The Post-Deal Returns of Acquiring Firms: Evidence of an Investment-based Explanation
43 Pages Posted: 16 Mar 2011 Last revised: 7 Jun 2013
Date Written: May 31, 2013
This paper examines an investment-based explanation for the poor post-deal returns associated with acquisitions. Using a large sample of U.S. firms, we find that the post-deal abnormal stock returns, operating returns, and analyst forecast errors associated with acquisitions are similar to those of other firms that grow organically at the same rate. Moreover, acquisitions that are not associated with balance sheet expansion do not experience poor returns. 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. Our evidence is most consistent with a model where investors systematically and symmetrically overcapitalize acquired and organic growth. The findings reframe our understanding of both the merger and asset growth literature.
Keywords: Takeovers, firm valuation, market efficiency, asset growth
JEL Classification: G14, G34
Suggested Citation: Suggested Citation