Long-Run Volatility and Risk around Mergers and Acquisitions

Abstract:     
In this paper, we study the changes in volatility and risk of acquirers around mergers and acquisitions (M&As) and seek to understand the determinants of those changes. We find that there is a strong run-up in volatility and risk beginning four years before the merger. This pre-merger run-up is consistent with the view that M&As are a response to industry shocks as documented by Mitchell and Mulherin (1996). We find that for a period of about one year after the merger the cross-sectional average of the volatility measures (total, systematic and idiosyncratic) continue to increase. Beyond one year the systematic volatility and beta begin to decline but idiosyncratic volatility does not. The post-merger volatility pattern is consistent with the notion that the risk of integration of the acquirer and the target firms gets resolved over time. Interestingly, there is no difference between the volatility patterns of intra and inter industry mergers. Our findings have important implications for understanding several issues, including the announcement wealth effect of mergers, changes in the diversification discount, and the long-run underperformance of acquirers in M&A transactions.

Keywords: Mergers and acquisitions, volatility, risk, diversification, long-run underperformance

JEL Classification: G12, G34

working papers series