Deconstructing Mergers and Acquisitions and Corporate Scandals in Pharmaceutical Industry

This study examines the role of mergers and acquisitions in offsetting adverse market reaction to corporate scandals and litigation on share price and therefore, shareholder wealth creation for pharmaceutical companies. Using a sample of 10 major pharmaceutical companies with financial data from 2004-2013, we find that M&A significantly reduce the decline in share price of firms facing corporate scandals. The results indicate that M&A are used by pharmaceutical firms as a strategic tool to offset loss in investor confidence and public image following a corporate scandal, as proxied by significantly positive cumulative abnormal returns (CARs) around M&A event windows. Our results are significant and consistent across all specifications