Which Relatedness Drives Synergies Creation? Evidence from Stock Return Correlations Using Machine-learning Tools

66 Pages Posted: 1 Oct 2018 Last revised: 2 Oct 2020

See all articles by Tingting Liu

Tingting Liu

Iowa State University

Zhongjin Lu

University of Georgia - Department of Finance

Tao Shu

The Chinese University of Hong Kong, Shenzhen; Shenzhen Finance Institute

Fengrong Wei

Georgia Institute of Technology

Date Written: March 18, 2019

Abstract

We find that bidder-target stock return correlations positively predict merger synergies, and the predictive power is enhanced when we focus more on idiosyncratic correlations. A measure of idiosyncratic correlation (IDC) between bidder and target firms that controls for all other stocks, constructed using machine learning tools, is the strongest predictor of merger synergies among the correlation measures. Case analyses show that IDC captures bidder and target firms’ unique product relatedness. Using IDC and the existing measures of product relatedness, we find that, consistent with theory, unique relatedness has a much stronger effect on merger synergies than general relatedness.

Keywords: Distinct Relatedness, Synergies, Mergers and Acquisitions, Conditional Dependence, Lasso, Stock return comovement

JEL Classification: G34, G30

Suggested Citation

Liu, Tingting and Lu, Zhongjin and Shu, Tao and Wei, Fengrong, Which Relatedness Drives Synergies Creation? Evidence from Stock Return Correlations Using Machine-learning Tools (March 18, 2019). Available at SSRN: https://ssrn.com/abstract=3257994 or http://dx.doi.org/10.2139/ssrn.3257994

Tingting Liu

Iowa State University ( email )

2330 Gerdin Business Building
Ames, IA 50011
United States

Zhongjin Lu

University of Georgia - Department of Finance ( email )

Terry College of Business
Athens, GA 30602-6254
United States

Tao Shu (Contact Author)

The Chinese University of Hong Kong, Shenzhen ( email )

Shenzhen Finance Institute ( email )

Fengrong Wei

Georgia Institute of Technology ( email )

Atlanta, GA 30332
United States

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