Market Misreaction? Leverage and Mergers and Acquisitions

Abstract

Using a large database of mergers and acquisitions (M&As) announced from 2010 through 2017, we examine the effects of capital ratio (leverage) on the announcement period stock price reaction as well as on longer-term stock returns and performance, for banks, and compare with non-banks. We find that, for banks, a lower capital ratio of acquirers at the time of the announcement of the M&A is significantly associated with negative announcement-period abnormal returns. However, for these banks, the longer-run abnormal returns and performance are positive. The opposite is true for non-bank M&A announcements: higher equity ratios (lower leverage) of acquirers as at the time of announcement, is significantly associated with negative announcement period abnormal returns. But, for such non-banks, the longer-run abnormal returns and performance are positive. This shows that the market may mis-react, on average, to both bank and non-bank M&A announcements, based on the acquirer leverage at the time of announcement.

Keywords: Mergers and Acquisitions, M&A, Acquirer Leverage, Capital Ratio, Equity Ratio, Bank M&As, Non-bank M&As, Announcement Period Returns, Post-announcement Returns, Post M&A Performance

JEL Classification: G34