Are Acquisitions Unique? Evidence of the Pedestrian Nature of Post-Merger Returns

Abstract

This paper compares firm stock returns associated with acquired and organic (non-acquired) asset growth. Using a large sample of U.S. firms, we show that the poor post-deal returns that have been associated with acquisitions are not unique but similar to the returns of other firms that grow organically at the same rate. This observation calls into question a large existing literature by asserting that the distinguishing characteristic associated with acquiring firms is simply their tendency to expand their balance sheet. Tests using analyst forecast errors and operating returns provide similar patterns. By proposing that investors systematically and symmetrically overcapitalize acquired and organic growth, the findings reframe our understanding of both the merger and asset growth literature.

Keywords: takeover returns, asset growth, long-run returns

JEL Classification: G14, G34