Why Do Small Stock Acquirers Underperform in the Long-Term?

37 Pages Posted: 26 Mar 2008

See all articles by Itzhak Ben-David

Itzhak Ben-David

Ohio State University (OSU) - Department of Finance; National Bureau of Economic Research (NBER)

Darren T. Roulstone

Ohio State University (OSU) - Fisher College of Business

Date Written: March 18, 2008

Abstract

We study the long-term performance of acquirers with respect to their size and method of payment. Our results shed new light on why stock acquirers appear to underperform cash acquirers in some studies. We present two main results. First, there is no economically or statistically significant difference between the performance of large stock acquirers and large cash acquirers. Conversely, small stock acquirers underperform small cash acquirers by about 12 in the first 12 months following mergers and up to 18 in the first 36 months. Hence, the previously documented underperformance of stock acquirers is due to the underperformance of small stock acquirers exclusively. Second, we find evidence that this underperformance is likely caused by mispricing related to limits to arbitrage: measures of short-selling constraints, illiquidity, and information uncertainty proxies subsume the size effect in our tests. We find no evidence that underperformance is related to acquirer-target integration problems or to earnings management prior to mergers.

Keywords: Limits to arbitrage, Mergers, Acquirer underperformance, Overvaluation, Stock market driven acquisitions, Stock mergers, Cash mergers, Small stocks, Market inefficiency, Managers,Long term event study,Market timing,Incentives,Overvalued stock,Empire building,Agency costs,Behavioral Corporate Finance

JEL Classification: G30, G31, G32, G35

Suggested Citation

Ben-David, Itzhak and Roulstone, Darren T., Why Do Small Stock Acquirers Underperform in the Long-Term? (March 18, 2008). AFA 2009 San Francisco Meetings Paper. Available at SSRN: https://ssrn.com/abstract=1108418 or http://dx.doi.org/10.2139/ssrn.1108418

Itzhak Ben-David (Contact Author)

Ohio State University (OSU) - Department of Finance ( email )

2100 Neil Avenue
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Columbus, OH 43210-1144
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773 988 1353 (Phone)

HOME PAGE: http://fisher.osu.edu/fin/faculty/Ben-David/index.htm

National Bureau of Economic Research (NBER) ( email )

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Cambridge, MA 02138
United States

HOME PAGE: http://fisher.osu.edu/fin/faculty/Ben-David/

Darren T. Roulstone

Ohio State University (OSU) - Fisher College of Business ( email )

2100 Neil Avenue
Columbus, OH 43210-1144
United States

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