Information Uncertainty and Acquirer Wealth Losses
48 Pages Posted: 21 Nov 2007 Last revised: 24 Feb 2011
Date Written: February 22, 2011
A large body of literature demonstrates that acquisitions are on average value-destroying for the acquirer. We investigate whether the change in the acquirer’s information uncertainty contributes to acquirer wealth losses. Information uncertainty affects the discount rate (the cost of capital), which in turn influences stock price. Our results indicate that acquisitions lead to increases in information uncertainty, as proxied by analysts’ earnings forecast dispersion. We also find that the change in information uncertainty is negatively related to acquirer long-term stock performance, after controlling for the acquirer’s fundamentals. Taken together, the evidence is consistent with the conclusion that increases in information uncertainty resulting from acquisitions contribute to acquirer post-acquisition wealth losses.
Keywords: Merger, acquisition, cost of capital, uncertainty, return
JEL Classification: G14, G24, G29, G34, D82
Suggested Citation: Suggested Citation