Table of Contents

of companies listed on Jakarta Islamic Index in 2004. The
outcome of this research explains that statistically all
variables except DER are significant and have positive
impact on stock price.
Statement of the Problem
The financial statements are a structured financial
representations of the financial position of and the
transaction undertaken by an enterprise. The objective of
general purpose financial statements is to provide
information about the financial position and performance of
an enterprise that is useful to a wide range of users in
making economic decisions. Thus the accounting
information from financial statements (reports) is the most
useful and important to all users especially for the
shareholders or investors in decision making process.
Therefore, this study intends to examine the relationship
between accounting information and shareholders wealth of
the banks involved in the acquisition activities.
Objectives of the Study
The major objective of this research is to find out the
financial factors that could determine the abnormal return
for shareholders‟ of banks in response to their acquisition
deals.
Hypothesis
The following null hypotheses are framed for the present
study:
(a) There is no significant relationship between
liquidity position and abnormal return.
(b) There is no significant relationship between
activity ratio and abnormal return.
(c) There is no significant relationship between
profitability and abnormal return.
(d) There is no significant relationship between interest
income and abnormal return.
Methodology
Sample
A sample of public and private sector banks involved in
acquisition activities during the years between 1996 and
2006 are considered for the study (See Table) Annexure 1.
Period of the Study
The acquisition activities of banks under public and private
sectors during the period from 1999 to 2004 are undertaken.
Data
The present study is relied on secondary data, which are
interim financial reports for three quarters, one event quarter
(quarter accompanying event month) and two quarters
before the event quarter. The daily close share prices of the
acquiring banks as well as BSE 100 index (used as
benchmark) for one year before and one year after the year
of official announcement of the acquisition deal also
collected for the study to calculate abnormal return. The
required data were gathered from PROWESS data base.
Three primary categories of commonly used financial ratios
relating to liquidity, activity and profitability have been used
in the present research. Under these three primary
categories, eleven financial ratios, namely Current ratio
(CR), Quick ratio (QR), Cash ratio (CSHRAT), Working
capital turnover ratio (WCTO), Asset turnover ratio
(ASTTO), Fixed asset turnover ratio (FATO), Net Interest
Income (NIMRGN), Net profit after tax (NPAT), Return on
net worth (RONW) and Return on capital employed
(ROCE) are considered. As there is correlation among
selected ratios under each category as well as high
correlation among the ratios across categories is likely,
using these ratios would lead to multi-collinearity problem
in the regression analysis. In order to avoid these problems,
principal method of factor analysis with varimax rotation is
used to group the correlated ratios into a common factor.
The newly extracted financial factors are then used as the
independent variables in the regression analysis.
Design
The abnormal return on the day of official announcement of
acquisition deals of the public and private banks is
calculated using event study approach. The event study
approach is adopted to eliminate the market influence from
the rate of return on a security during the event time period.
The abnormal returns for each public and private sector
banks are first calculated using market model. For
calculating estimated return, the market model is used
because it is widely used standard method for studies of this
type. This model uses the following formula to compute
the abnormal returns:
ARjt = Rjt – (a + bjRmt)
where Rmt is the value-weighted return on the market on
day t.
After first finding the estimates of the parameters (a, b) for
each bank (j) during a control period (estimation period)
comprised of non-event day of -120 through +60 excluding
20 days before and after the official release of acquisition
deal, the market model was used to calculated the expected
return. The abnormal returns on stock j on day t, ARjt, (here
on event day) could then be found as the difference between
the actual daily return (Rjt) and the expected (estimated)
daily return (a + bRmt).
Statistical Tool
To find out the relationship of liquidity, activity and
profitability of the acquiring banks on abnormal return to
shareholders in response to their acquisition deals, multiple
regression model is used. The specification of the
regression model is:
Where,
is the Abnormal return on the event day considered as
dependent variable in the regression model.
… are the explanatory variables (here financial factors)
…. are the estimated coefficients
„e‟ is the error term
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