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Stock Returns in Mergers and Acquisitions

Dirk Hackbarth
University of Illinois at Urbana-Champaign

Erwan Morellec
Swiss Finance Institute; Swiss Federal Institute of Technology Lausanne


October 2006

Swiss Finance Institute Research Paper No. 06-1
EFA 2006 Zurich Meetings Paper

Abstract:     
This paper develops a real options framework to analyze the behavior of stock returns in mergers and acquisitions. In this framework, the timing and terms of takeovers are endogenous and result from value-maximizing decisions. The implications of the model for abnormal announcement returns are consistent with the available empirical evidence. In addition, the model generates new predictions regarding the dynamics of firm-level betas for the time period surrounding control transactions. Using a sample of 1090 takeovers of publicly traded US firms between 1985 and 2002, we present new evidence on the dynamics of firm-level betas, which is strongly supportive of the model's predictions.

Keywords: takeovers, real options, stock returns, firm-level betas

JEL Classifications: G13, G14, G31, G34

Working Paper Series

Date posted: March 03, 2006 ; Last revised: November 07, 2006

Suggested Citation

Morellec, Erwan and Hackbarth, Dirk, Stock Returns in Mergers and Acquisitions (October 2006). Swiss Finance Institute Research Paper No. 06-1; EFA 2006 Zurich Meetings Paper. Available at SSRN: http://ssrn.com/abstract=886714


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Contact Information

Erwan Morellec (Contact Author)
Swiss Finance Institute
c/o University of Geneve
40, Bd du Pont-d'Arve
1211 Geneva CH-6900
Switzerland
Swiss Federal Institute of Technology Lausanne ( email )
Station 5
Odyssea 3.04
1015 Lausanne CH-1015
Switzerland
HOME PAGE: http://ccf.epfl.ch/morellec
Dirk Hackbarth
University of Illinois at Urbana-Champaign ( email )
340 Wohlers Hall, MC-706
1206 South Sixth Street
Champaign, IL 61820
United States
(217) 333-7343 (Phone)
(217) 244-3102 (Fax)
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