The (Missing) Relation between Announcement Returns and Value Creation

Abstract

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.