Value Creation Estimates Beyond Announcement Returns: Mega-Mergers versus Other Mergers

Abstract

Much of the literature considers only short-term acquirer announcement returns when analyzing which mergers create value for the acquirer. However, announcement returns combine information about value creation because of the merger and a revaluation of the acquirer’s stand-alone value. We use three methods to infer revaluation-free value creation directly because of the merger. We find that despite their negative average announcement returns, acquisitions of public targets typically do not destroy value and, by most measures, create value. Only mega-mergers, the top 1% of mergers in absolute transaction value, destroy value for the acquirer. In contrast, non-mega-mergers create value for the acquirer. We also show that the value destruction in mega-mergers is driven by managerial motives and weak corporate governance.

Keywords: Mergers, Value Creation, Announcement Returns, Corporate Governance

JEL Classification: G34