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

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.