The Performance of Stock-Price Driven Acquisitions (Published as 'Market Valuation and Acquisition Quality: Empirical Evidence')
Review of Financial Studies, Vol. 22, No. 2, 2009
43 Pages Posted: 4 Jun 2003 Last revised: 15 Jul 2013
Date Written: May 6, 2003
Existing literature has shown that periods of high merger activity are correlated with high market valuations. Significantly more acquisitions occur when stock markets are booming than when markets are depressed. Using methodologies robust to recent criticism we show that viewed through an ex-post-performance lens, acquirers buying during periods of low stock-market-valuation appear to be making better acquisitions than those buying during high stock-market-valuation periods. We find that the market welcomes acquisition announcements during high market-valuation periods but is at best indifferent to acquisition announcements during low market-valuation periods. In the long run however, fortunes are reversed. Acquisitions initiated during high market-valuation periods earn negative abnormal returns while acquisitions initiated during low market-valuation periods earn positive abnormal returns. We suggest that acquirers make worse decisions during periods of high market-valuation possibly due to a combination of managerial hubris and market irrationality and that the market learns about the true quality of the acquisition decisions gradually.
JEL Classification: G34, G12, M41
Suggested Citation: Suggested Citation