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

See all articles by Christa H. S. Bouwman

Christa H. S. Bouwman

Texas A&M University; Wharton Financial Institutions Center

Kathleen P. Fuller

University of Mississippi - School of Business Administration

Amrita Nain

University of Iowa - Henry B. Tippie College of Business

Date Written: May 6, 2003

Abstract

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

Bouwman, Christa H. S. and Petrie Fuller, Kathleen and Nain, Amrita, The Performance of Stock-Price Driven Acquisitions (Published as 'Market Valuation and Acquisition Quality: Empirical Evidence') (May 6, 2003). Review of Financial Studies, Vol. 22, No. 2, 2009. Available at SSRN: https://ssrn.com/abstract=404760

Christa H. S. Bouwman

Texas A&M University ( email )

360H Wehner
College Station, TX 77843-4218
United States
979-845-3514 (Phone)
979-845-3514 (Fax)

HOME PAGE: http://people.tamu.edu/~cbouwman/

Wharton Financial Institutions Center

2306 Steinberg Hall-Dietrich Hall
3620 Locust Walk
Philadelphia, PA 19104
United States

Kathleen Petrie Fuller

University of Mississippi - School of Business Administration ( email )

PO Box 3986
Oxford, MS 38677
United States

Amrita Nain (Contact Author)

University of Iowa - Henry B. Tippie College of Business ( email )

Acquisitions
5020 Main Library
Iowa City, IA 52242-1000
United States

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