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Stock Returns in Mergers and Acquisitions

44 Pages Posted: 3 Mar 2006  

Erwan Morellec

Ecole Polytechnique Fédérale de Lausanne; Ecole Polytechnique Fédérale de Lausanne - Ecole Polytechnique Fédérale de Lausanne

Dirk Hackbarth

Boston University Questrom School of Business

Date Written: October 2006

Abstract

This paper develops a real options framework to analyze the behavior of stock returns in mergers and acquisitions. In this framework, the timing and terms of takeovers are endogenous and result from value-maximizing decisions. The implications of the model for abnormal announcement returns are consistent with the available empirical evidence. In addition, the model generates new predictions regarding the dynamics of firm-level betas for the time period surrounding control transactions. Using a sample of 1090 takeovers of publicly traded US firms between 1985 and 2002, we present new evidence on the dynamics of firm-level betas, which is strongly supportive of the model's predictions.

Keywords: takeovers, real options, stock returns, firm-level betas

JEL Classification: G13, G14, G31, G34

Suggested Citation

Morellec, Erwan and Hackbarth, Dirk, Stock Returns in Mergers and Acquisitions (October 2006). Swiss Finance Institute Research Paper No. 06-1; EFA 2006 Zurich Meetings Paper. Available at SSRN: https://ssrn.com/abstract=886714 or http://dx.doi.org/10.2139/ssrn.886714

Erwan Morellec (Contact Author)

Ecole Polytechnique Fédérale de Lausanne ( email )

College of Management
Extranef Quartier UNIL-Dorigny
1015 Lausanne, CH-1015
Switzerland

HOME PAGE: http://sfi.epfl.ch/

Ecole Polytechnique Fédérale de Lausanne - Ecole Polytechnique Fédérale de Lausanne ( email )

c/o University of Geneve
40, Bd du Pont-d'Arve
1211 Geneva, CH-6900
Switzerland

Dirk Hackbarth

Boston University Questrom School of Business ( email )

Department of Finance
595 Commonwealth Avenue
Boston, MA 02215
United States
(617) 358-4206 (Phone)
(617) 353-6667 (Fax)

HOME PAGE: http://people.bu.edu/dhackbar/

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