The Post-Deal Returns of Acquiring Firms: Evidence of an Investment-based Explanation

43 Pages Posted: 16 Mar 2011 Last revised: 7 Jun 2013

See all articles by Sandra Mortal

Sandra Mortal

University of Alabama - Culverhouse College of Commerce & Business Administration

Michael J. Schill

University of Virginia - Darden School of Business

Multiple version iconThere are 2 versions of this paper

Date Written: May 31, 2013

Abstract

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

Mortal, Sandra and Schill, Michael J., The Post-Deal Returns of Acquiring Firms: Evidence of an Investment-based Explanation (May 31, 2013). Available at SSRN: https://ssrn.com/abstract=1785303 or http://dx.doi.org/10.2139/ssrn.1785303

Sandra Mortal

University of Alabama - Culverhouse College of Commerce & Business Administration ( email )

Culverhouse College of Business
Tuscaloosa, AL 35487-0223
United States

Michael J. Schill (Contact Author)

University of Virginia - Darden School of Business ( email )

P.O. Box 6550
Charlottesville, VA 22906-6550
United States
434-924-4071 (Phone)
434-243-7676 (Fax)

HOME PAGE: http://www.darden.virginia.edu/faculty/schill.htm

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