Abstract:
In this paper, we investigate whether motives behind Mergers and Acquisitions explains short
run cross sectional return in emerging markets. We use a sample of thirty (30) listed firms in
Eastern Africa securities markets involved in mergers and acquisitions for a period of twenty
(20) years between 1996 and 2015. The study was guided by the Hubris theory, Free Cash
Flow hypothesis and overvaluation Theory. Event study approach was employed to compute
cumulative abnormal return. The predictors were tested for linearity using graphical analysis,
multicollinearity using Variance Inflation Factors (VIF) , independence using Durbin Watson d
Statistics and the response variable for normality using Kolmogorov- Smirnova and Shapiro
Wilk Labda statistics. Further, the model residuals were tested for homogeneity using Breusch-
Pagan Chi- test. Using cross sectional regression analysis, we find a significant positive relationship between firm size and both Cumulative Abnormal Return (CAR) and Tobin Q, our
proxy for firm value. In line with other studies, we document a negative association between free
cash flow and cumulative abnormal return supporting the free cash flow hypothesis. In this
respect our findings suggest that firm size, Tobin Q and free cash flow significantly explains
cumulative abnormal returns in the short run among firms in Eastern Africa Securities Markets.