on market
valuationsis the event study. Since its originationby Fama et al. (1969), there
have been many variationson the basic theme, all consisting of statistical pro-
cedures designed to measurethe event more precisely. In the sequel below, we
employ severalvariantsin an effortto assurethatthe resultsare robust.
The first step in isolating the effect of an event is to constructa model for
normalreturns;i.e., individualfirm returnsthat would have occurredin the ab-
sence of the event. We decided to try three differentprocedures,each of which
has appearedmany times in otherpapersand each possessing variousmerits and
possible problems.They are the simple marketmodel, the marketmodel with pa-
rametersestimatedby the Scholes and Williams (1977) method,and the constant
mean returnmodel.
Parametersfor each model are estimatedusing 200 daily observationsfrom
a periodpriorto the initial announcement.Thirtydays immediatelyprecedingthe
announcementevent window are excluded since they might be contaminatedby
informationleakage. Eleven observationsconstituteour event window,five days

before and five days afterthe event date, which is day zero. The same parameter
estimates are employed for all event windows, even events other than the initial
announcement(such as the final resolutiondisclosure),because data subsequent
to the initial announcementare possibly abnormallyinfluencedby the proposed
combination.
Unreportedresults show that abnormalreturnsdo not adherevery well to
the sphericalGaussianspecification.They are significantlynon-normalin a large
majorityof instances (which is typical for financialreturns),and there is slight
but significantautocorrelation.These are adequatereasons for trying alternative
statisticalapproaches.
The cumulativeaverage abnormalreturnis computedfrom the regression
residuals (or from the mean deviations in the case of the constant mean model
return),first averagingacross firms relativeto the announcementdates and then
accumulatingthe averagesfrom the day priorto the event window.
Inferencesabout the observed cumulativeabnormalreturn(CAR) face not
only the difficultiesof non-normaldisturbancesandautocorrelation,butalso cross-
sectional correlation(because mergers and acquisitionsare known to cluster in
time) and event-inducedvolatility. Solutions to these problemshave been exten-
sively studied in the literature(see Ruback(1982), Corrado(1989), Boehmer et
al. (1991), Salinger (1992), and Cowan and Sergeant(1996)) but there has been
no procedurefor resolving all problems simultaneously. Our procedureshould
help amelioratethis situation.
Building on the Boehmeret al. (1991) method,our adjustedestimateof the
varianceof abnormalreturns(for the marketmodel1) is
(1) =
Var[CARr]
T
+ 2(T-
where T is the numberof daily abnormalreturnsaccumulatedin CAR, a 2 is the

estimatedresidualvariance, U is the estimationperiod length in days, Tm is the
mean of the marketreturnover the estimationperiod,Var(rm)is its variance,rT0
is the cumulatedmarketreturnfrom the beginning of the event window up to
time T, and Cov[Rt,RlI] is the estimated first-orderautocovarianceduringthe
estimationwindow.
As in the Boehmer et al. (1991) method, Var[CART]is used to standard-
ize the observed CART. StandardizedCARTSfor the N stocks are then aver-
aged cross-sectionallyto obtainthe cumulativeaverageabnormalreturn,CAART,
whose standarderrorwill be 1/ v by construction(providedthatthe individual
elements of the averageare cross-sectionallyuncorrelatedand that the residual
variance does not change during the event window). The resulting t-statistics
are robustto event-inducedvariance,which is takeninto accountby the adjusted
standarderrorsof CART.
1The approach is easily extended to the constant mean return model and the Scholes/Williams
method.
To tackle the normalityproblemandto improvethe power of the test, we do

not rely on an asymptoticp-value but use a percentilet bootstrapapproach(Efron
and Tibshirani(1993)). The procedureis very intuitive. From the original data
matrix,we drawwith replacement500 bootstrapsamples of the same size as the
original.Foreach bootstrapsample,we applythe correctedBoehmeret al. (1991)
method. The estimatedbootstrapt-statisticsprovide an empiricaldistributionto
which the t-statisticobtainedfrom the original data can be compared. This pro-
duces a bootstrapp-value estimate. As Horowitz(2001) shows, this substantially
improvesthe speed of convergenceof the estimatedp-value and does not rely on
normality.Hence, our approachis an alternativeto Corrado's(1989) andis robust
to both departuresfrom normalityand to event-inducedvolatility.Unreportedre-
sults show that, while the event study method is highly robustto the choice of a
specific return-generating process, using bootstrapp-values can significantlyalter
the conclusions,particularlywith small samples.
Event clusteringin time remains an issue. In some cases, there is perfect
overlap because several firms are involved in the same proposed combination.
In that situation,we adopt the Mandelker(1974) and Jaffe (1974) procedureof
formingone portfoliofor each combination.Eachfirmis weightedin the portfolio
by its marketvalue as of the last day of the estimationwindow. Most of ourresults
are at combinationlevel and hence are resolved by the perfect overlapportfolio
method.For partialoverlap,thejoint estimationprocedureadvocatedby Salinger
(1992) is computationallycomplex and would imply estimatinga matrixof size
88,600 x 886! Instead,we proposein Section VII a robustnesscheck, based also
on a bootstrapprocedure,which shows that our results are not sensitive to this
problem.
Finally, we stress that our abnormalreturnscaptureonly the unanticipated
part the informationrelease aroundevent dates (see Malatestaand Thompson
of
(1985) or Schipper and Thompson (1983) for analyses of partially anticipated
events) and that all statisticaltests of differencesbetween sub-samplesare based
on a presumptionof independence.
B. PreliminaryResults
Our first results, shown in graphA of Figure 1, depict cumulativeaverage

abnormalreturns(CAAR) for all firmsin the sample at the initial announcement
date. Note that both the bidder and target firms along with joint ventures are
included.All returnsare convertedinto U.S. dollarsat spot exchangerates. Local
marketindexes are used as proxies for the marketportfolio.
As could be expected, a sizeable price movement occurs on the first an-
nouncementof a proposedbusiness combination.It exceeds 2% on the day of the
announcementand the two precedingdays. Evidently,there is either leakage or
insidertradingin some cases or imprecisionin announcementdatedetermination.
Figure 1 clearly highlightsthe robustnessof CAAR estimationto the choice of a
particularnormalreturnmodel. Since the threemethodsof computingcumulative
abnormalreturnsgive similarresults, we will henceforthpresentonly those ob-
tainedwith the marketmodel, but will providesome additionalrobustnesschecks
in Section VII.
1
FIGURE
Market
Reactionat the Initial of a BusinessCombination
Announcement
GraphA. InitialAnnouncementof Combination,

AllFirms,U.S.$,and LocalIndexes
AllFirms,and MarketModel
GraphB. InitialAnnouncementof Combination,
GraphA plots cumulativeaverageabnormalreturns(CAARs)forallfirmsin the sample aroundthe initialdeal announce-

mentdate forthreedifferentmethodsof estimatingabnormalreturns(MM:marketmodel,CMRM: constantmean return
model,and SW:Scholes and Williamsmodel). Allprices are convertedintoU.S. dollars.Localmarketindexes are used
as proxiesforthe marketportfolio.GraphB shows the impactof the currency(localvs. U.S. dollar)and the index(MSCl
WorldPriceIndexvs. local indexes),usingthe marketmodel.
GraphB of Figure 1 shows the impactof currency(local vs. U.S. dollar)and

of the index (MSCIWorldPrice Indexvs. local indexes). Thereis little difference
between using local currenciesand dollarsbecause exchangeratemovementsare
virtuallyindependentacrosseventperiodsand are swampedby stock price move-
ments. Similarly,the results are not very influencedby the index. Consequently,
hereafterwe presentresults only in U.S. dollarsusing local indexes.
C. ReturnEffectsaroundAnnouncementsand DGCDecision Dates

1. Initial Date
Announcement
For each business combination,we assigned the role of bidderto one firm
andthe role of targetto a secondfirm. Usually,the notificationto the EC explicitly
states which firm is the bidder. If this were not true in a particularcombination,
we consulted the financialpress and made a best effort to ascertaineach firm's
role.
Table 3 reportsinitial announcementCAARs for bidders,targets,and their
combination. Not surprisinggiven past empirical studies of mergers,2 there is
a large abnormalprice increase for targetfirms and it is statisticallysignificant.
Targetfirmshave significantabnormalpositive performanceup to five days prior
to the announcement. The targets' CAAR over the event window is 10.15%,
which is somewhatlower than in previous studies. For example, Mulherinand
Boone (2000) find a target CAAR of 20.2% in a sample of 281 combinations
during 1990-1999 and Andradeet al. (2001) report 15.9% during 1990-1998;
both were for U.S. combinationsonly.
TABLE 3
Price Reactionto the InitialAnnouncementof a Business Combination
RelativeDate
-5 -4 -3 -2 1 0 1 2 3 4 5
Bidders(N = 583)
CAAR(%) -0.22 -0.32 -0.36 -0.38 -0.04 0.07 0.14 0.65 0.00 -0.04 -0.15
p-value 0.00 0.00 0.01 0.01 0.97 0.20 0.18 0.02 0.62 0.66 0.74
Targets(N 487)
CAAR(%) 0.58 0.88 1.24 2.04 5.58 8.20 8.70 8.96 9.12 9.10 10.15
p-value 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Combinations (N = 441)
CAAR(%) 0.03 0.01 -0.01 -0.05 0.53 1.02 0.96 1.66 1.01 0.99 1.51
p-value 0.37 0.95 0.29 0.45 0.00 0.00 0.00 0.11 0.00 0.00 0.13
MeanDifference,Target-Bidder
p-value 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
CAARsaroundthe initialannouncementdate (day 0) of proposedcombinationsfor bidders,targets,and combinations
(biddersplus targetsweighted by theirrespectivemarketvalues on the last day of the estimationwindowpriorto the
announcement).Estimationis by the marketmodel withlocal indexes convertedinto U.S. dollars;p-values are froma
percentilet bootstrapbased on the modifiedBoehmeret al. (1991) methoddescribedin SectionV.
Our bidding firms have significantnegative returnsfrom days -5 through

-2. Over the 11-day window, the bidder CAAR is -0.15% (not far from the
-0.37% found by Mulherinand Boone (2000) and somewhatless negative than
the - 1%reportedby Andradeet al. (2001)). For the combinedfirms,bidderplus
target,therearesignificantpositivereturnson the announcementdateitself andon
the previous(-1) and following (+1) days. Overthe event window,the combined
2See, for example, the review paper by Jensen and Ruback (1983) and other studies in the same
special issue of the Journal of Financial Economics, Andrade,Mitchell, and Stafford(2001) or Mul-
herin and Boone (2000).
CAAR is 1.51% (as comparedwith 3.51% in Mulherinand Boone (2000) and

1.4%in Andradeet al. (2001)).
Differences between targets and bidders are highly significant. Using the
last day of the estimation window marketvalue and the sub-samplefor which
we have both a quoted targetand a quotedbidder,the aggregateddollar gain is
$147,159 million for targetsbutthe loss is $229,033 million for bidders,a material
net reductionin value. This loss is comparableto that reportedby Moeller et
al. (2004) using a sample of 12,023 U.S. acquisitionsduring 1980-2001. They
estimatea total value destructionof $218 billion for acquirers'shareholders,most
of which is attributableto large firms. Althoughwe have fewer acquiringfirms,
they are mostly large.
Later, we focus mainly on the combinationlevel. This choice is dictated
both by econometricconsiderations(combinationportfolios overcome the event
clusteringproblem)and, more importantly,by the motivationfor our study. We
are not tryingto uncoverthe determinantsof becominga targetor a bidder,but to
understandthe impactof DGC interventionon combinations.
2. Endof Phase I
Table4 shows CAARs for combinedfirms at the end of Phase I by decision
type. Outrightauthorizationis apparentlyno surprisesince the CAAR is insignif-
icant. The most strikingresult is the clear difference(statisticallysignificantat
a 5% level) between the market'sreaction to authorizationwith conditions and
an in-depthinvestigation. The formeris good news even though the conditions
could imply costs to the involved firms, because the combinationis tentatively
acceptableand the DGC investigationis closed. The latteris bad news (a Phase
II investigationtakes time and its outcome is uncertain).
TABLE 4
of PhaseITermination
Announcement
RelativeDate
-5 -4 -3 -2 -1 0 1 2 3 4 5
OutrightAuthorization(N - 348)
CAAR(%) 0.04 0.04 -0.20 -0.32 -0.20 -0.13 -0.20 -0.26 -0.28 -0.36 -0.48
p-value 0.23 0 31 0.35 0 16 0.48 0.57 0.71 0.79 0.61 0.39 0.13
AuthorizationwithConditions(N = 38)
CAAR(%) 0.18 0.91 1.19 1.07 1.22 1.69 1.96 1.73 1.44 1.33 1.48
p-value 0.79 0 02 0 04 0.06 0.03 0.03 0.03 0.09 0.12 0.21 0.19
(N = 32)
In-Depth(Phase II)Investigation
CAAR(%) 0.08 -0.80 -0.61 -0.65 -0.72 -1.33 -1.61 -1.78 -1.78 -2.33 -2.65
p-value 0.81 0.09 0.13 0.18 0,21 0.15 0.07 0.05 0.02 0.01 0.01
Testsof Differencesin CAARs
OutrightAuthorization-= Authorization
withConditions
p-value 0.72 0.04 0.00 0,02 0.06 0.03 0.06 0.10 0.13 0.21 0.13
OutrightAuthorization= In-DepthInvestigation
p-value 0.53 0.09 0.23 0 28 0 27 0.16 0.07 0.04 0.03 0.02 0.03
withConditions=- In-DepthInvestigation
Authorization
p-value 0.73 0.01 0 03 0 05 0.05 0.01 0.01 0.01 0.01 0.01 0.00
CAARs around the announcement date (day 0) at the end of an EC Phase I investigation, categorized by decision type
(outright authorization, authorization subject to conditions, and in-depth investigation). Estimation is by the market model
with local indexes converted into U.S. dollars; p-values are from a percentile t bootstrap based on the modified Boehmer
et al. (1991) method described in Section V.
3. Endof Phase II
Table5 presentsresults for the end of Phase II. Thereis a positive reaction
aroundthe decision date, which could signify thatthe end of uncertaintyis good
news, but nothing is significant. This might be due to the CAAR mixing dif-
ferent decisions (prohibition,authorization,authorizationsubject to conditions)
and to possible marketanticipationof the final decision. Splittingthe analysis by
decision type would not improvepower because sub-samplesizes are so small.
TABLE 5
of PhaseIITermination
Announcement
RelativeDate
-5 -4 -3 -2 1 0 1 2 3 4 5
AllOutcomes(N -= 30)
CAAR(%) -0.40 0.00 0.01 -0.35 0.15 0.13 0.30 0.20 -0.26 -0.72 -0.43
p-value 0.12 0.97 0.57 0.60 0.61 0.96 0.83 0.72 0.73 0.35 0.59
CAARforall proposedcombinationsat the end of an EC Phase IIinvestigation,announcedon day 0. The resultshere
mixdifferentdecisions (prohibition, and authorizations
outrightauthorizations, subjectto conditions).Estimation
is by the
marketmodel withlocal indexes convertedinto U.S. dollars;p-values are froma percentilet bootstrapbased on the
modifiedBoehmeret al. (1991)methoddescribed in SectionV
D. Announcement
Effectsby HomeCountryof the Bidder
SuspicionaboutEC motives has been frequentlyarticulatedin the non-Euro-
pean press. Do EC anti-mergeractivities differentiallyimpact non-European
firms,perhapsreflectingde facto protectionismof Europeanrivals?To shed some
light on this issue, Table6 presentsresultsfor biddersand for combinationsafter
dividing the sample between EC and non-EC bidders.3 The table includes five
panels. Panel A presentsthe CAAR aroundthe initial announcementdate; panel
B, outrightauthorizationafter Phase I; panel C, authorizationsubject to condi-
tions after Phase I; panel D, announcementof a Phase II investigationat the end
of Phase I; and panel E, decisions at the end of Phase II.
Table 6, panel A shows no significant difference upon original deal an-
nouncement.Panel B revealsthat,in case of outrightauthorization,combinations
involving non-ECbiddersseem to undergoslight wealth destruction(near -1%
on the 11-day event window) while those involving EC biddersshow no signif-
icant reaction. The differencebetween EC and non-ECbiddersis, however,not
significantand, at the combinationlevel, unreportedresults show that it is only
marginallysignificantin the few days following the announcementdate.
Panel C provides a more interestingresult. There is a clear domicile dif-
ference in case of authorizationsubjectto conditions at the end of Phase I. For
EC bidders and combinationsinvolving them, there is almost no reaction. For
non-EC biddersand combinationsinvolving them, there is a strongpositive (up
to 9% for bidders)impact. The differencesbetween EC and non-ECsub-samples
are significant,both at the bidderand the combinationlevels. Clearly,the market
interpretsan authorizationsubjectto conditionsas good news for non-ECbidders.
3The bidderis a U.S. firmin 121 (71%) of the 169 combinationsin which the bidderis a non-EC
firm.
TABLE6
PriceReactionsforEuropean
andNon-European Firms
Bidding
CAAR
N (%) p-Value
PanelA. InitialAnnouncementof BusinessCombinations
ECbidders 367 -0.21 0.44
Non-ECbidders 216 -0.06 0.60
Combinations withECbidders 272 1.75 0.13
Combinations withnon-ECbidders 169 1.13 0 00
Difference,ECvs. non-ECbidders 0.41
Difference,combinationswithand withoutECbidders 0 25
PanelB. Announcementof Outright afterPhase I
Authorization
ECbidders 305 0.24 0.24
Combinations withECbidders 212 -0.32 0.28
Combinations withnon-ECbidders 136 -0.74 0.09
Difference, vs. non-ECbidders
EC 0.20
Difference,combinationswithand withoutECbidders 0.41
PanelC. Announcementof AuthorizationSubjectto ConditionsafterPhase /
ECbidders 35 0.34 0.74
Non-ECbidders 12 9.60 0.03
Combinations withECbidders 29 0.70 1.00
Combinations withnon-ECbidders 9 4.01 0.11
combinations
Difference, withand withoutECbidders 0.11
PanelD. Announcementof Phase //II
Investigation
ECbidders 23 -0.74 0.53
Combinations withnon-ECbidders 15 -3.87 0.05
PanelE Announcementof DecisionafterPhase I
ECbidders 25 0.84 0.52
Non-ECbidders 21 2.34 0.06
Combinations withNon-ECbidders 13 0.80 0.47
CAARsand theirassociated p-valuesare reportedforthe 11-dayeventwindowforbiddersand forbusinesscombinations
afterdividingthe sample between EC and non-ECbidders. Panel A presents the CAARat the initialannouncement;
panel B, outrightauthorizationafterPhase I;panel C, authorizationsubjectto conditionsafterPhase I;panel D, Phase II
investigationat the end of Phase I;and panel E the end of Phase II.Testsof differencesare also given forbothbidders
and combinations.Estimationis by the marketmodelwithlocal indexes convertedintoU.S. dollars;p-valuesare froma
percentilet bootstrapbased on the modifiedBoehmeret al. (1991)methoddescribedin SectionV
This result might at first sight seem surprisingbut it can probablybe interpreted
as follows: authorizationsubjectto conditionsis good news for non-ECbidders
because investorshad fearedan in-depthinvestigation.
Panel D shows what is probablythe most importantresult. While the value
destructionaroundthe announcementof a Phase II investigation(at the end of
Phase I) is insignificantfor EC biddersandcombinationsinvolvingthem, it is sig-
nificantlynegative for non-ECbiddersand combinationsinvolving them, (more
than -2.5% with a p-value less than 1%for non-ECcombinations).4Moreover,
the differencesbetween the two sub-samplesare significant. Evidentlythe mar-
ket anticipatesa much higher cost for non-EC bidders as a result of a Phase II
investigation.
4Ellert (1976) found a negative reaction to the announcementthat the mergerof two U.S. firms
was to be challenged by Americanregulators. We thankJ. Fred Weston for remindingus of Ellert's
work.
One might have thoughtthis result could be ascribedto systematic differ-

ences between the deals initiated by EC and non-EC bidders. But this can be
ruled out by the results in panel A. If there were systematic differences, they
would have influencedvalue creationon the initial announcementdate, which is
clearly not the case. This leaves two possible explanations:the marketinitially
anticipatesmore costly DGC decisions for non-ECbidders,or the marketantici-
pates a betterlobbyingeffortby EC bidders(presumablysupportedby theirhome
countryauthorities).Eitherexplanationimplies protectionism.This findingalso
opens anotherquestion. Is the probabilityof DGC interventionhigher for com-
binations involving non-EC bidders? Section VI investigatesthis question in a
multivariatesetting. Finally,panel E depicts the end of Phase II. Phase II termi-
nation seems to convey slightly betternews for combinationsinvolving non-EC
bidders,but most of the results are insignificant.Interpretationsshouldtherefore
be made with care, keeping in mind the mix in the sample of several decision
types (see Section V.C).
E. Announcement
Effectsas Predictions
of FinalOutcome
On the initial announcementof a proposedbusiness combination,market
participantsmust consider the likely outcome of regulatoryaction, but it seems
possible thatthe regulatorsthemselves are influencedby the initial price response
to a proposed deal. For example, suppose on occasion there really are some
monopoly rents to be gained from a merger;if the marketassesses this possi-
bility correctly,thereshouldbe a largerthanaverageprice rise of both bidderand
targetaroundthe initial announcement.But if regulatorsare doing a good job,
this should be associated with a higher probabilityof a subsequentprohibition.
Table 7 is consistent with this idea. Combinationsthat eventuallyproceed to an
in-depth Phase II investigationby the regulatorshave largerprice increases on
the initial announcementdate (at least up to day +4). Perhapsregulatorysuspi-
cion is arousedby the announcementdatereturnor, alternatively,the potentialfor
monopoly rents is independentlydeterminedby the regulatorsto be worthy of a
Phase II investigation.
TABLE7
InitialDeal AnnouncementEffectand EventualRegulatoryOutcome
RelativeDate
-5 -4 -3 -2 1 0 1 2 3 4 5
CombinationsEndingin Phase I and PhaseIIProceedings

Phase I Combinations
(N 406)
CAAR(%) 0.01 -0.02 -0.05 -0.14 0.35 0.86 0.86 1.62 0.94 0.91 1.49
p-value 0.71 0.55 0.19 0 99 0.00 0.00 0.00 0.15 0.00 0.00 0.07
Phase //II (N = 35)
Combinations
CAAR(%) 0.21 0.34 0.45 0.95 2.59 2.83 2.11 2.20 1.74 1.88 1.78
p-value 0.08 0.11 0.25 0.00 0.00 0.00 0.00 0.00 0.00 0.00
0.07
Difference, Phase II vs. Phase I Combinations
p-value 0.11 0.11 0.15 0.10 0.00 0.00 0.02 0.43 0.07 0.03 0.30
Table 7 presents the CAAR at the initial announcement date for business combinations ending in Phase I and those
proceeding through Phase II. Estimation is by the market model with local indexes converted into U.S. dollars; p-values
are from a percentile t bootstrap based on the modified Boehmer et al. (1991) method described in Section V.
VI. Determinants
of the Probability
of Intervention
and of
ValueCreation
To this point, we have reliedmainly on univariatestatisticsof price reactions
aroundvariousannouncementdates. Even though some interestingresults have
emerged,thereareimportantquestionswhose answersseem likely to be provided
only by a multivariateapproach. For example, to properlyanswer the question
raised in Section V.D (does the bidder'shome countryinfluence the probability
of DGC intervention?),we should controlfor otherpossible determinantsof the
probabilityof intervention.It would also be interestingto uncovervariablesthat
influencethe magnitudeof the price movementaroundthe initial announcement
of the proposed combination. These questions raise serious endogeneity prob-
lems. As pointedout in Section V.C, we cannotrule out an endogenousrelation
between the observed CAR and the probabilityof DGC intervention. We first
introducea methodto resolve this particularconundrum.
A. Self-Selectivity
Biasand Investor/Regulator
Endogeneity
Eckbo et al. (1990) are probablythe first to directly addressthe endogene-
ity problem.They develop a model thattakes into accountself-selectivitybias in
voluntarycorporateeventsandendogeneitybetweenthe announcementreturnand
the probabilityof intervention;i.e., investors'simultaneousassessmentsof value
creation and the probabilityof regulatoryinterventionand regulators'simulta-
neous observationsof announcementreturnsand decisions to intervene. Eckbo
et al. apply their model to U.S. mergersand acquisitions. With respect to self-
selectivity bias, they arguethatwhen corporateeventsresultfromvoluntarydeci-
sions (such as corporateacquisitions,IPOs, or SEOs), rationalmanagementwill
undertakeonly those combinationsthatare anticipatedto be value creating.(This
does not mean, of course, that all combinationswill be value creatingex post.)
Self-selection truncatesthe distributionof the observedCAR. To accountfor this
phenomenon,the authorsadvocatetruncatedregressionssuch as
(2)
0
(see Green (2003), p. 760) where yiis the dependentvariablefor observationi, xi

is the vectorof independentvariables,0 is the normaldensityfunction,4 is its cu-
mulative,a is the truncationpoint, cris the standarddeviationof the disturbances,
and3 is the set of coefficients. Estimationis by maximumlikelihood. The re-
sults presentedby the authorsindicate the importanceof self-selectivity. Using
truncatedregression,they show, interalia, thatthe largerthe bidderrelativeto the
target,the smallerthe gain to the bidder,while ordinary(non-truncated)estima-
tion does not find a significanteffect. Despite its apparentpower, the truncated
regressionapproachhas not been widely employed. In Section VI.C, we present
resultsusing both techniques.
Consider next the simultaneousestimation of CAR determinantsand the
probabilityof regulatoryintervention.Eckbo et al. (1990) tackle the same prob-
lem but base theiranalysis on an assumptionthatinvestorsandregulatorspossess
independentsets of information.This seems at odds with the reality. Represen-

tatives of the DGC M&A task force clearly reveal theirkeen interestin financial
marketdata in conversationswith the authors. Moreover,results below suggest
thatEC regulatorsbase theirdecisions partlyon stockpricemovementsaroundthe
announcementdate. Section VI.B studies determinantsof the probabilityof in-
terventionwhile Section VI.C looks for determinantsof the initial announcement
CAR. To resolve the investorsvs. regulatorsendogeneityproblem,we employ a
two-step instrumentalvariableapproach.Also, as in the univariateanalysis, we
undertakea bootstrapcorrespondingto each multivariatemodel. Moreover,we
enlargethe bootstrapto 2,500 replicationsto accommodatethe double source of
variabilityimplicit in the two-stage instrumentalvariablesestimation.
B. Determinants
of the DGC'sProbability
of Intervention
Consideringthe limited sample size andthe natureof the dependentvariable
(whetherthere is an intervention),we code interventionas a qualitativevariable
with threepossible levels. This variabletakesthe value 1 in case of outrightautho-
rizationafterPhase I, the value 2 in case of authorizationsubjectto conditionsat
the end of Phase I, and the value 3 in case of an in-depth(Phase II) investigation.
It does not reflectthe final outcome afterPhase II.
To estimate the determinantsof probabilityof intervention,we then fit an
orderedprobitmodel of the form,
(3) Pr(OutrightAuthorization) = 0,
Pr(AuthorizationSubjectto Conditions) = (0),
Pr(In-DepthInvestigation) = (0),
whereX is a vectorof explanatoryvariablesand3 is a correspondingvectorof co-
efficients,the pi coefficientsarethresholds,and! denotes the normalcumulative
density function.Estimationis by maximumlikelihood.
The explanatoryvariablesare: EstimatedCAR is an instrumentfor CAR (see
explanationbelow); DGC Experts'Diagnostic is a dummyvariablethattakes the
value 1 if the DGC determinesthat the involved firmsare not in the same sector,
in the same geographicalarea,or have insufficientsales (see Section IV.B for de-
tails); OutsideEC is a dummyvariablethattakes the value 1 if the home country
of the bidderis outside the EC; LargeEC Countryis a dummyvariablethattakes
the value 1 if the home countryof the bidderis one of the largeEC countries(Ger-
many,France,Spain, Italy,or U.K.); TargetSize is the marketvalue of the target
evaluatedat the end of the estimationperiod; Bidder/TargetReturnsCorrelation
is the correlationcoefficient of the targetand bidderreturnsevaluatedduringthe
estimationperiod(a proxy for the sector and geographicalproximityof the target
and the bidder),and Deal Value is the deal value in millions of dollars. To alle-
viate concernsaboutinvestorsvs. regulatorsendogeneity,we form an instrument
for the CAR by regressingit on the following variables:Outside EC, Large EC
Country,Deal Value, TargetSize, Bidder/TargetReturnsCorrelation,which are
all describedabove and,in addition,on the following variables(which arenot ex-
planatoryvariablesin the orderedprobit);BidderMarketValue,the marketvalue
of the bidderevaluatedat the end of the estimationperiod;Target/BidderSize Ra-

tio, the targetto biddersize ratio;TenderOffer,a dummyvariabletakingthe value
1 if the combinationis a public offering;Cash Offer,a dummyvariabletakingthe
value 1 if the combinationis 100%cash, Stock Offer, a dummy variabletaking
the value 1 if the combinationis 100% stock; Rumor,a dummy variabletaking
the value 1 if therehave been rumorsin the financialpress duringthe six-months
precedingthe combination,andBidderPastPerformance,the accumulatedbidder
performanceduringthe estimationperiod. The instrumentincludedin the ordered
probitis EstimatedCAR, the fittedvalue of CAR from the above regression.
The results are in Table 8. Panel A reportsthe full model. Panel B ex-
plores the impact of removing DGC Experts' Diagnostic, a variable subject to
possible bias because it could be manipulatedby the DGC. Being nonlinear,
an orderedprobit model does not provide coefficients that directly measurethe
marginaleffects of explanatoryvariables,but the procedureadvocatedin Greene
(2003), p. 738) can be used to estimatethese marginaleffects. They are reported
in the MarginalEffects section of thetable.5
The main conclusions include the following. The OutsideEC dummyvari-
able has no impact on the probabilityof intervention(in either version of the
model). While Section V found evidence that higher costs are imposed on non-
EC biddersby DGC intervention,there is no greaterprobabilityof intervention.
The combinationof these two results suggests that EC biddersengage in more
effective political lobbyingonce the DGC has intervened.The LargeEC Country
dummy variableis also not significant at the usual statistical levels. Its boot-
strapp-value is around17%to 18%. In the MarginalEffects section of Table 8,
LargeEC Countryis negativefor OutrightAuthorizationand positive for Autho-
rization Subject to Conditions;i.e., bidders from the largerEuropeancountries
are (insignificantly)less likely to receive outrightauthorizationand more likely
to be subjectedto an intensive investigation. EstimatedCAR, the instrumental
variable,is not significant.DGC Experts'Diagnostic,Bidder/TargetReturnsCor-
relation,and Deal Value are all significantin panel A. DGC Experts'Diagnostic
has a negative effect on the probabilityof intervention(and a bootstrapp-value
of 0.033) while Bidder/TargetReturnsCorrelationandDeal Valuea have positive
effect. As panel B shows, removing DGC Experts'Diagnostic does not change
the conclusions;hence thereis little evidence to concludethat the DGC willfully
manipulatesits characterizationof the combination.Bidder/TargetReturnsCor-
relationmeasuresthe returncorrelationof the two subjectcompaniespriorto the
announcement,a "smokinggun"thatthe combinationmight be anti-competitive.
Hence, it not surprisinglymakes DGC interventionmore likely. Similarly,the
size (Deal Value)of the proposedcombinationincreasesDGC scrutiny.
C. Determinants DateReturns
of Announcement
The previoussection found thatthe probabilityof regulatoryinterventionis
predictableto some extentfromdeterminantsknownon the announcementdateof
the deal. Investorssurely realize this and exploit it when coming to a consensus
5The marginal impact of variable 1X on probability Pr(Decision Type) is an estimate of

OPr(DecisionType)/OXi.
TABLE8
Determinantsof the Probability
of RegulatoryIntervention
PanelA. PanelB.
Coefficient t-Value p-Value Coefficient t-Value p-Value
EstimatedCAR -2.014 -0.39 0.417 -1.661 -0.33 0.501
DGCExperts'Diagnostic -0.272 -1.53 0.033
OutsideEC 0 001 0.01 0.992 0.011 0.04 0.939
LargeECCountry 0.199 0.74 0 177 0.202 0.75 0.161
TargetSize 0.0026 0 71 0 240 0.0021 0.59 0.293
ReturnsCorrelation
Bidder/Target 0.960 1.80 0.026 0.951 1.79 0.026
DealValue 0.0138 4.52 0.000 0.0141 4.70 0.000
Threshold1 1.245 4.79 0.000 1.353 5.34 0.000
Threshold2 1.737 6.25 0.000 1.842 6.81 0.000
LR 33.9 31.3
p-value 0.000 0.000
MarginalEffectsa
Pr(1) Pr(2) Pr(3) Pr(1) Pr(2) Pr(3)
EstimatedCAR 0.4805 0.2219 -0.2586 0.4013 -0.1830 -0.2183
DGCExperts'Diagnostic 0.0637 -0 0296 -0.0341
OutsideEC -0.0003 0 0002 0.0002 -0.0026 0.0012 0.0014
LargeECCountry -0.0478 0 0219 0.0259 -0.0493 0.0223 0.0270
TargetSize 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000
ReturnsCorrelation
Bidder/Target -0 2291 0.1058 0.1233 -0.2299 0.1048 0 1250
DealValue 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000
Theestimatedmodelis an orderedprobitThedependentvariabletakes the value 1 foroutrightauthorization afterPhase
I,2 forauthorization subjectto conditionsafterPhase I,and 3 fora Phase IIinvestigation.The independentvariablesare
EstimatedCAR(an instrument forCAR),DGCExperts'Diagnostic(a dummyvariable,1 0 if DGCexpertsdeterminethat
the involvedfirmsare not inthe same sector,not inthe same geographicalarea,or have insufficient sales), OutsideEC(a
dummyvariable, 1.0 if the home countryof the bidderis outsidethe EC),LargeECCountry(a dummyvariable,1.0 ifthe
home countryof the bidderis one of the LargeECcountries),TargetSize (the marketvalueof the targetat the end of the
estimationperiodin billionsof dollars),Bidder/Target ReturnsCorrelation (the correlation
of the targetand bidderreturns
duringthe estimationperiod),and DealValue(the deal value in billionsof dollars).Toconstructthe instrument Estimated
CAR,the observedCARwas regressedon OutsideEC,LargeECCountry,TargetSize, Bidder/Target ReturnsCorrelation,
and Deal Valueand also on BidderMarketValue(the marketvalue of the bidderat the end of the estimationperiod),
Target/Bidder Size Ratio(thetargetto biddersize ratio),TenderOffer(a dummyvariable,1 0 ifthe combinationis a public
offering),Cash Offer(a dummy,1.0 ifthe combination100%cash), StockOffer(a dummyvariable,1 0 ifthe combination
is 100%stock),Rumor(a dummyvariable,1.0 iftherehave been rumorsinthe financialpress duringthe six-monthperiod
precedingthe combination),and BidderPast Performance(the accumulatedbidderperformanceduringthe estimation
period). EstimatedCARis the fittedvalue fromthat regression. Panel B presentsthe estimationwithoutDGCExperts'
Diagnostic.Estimationis by maximumlikelihood.Marginaleffects are evaluatedas in Greene((2000),p 879).
aln a few cases, the probabilitiesdo notsum exactlyto 1 0 because of roundingerror.
about the deal's value, including any expected costs of regulatoryintervention.

This implies that CAR itself should depend on the anticipatedprobabilityof in-
terventionon the announcementdate. The orderedprobitmodel of the previous
section providesdirectestimatesof interventionprobabilitiesby type of interven-
tion. Denote byPrj the probitmodel's estimatedprobabilityof an interventionof
typej, wherej = 1 for outrightapprovalafterPhase I, j =- 2 for approvalsubject
to conditions after Phase I, andj = 3 for a Phase II proceeding. Since the three
probabilitiessum to unity by construction,we can include only two of them in
a regressionto explain CAR. Thus, we regress the observed CAR against Deal
Value, TenderOffer, Cash Offer, Stock Offer, Rumor, and Bidder Past Perfor-
mance (all variables as defined in the previous section) and also against
Prj=2
(Authorizationsubjectto Conditions) andPrj=3 (In-depthinvestigation). Deter-
minantsof CAR were estimatedwith both a standardlinear model and with the
truncatedmodel advocatedby Eckbo et al. (1990) to tackle the potential self-
selectivity bias presentin voluntarycorporateevents (see Section VI.A). Table9
summarizesthe results. Panel A (B) uses OLS estimation(truncatedregression).
TABLE 9
Determinants
of CARat the Initial
Announcement
Date
PanelA. Linear PanelB. Truncated
Coefficient t-Value p-Value Coefficient t-Value p-Value
Intercept -0.106 -2.247 0.009 -0.582 -2.941 0.006

of Authorization
(Probability Subjectto Conditions) 0.894 1.886 0.035 2.815 2.307 0.016
rj=2
Prj=3(Probabilityof In-DepthInvestigation) 0.762 2.150 0 013 2.243 1.991 0.023
DealValue -0.004 -1.427 0.068 -0.011 -1.296 0.094
TenderOffer 0.018 1.881 0.010 0.039 0.687 0.240
CashOffer 0.004 0.318 0.590 -0.014 -0.257 0.478
StockOffer -0,023 -1.228 0.040 -0.023 -0,305 0.411
Rumor -0,001 -1.301 0.144 0.001 0.182 0.681
BidderPast Performance -0.015 -0.973 0.108 0.013 0.254 0 506
r 0.004 0.967 0.216
R2 0.375
F 25.417
A linearmodel(panelA) and the truncatedregressionmodeladvocated in Eckboet al. (1990) (panelB) are estimated.
Thedependentvariableis the CARaroundthe initialannouncementof the business combination.Tomeasurethe marginal
impacton CARof anticipatedregulatoryintervention, predictedvalues forthe probabilitiesof interventionwere obtained
froman orderedProbitmodelestimateduponthe announcementdate of the proposedcombination.FPrj=2 is the estimated
probabilityof endingPhase I withapprovalsubjectto conditions.Prj._3is the estimatedprobability of an in-depthPhase
IIinvestigation.Otherdeterminantsof CARare DealValue(in billionsof dollars),TenderOffer(a dummyvariabletaking
the valueone ifthe combinationis a publicoffering),Cash Offer(a dummyvariabletakingthe value 1 ifthe combinationis
100%cash), StockOffer(a dummyvariabletakingthe value 1 ifthe combinationis 100%stock),Rumor(a dummyvariable
takingthe value 1 iftherehave been rumorsin the financialpress duringthe six monthsprecedingthe combination),and
BidderPast Performance(the accumulatedbidderperformanceduringthe estimationperiod). The truncatedmodel is
estimatedby maximumlikelihoodand a is the estimatedstandarddeviationof the disturbances The t-valuesand p-
values are obtainedfroma bootstrapprocedure.Samplesize is 348 in bothpanels.
In panel A, the OLS estimation, the two interventionvariables, the prob-

ability of being authorizedsubject to conditions (Prj=2) and the probabilityof
being subjectedto an in-depthinvestigation(Prj=3), have significantpositive coef-
ficients. This suggeststhatinvestorstakeinto accountthe likelihoodof regulatory
interventionwhen evaluatingproposedbusiness combinations.The impact of an
in-depthinvestigationis the more significantof the two effects but its coefficient
is slightly smaller. The positive impact of these probabilitiesmight at first seem
surprisingsince they signify moreprobableregulatoryintervention;butremember
thatmost interventionsend with approval,even afterPhase II, andan intervention
probablysignals a belief by the regulatoryauthoritiesthatconsiderablevalue is to
be createdby the proposedcombination.In Table4, we showedthatauthorization
subjectto conditionsafterPhase I is actuallygood news, even betterthanoutright
authorization.The same figure showed that going into a Phase II investigation
is bad news, but this is still consistent with the positive effect of the probabil-
ity of In-DepthInvestigation(Prj=3) in Table9 since a higherex ante probability
implies more value creation (not counting the costs of intervention). If we had
been able to uncoverdeterminantsof wealth creationalone, the marginalimpact
of a Phase II investigationshouldhave been negative.But the positive coefficient
on(Prj=3) shows thatthe investigationhas incrementalinformationcontentabout
wealth creation,which dominatesthe negativeaspect of regulatoryintervention.
The existence of previousrumorshas a negativeand (almost) significantim-
pact. When the marketanticipatesthe combination,part of the value creation
is alreadyincorporatedin prices before the official announcement.Stock Offer
combinationscreateless value. This is a well-knownresultin the M&A literature
(see, e.g., Travlos(1987)). Paymentin stock is supposedlya signal of overvalu-
ation. TenderOffer creates more value, a well-known result. Lastly, the size of
the combination(Deal Value) has a negative and fairly significantimpact on the
value creation.In percentagereturnterms,large deals createless value.
Are these resultsrobustto self-selectivity bias? Panel B of Table9 attempts
to answer this question. The coefficients of Prj=2and Prj=3remainpositive and
retaintheirsignificance.Deal Valuekeeps its negativecoefficientbut dropsin sig-
nificance. TenderOfferkeeps its positive sign and Stock Offerkeeps its negative
sign but neitherremainssignificant. Rumordropsfrom marginallysignificantto
insignificant.Cash Offer has an insignificantcoefficientin both panels. We con-
clude that standardCAR results should be interpretedwith care, at least in the
context of voluntarycorporateevents decided by economically motivatedman-
agers (see Eckbo et al. (1990)). Some apparentlyimportantdeterminantsof CAR
can vanishwhen truncatedregressionis employed.
VII. RobustnessChecks
We have alreadychecked the sensitivityof CAAR estimationto the method
used for establishinga normalreturn(using the constantmean return,the simple
marketmodel, and the Scholes and Williams (1977) specification).We have also
examinedsensitivitycurrencydenomination(local vs. U.S. dollar)andpriceindex
(local marketvs. a global index (see Section V.B)). In this section, we present
some additionalchecks of robustnessagainstotherpotentialproblems.
TABLE10
Checks of Robustness
RelativeDate
-5 -4 -3 -2 -1 0 1 2 3 4 5
PanelA. Arethe ResultsRobustto the BidderPriceRun-Up?
MarketModel,EstimatedIntercept(N = 1535)
CAAR(%) -0.09 -0.14 -0.27 -0.19 0.46 0.91 0.85 1.46 0.73 0.48 1.05
p-value 0.30 0.14 0.03 0.33 0.00 0.00 0.00 0.04 0 00 0.00 0.01
CAPMwithRisklessRate(N = 1535)
CAAR(%) -0.09 -0.14 -0.26 -0.19 0.47 0.92 0.86 1.47 0.74 0.49 1.06
p-value 0.26 0.15 0.03 0.24 0.00 0.00 0.00 0.05 0.00 0.01 0.01
PanelB. Arethe ResultsRobustto QuotationSuspensions?
WithQuotationSuspensions(N = 267 combinations)
CAAR(%) -0.02 -0.16 -0.30 -0.20 0.59 0.89 0.80 0.64 0.72 0.39 0.39
p-value 0.63 0 22 0.08 0.40 0.00 0.00 0.00 0.00 0.00 0.01 0.02
WithoutQuotationSuspensions(N = 244 Combinations)
CAAR(%) -0.01 -0.11 -0.28 -0.15 0.64 0.92 0.79 0.62 0.74 0.37 0.34
p-value 0.44 0.39 0.10 0.71 0.00 0.00 0.00 0 00 0 00 0 02 0 02
PanelC. Arethe ResultsRobustto EventClustering?
NotAccountingforEventClustenring(N = 1535)
CAAR(%) -0.09 -0.14 -0.27 -0.19 0.46 0.91 0.85 1.46 0.73 0.48 1.05
p-value 0 27 0.14 0.05 0.30 0.00 0.00 0.00 0.07 0.00 0.00 0.01
TakingAccountof Clustering(N = 1535)
CAAR(%) -0.09 -0.14 -0.27 -0.19 0.46 0.91 0.85 1.46 0.73 0.48 1.05
p-value 0 23 0.02 0.00 0.18 0.00 0.00 0.00 0.00 0.00 0.00 0.00
PanelA examineswhetherbidderpriceincreases beforethe business combinationaffectthe resultsby biasingthe inter-
cept of the marketmodel. Panel B presents resultsobtainedwithand withoutcases wherethere has been a quotation
suspension. PanelC exploresthe potentialbias thatpartialevent clusteringcould generateby comparingbootstrapped
p-valueswithand withoutevent clustering.
A. Bidders'PriceRun-Up
Previousliteraturehas found biddersgenerallyexperienceabnormallygood
returnsbefore the announcementof a proposedcombination.This could bias the
interceptof the simple marketmodel. To check the robustnessof our previousre-
sults to this potentialproblem,we replacethe estimatedinterceptby the risk-free
ratemultipliedby 1 - /3. Ourproxyfor the risk-freerateis the U.K. Cash Deposit
U.S.$ one-monthrate. The MSCIWorldPriceIndexis ourmarketportfolioproxy
here. Table 10, panel A comparesthe resultsfor the 1,535 firmssample. Thereis
virtuallyno difference.
B. Quotation
Suspension
In a significantnumberof cases (23 business combinations),reportedvol-
umes are zero aroundthe event date. We inquiredabout this puzzling circum-
stance with Datastreamand learnedthat the zero volume usually correspondsto
quotationsuspension. To assure this did not influence our results, we reranour
tests withoutthese cases. Table 10, panel B comparesthe results; again, no sig-
nificantdifferencesappear.
C. Clustering
As discussed in Section V.A, event clusteringcan be treatedin two different
ways. If thereis perfectoverlap,one can adoptthe portfolioformationprocedure
introducedby Mandelker(1974) and Jaffe (1974). When the overlapis only par-
tial, Salinger (1992) advocates a joint estimationprocedure. But his procedure
is not well suited to large sample sizes, even with cheap computingpower (see
Section V.A for more aboutthis).
So to evaluatethe potentialimpactof partialoverlap,we have bootstrapped
the initial datamatrixby includingeach observationin the bootstrapsampleonly
if it does not overlapwith anotherobservation.This procedureprovidesbootstrap
samples without any clustering. Table 10, panel C compares the bootstrapp-
values obtainedusing the original procedureand the new procedureexcluding
any event clustering. The slight variationsobservedbetween the two sets of p-
values are not sufficientto raise doubt aboutthe results alreadypresentedin this
paper.
VIII. Summaryand Conclusions

Governmentregulationof business combinationsis becoming an interna-
tional phenomenon.Overthe past decade,for example,regulatorsfromthe Euro-
pean Commissionhave increasinglyintervenedin proposedmergersand acquisi-
tions, even for entirelynon-Europeancombinationsfully approvedby theirhome
countries.EC regulatorshave the powerto block combinationsfromvirtuallyany
countryif the subjectcompaniesdo significantbusiness within Europe. It seems
likely that otherjurisdictionswill reciprocateand some, such as the U.S., have
alreadydone so.
This regulatorytrendposes obvious potentialdifficultiesfor the efficient or-

ganizationof global industry.Imaginethaton some futuredate thereare five sep-
arateregulatoryblocks, each with its own approachto approvingor prohibiting
business arrangements.To the extent thatregulatorsact independently,the prob-
ability of simultaneousapprovalcould be small, even if authorizationis likely
within each single jurisdiction. Some degree of regulatoryharmonizationwill
undoubtedlyarise,but it would be altogetherutopianto anticipateperfectcooper-
ation.
To our knowledge, this paper is the first to present global evidence about
marketreactionsto EC regulatoryevents duringthe period 1990-2000. We first
describe the regulatoryprocess in Europe,which conforms to a strict timetable
and thus allows accuratemeasurementof marketprice reactionto regulatoryde-
cisions. Accordingto currentEC regulatorylaw, only the largerproposedbusi-
ness combinationsare subjectto intervention.Interventionthen proceedsin two
stages. Phase I provides for a preliminaryinvestigationwith four possible out-
comes: not subjectto EC intervention,approval,approvalsubjectto conditions,
and furtherinvestigation.Most investigationsterminatewithoutfurtherinvestiga-
tion. However,a significantnumberof proposalsare subjectedto a morethorough
examination,called Phase II, which terminatesdefinitivelyin approval,approval
subjectto conditions,or prohibition.
We examinethe abnormalmarketprice movementsof 1,535 firms(874 busi-
ness combinations)from 19 countriesas they moved throughthe EC regulatory
process. To estimate observedcumulativeabnormalreturnsand their associated
p-values, we adoptthe Boehmer et al. (1991) approach,which takes account of
event-inducedvariancein returns.We modify this approachto accommodatefirst-
orderauto-correlationof returnsand employ a percentilet bootstrapprocedureto
accountfor non-sphericaldisturbances.Our multivariateestimationcontrolsfor
endogeneitybetween regulatoryinterventionand wealth creation.We also check
whetherself-selectivitybias and event date clusteringhave influencedthe results.
We find clear confirmationthat investors take anticipatedregulatoryinter-
vention into accountwhen consideringa business combination.Observedcumu-
lative abnormalreturnsaroundbusiness combinationannouncementsmust there-
fore be interpretedconditionallywith respectto the probabilityand costs of regu-
lation.
We find that mergers with greaterpromise of value creation attractcloser
scrutinyfromEEC regulators,which is consistentwith theirstatedanti-monopoly
objective. Also, EEC regulatorshave not subjectednon-Europeanfirmsto exten-
sive scrutinymore often than Europeanfirms, which, takenby itself, would also
be consistentwith an anti-monopolymotivation.
However,theirown countryregulatorslikely scrutinizednon-Europeanfirms
priorto considerationby the EEC, so the survivingcombinationsconstitutea less
monopoly-pronesample. This implies that an equal probabilityof intervention
by the EEC is actually biased and perhapsprotectionist. Moreover,when non-
Europeanfirms are subjectedto an in-depthinvestigationby EC regulators,the
marketanticipatesa much higher cost than for Europeanfirms, also suggesting
a protectionistdimensionin Europeanregulatoryactivities arisingfrom a stricter
attitudetowardforeign firmsor from more effective lobbyingby Europeanfirms,

or both.
The results aboutmotivationare mixed. It is possible, of course, that Euro-
pean regulatorssometimes have pristineanti-monopolymotives while their mo-
tives are less laudablein othercases. Furtherresearchis requiredto sort out the
frequencyand extent of these conflictingmotives.
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Roll Et Al. - Market Response To European Regulation of Business Combinations

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Market Response to European Regulation of Business Combinations

Author(s): Nihat Aktas, Eric de Bodt, Richard Roll

*Aktas, aktas@fin.ucl.ac.be, Universit6 Catholique de Louvain, 1 place des Doyens, 1348

Europeanchallenges to the GE/Honeywellmergerwere followed closely in

nouncementinfluencedby anticipationof regulatorycosts? If so, announcement

anticipatedregulatoryactivitieson returns.Section VII presentssome robustness

III. EuropeanControlof Combinations:

mainly on the informationcontainedin the notification.Fourdecisions are possi-

Table 1 provides summaryinformationabout proposed combinationsthat

Another three cases were resolved differently (by referralto an individualEC

is particularlyvaluable. Only firms that operate in category iv representa risk

PanelA. Yearof Notification

9 102 759 4 874

C. Firmsand Cases withAvailableData

notificationsfrom 1990 through2000 inclusive; later cases were mostly incom-

informationleakage. Eleven observationsconstituteour event window,five days

where T is the numberof daily abnormalreturnsaccumulatedin CAR, a 2 is the

To tackle the normalityproblemandto improvethe power of the test, we do

Our first results, shown in graphA of Figure 1, depict cumulativeaverage

GraphA. InitialAnnouncementof Combination,

GraphA plots cumulativeaverageabnormalreturns(CAARs)forallfirmsin the sample aroundthe initialdeal announce-

GraphB of Figure 1 shows the impactof currency(local vs. U.S. dollar)and

C. ReturnEffectsaroundAnnouncementsand DGCDecision Dates

Our bidding firms have significantnegative returnsfrom days -5 through

CAAR is 1.51% (as comparedwith 3.51% in Mulherinand Boone (2000) and

One might have thoughtthis result could be ascribedto systematic differ-

CombinationsEndingin Phase I and PhaseIIProceedings

(see Green (2003), p. 760) where yiis the dependentvariablefor observationi, xi

independentsets of information.This seems at odds with the reality. Represen-

of the bidderevaluatedat the end of the estimationperiod;Target/BidderSize Ra-

5The marginal impact of variable 1X on probability Pr(Decision Type) is an estimate of

about the deal's value, including any expected costs of regulatoryintervention.

Coefficient t-Value p-Value Coefficient t-Value p-Value

Intercept -0.106 -2.247 0.009 -0.582 -2.941 0.006

In panel A, the OLS estimation, the two interventionvariables, the prob-

VIII. Summaryand Conclusions

This regulatorytrendposes obvious potentialdifficultiesfor the efficient or-

attitudetowardforeign firmsor from more effective lobbyingby Europeanfirms,

Malatesta,P. H., and R. Thompson."PartiallyAnticipatedEvents: A Model of Stock Price Reactions

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