The (Missing) Relation Between Announcement Returns and Value Creation

Cumulative abnormal returns (CAR) computed during acquisition announcements are widely considered to be market-based assessments of expected value creation. We show that announcement returns do not correlate with commonly used and new measures of ex-post acquisition outcomes. A simple characteristics model using standard information known at announcement can predict outcomes reasonably well, and CAR fails even to capture the prediction from this model. A likely reason is that, because acquisition decisions are endogenous, CAR conveys information about the NPV of the deal as well as the event that triggered the deal announcement. We find that CAR variance is too high to be explained by NPV variance alone, suggesting that other non-NPV information related to this trigger dominates. We conclude that CAR is an unreliable measure of expected value creation.

Keywords: Announcement returns, mergers, acquisitions, value creation, deal quality, market efficiency

JEL Classification: G02, G14, G32, G34

Suggested Citation: Suggested Citation

Ben-David, Itzhak and Bhattacharya, Utpal and Huang, Ruidi and Jacobsen, Stacey E., The (Missing) Relation Between Announcement Returns and Value Creation (April 8, 2024). Fisher College of Business Working Paper No. 2020-3-018, Charles A. Dice Center Working Paper No. 2020-18, HKUST Business School Research Paper No. 2022-078, Available at SSRN: https://ssrn.com/abstract=3664087 or http://dx.doi.org/10.2139/ssrn.3664087