Winning by Losing: Evidence on the Long-Run Effects of Mergers
58 Pages Posted: 19 Mar 2011 Last revised: 24 Apr 2012
Date Written: April 15, 2012
Do acquirors profit from acquisitions, or do acquiring CEOs overbid and destroy shareholder value? We present a novel approach to estimating the long-run abnormal returns to mergers exploiting detailed data on merger contests. In the sample of close bidding contests, we use the loser’s post-merger performance to construct the counterfactual performance of the winner had he not won the contest. We find that bidder returns are closely aligned in the years before the contest, but diverge afterwards: Winners underperform losers by 50 percent over the following three years. Existing methodologies, including announcement effects, fail to capture the acquirors’ underperformance.
Keywords: Mergers, Acquisitions, Misvaluation, Matching, Counterfactual
JEL Classification: G34, G14, D03
Suggested Citation: Suggested Citation