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Effects of merger and foreign alliance: An event study of the Canadian airline industry

By Anming Zhang and Derek Aldridge

Abstract

This paper uses an event study methodology to investigate how investors have reacted to new information (events) affecting merger/foreign alliance possibilities in the Canadian airline industry for the 1992-1993 period. We find that news regarding the merger/foreign alliance possibilities had a significant impact on the stock prices of Air Canada and Canadian Airlines International (CAI). Furthermore, shareholders of both airlines preferred an alliance between CAI and American Airlines to a merger between the two domestic carriers. However, the preference does not necessarily suggest an industrial structure based interpretation, with investors expecting greater profits under a duopoly with foreign alliance partners than under a likely domestic monopoly.

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