Endogenous mergers: bidder momentum and market reaction
AbstractRecent empirical studies on stock misvaluation as a possible determinant of mergers are inconclusive concerning the central hypothesis that over (under) valuation is negatively (positively) associated with merger announcement returns in stock mergers, but not in cash mergers. We provide empirical support for this hypothesis. In contrast to prior research, we employ a two-stage model to account for endogenous mergers and suggest an alternative specification of misvaluation based on an asset-pricing model (bidder momentum). In the first stage, we specify panel logit models to predict US mergers from 1981 to 2003 and find that bidder momentum triggers stock mergers, but not cash mergers. In the second stage, we regress cumulated abnormal returns on merger probabilities to control for the endogeneity of mergers. This reveals a lower market response for stock mergers compared to cash mergers, which we identify as market correction of misvalued acquirers.
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Bibliographic InfoArticle provided by Taylor & Francis Journals in its journal Applied Financial Economics.
Volume (Year): 20 (2010)
Issue (Month): 3 ()
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Web page: http://www.tandfonline.com/RAFE20
Other versions of this item:
- Gerhard Kling & G.U. Weitzel, 2009. "Endogenous mergers: bidder momentum and market reaction," Working Papers 09-22, Utrecht School of Economics.
- G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
- G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
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