(the day of announcement) to one month after the announcement.

#### 4.3. An Example: Merger of Two Pharmaceutical Firms, Sankyo and Daiichi

On 21 February 2005, Sankyo and Daiichi, both among the largest ten pharmaceutical manufacturers in Japan, announced their plan to merge to create Daiichi Sankyo. Figure 1 shows the movement of CAR of these two firms and of two rival pharmaceutical firms of similar sizes, Eisai and Chugai.

On the day of merger announcement, both Sankyo and Daiichi yielded CAR of about 0.04, implying that their share price increase was 4 percent point higher than the one that would have occurred were it not for the announcement. It is often the case that the news of a merger (or other reorganization plans) produces excitement and certain optimism in the stock market, raising the share prices of the merger partners. Such optimism, however, tends to fade soon and be replaced with cool-headed calculation. Indeed, as shown in Figure 1, CARs of the two companies soon decline and turn to negative in Day 3 (Daiichi) or Day 5 (Sankyo). Daiichi's CAR then bounced back and stay positive for a few days but eventually turns negative again. Sankyo's CAR stays negative. By contrast, even though on the announcement day the CARs of the two rival companies, Eisai and Chugai, were smaller than those of Daiichi and Sankyo, they got to overwhelm the latter after several days and then stayed positive.

The result suggests that, except for the excited reaction on the day of announcement, the stock market tends not to expect positive long-run gains to merging firms from the merger but do expect such gains to the competitors. This result agrees with the theoretical conclusion of “merger paradox” discussed in Section 2 and implies that the stock market was expecting that the merging firms would not be able to produce efficiency gains large enough to offset the paradox.

#### 4.4. Summary of the Results from 15 Cases

We show the number of cases with positive and negative CAR in Table 5, with the estimated CAR of individual merger firms given in Appendix Table. As in the case of Daiichi Sankyo, CAR is positive on the day of announcement (Day 0) in 25 (78%) of the 32 firms in 16 merger cases; however, this proportion gradually declines. More importantly, the table shows that whereas 16 of the 25 positive CARs on Day 0 were statistically significant, they all become insignificant by Day 7. More CARs are still positive than negative on Day 7; however, only two CARs are statistically significant and both of these are actually negative.

In that there were more cases of positive CAR than negative CAR throughout the seven days, this event-study result on share prices is somewhat more favorable to the expected performance of mergers than that with the profit rate discussed in Section 3, in which the proportion of positive results was roughly on a par with that of negative results. Still, the lack of significance in the majority of cases (except the day of announcement) gives only a limited support, if any, to the hypothesis of investors' anticipating long-run efficiency gains from the merger.

### 5. Effects on Innovation

#### 5.1. The Motivation

In announcing the merger plan to the press and the investors, the firms almost always proclaim that the merger will improve efficiency, including efficiency in R&D activities.