Winning by Losing: Evidence on the Long-Run Effects of Mergers

64 Pages Posted: 28 Apr 2012

See all articles by Ulrike Malmendier

Ulrike Malmendier

University of California, Berkeley - Department of Economics; University of California, Berkeley - Haas School of Business; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR); Institute for the Study of Labor (IZA)

Enrico Moretti

University of California, Berkeley - Department of Economics; National Bureau of Economic Research (NBER); IZA Institute of Labor Economics

Florian S. Peters

University of Amsterdam

Multiple version iconThere are 3 versions of this paper

Date Written: April 2012

Abstract

Do acquirors profit from acquisitions, or do CEOs overbid and destroy shareholder value? We propose a novel approach to measuring the long-run returns to mergers. In a new data set of close bidding contests we use losers' post-merger performance to construct the counterfactual performance of winners had they not won the contest. We find that winner and loser returns are closely comoving in the years before the contest, providing support for our approach to identification. After the merger, they diverge: Winners underperform losers by 24 percent over the following three years in the U.S. sample, and by 14 percent in the international sample. Merger characteristics commonly associated with underperformance, such as acquiror size, acquiror Q, or stock financing do not explain the underperformance. Instead, the large underperformance of cash-financed mergers and their post-merger increase in leverage is consistent with behavioral and practitioner views on the determinants of merger outcomes. We also show that commonly used methodologies such as the announcement effect fail to identify the acquiror underperformance.

Suggested Citation

Malmendier, Ulrike and Moretti, Enrico and Peters, Florian S., Winning by Losing: Evidence on the Long-Run Effects of Mergers (April 2012). NBER Working Paper No. w18024, Available at SSRN: https://ssrn.com/abstract=2047295

Ulrike Malmendier (Contact Author)

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Enrico Moretti

University of California, Berkeley - Department of Economics ( email )

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Berkeley, CA 94720-3880
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National Bureau of Economic Research (NBER)

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IZA Institute of Labor Economics

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Florian S. Peters

University of Amsterdam ( email )

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Amsterdam, 1018 TW
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