The Revaluation of Industry Assets Following Acquisitions of Public or Private Targets
57 Pages Posted: 1 May 2017 Last revised: 12 Jul 2019
Date Written: July 11, 2019
This paper documents positive revaluations of industry peers following horizontal acquisitions of public targets, but negative revaluations when targets are privately owned. Because informed managers opportunistically purchase undervalued public firms, but favor private firms when similar public firms are overvalued, the ownership of acquisition targets conveys information about industry-wide misvaluation, triggering predictable revaluations of peers. The “revaluation spread” observed across public and private targets predicts future industry returns, is larger when valuation appears further away from fundamentals, and varies with proxies for overall market misvaluation. In contrast, the revaluation spread is largely unrelated to peers’ fundamentals and the possible real implications of horizontal transactions. Our findings suggest that an active market for real assets fosters the ability of stock prices to reflect fundamentals accurately.
Keywords: Merger & acquisitions; Information; Revaluation; Stock returns; Peers; Misvaluation
JEL Classification: G34
Suggested Citation: Suggested Citation