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Post-acquisition performance in the short and long run. Evidence from the Copenhagen Stock Exchange 1993-1997

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Author Info
Jan Bo Jakobsen
Torben Voetmann

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Abstract

The paper investigates the short-run price adjustment around acquisition announcements and the long-run upward bias of cross-sectional average buy-and-hold returns. The geometric Brownian motion model is applied to decompose the cross-sectional average long-run returns into transformed mean and volatility components. The decomposition improves the interpretation of security performance. The methodology is demonstrated on the security performance of bidding firms listed on the Copenhagen Stock Exchange. The most surprising finding is that the long-run abnormal return after three years is not significantly different from zero. This implies that the bidding firms do not under-perform relative to the market. This result stands in contrast to findings in other studies and it may reflect that earlier studies do not adjust correctly for the volatility component. These current findings indicate that the market efficiency hypothesis is intact in the long run. It is only in the very short run, a few days around acquisition announcements, that the market makes a significant adjustment to uphold the efficiency hypothesis.

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Publisher Info
Article provided by Taylor and Francis Journals in its journal The European Journal of Finance.

Volume (Year): 9 (2003)
Issue (Month): 4 (August)
Pages: 323-342
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Handle: RePEc:taf:eurjfi:v:9:y:2003:i:4:p:323-342

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Related research
Keywords: Event-study Methodology; Wealth Relatives; Long-run Returns; Acquisitions; Right-skewness;

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References listed on IDEAS
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  2. Jensen, Michael C. & Ruback, Richard S., 1983. "The market for corporate control : The scientific evidence," Journal of Financial Economics, Elsevier, vol. 11(1-4), pages 5-50, April. [Downloadable!] (restricted)
  3. Mark L. Mitchell & Erik Stafford, 1997. "Managerial Decisions and Long-Term Stock Price Performance," CRSP working papers 453, Center for Research in Security Prices, Graduate School of Business, University of Chicago. [Downloadable!]
    Other versions:
  4. Jurgen A Doornik & Henrik Hansen, . "An omnibus test for univariate and multivariate normalit," Economics Papers W4&91., Economics Group, Nuffield College, University of Oxford. [Downloadable!]
    Other versions:
  5. Linda Canina & Roni Michaely & Richard Thaler & Kent Womack, 1998. "Caveat Compounder: A Warning about Using the Daily CRSP Equal-Weighted Index to Compute Long-Run Excess Returns," Journal of Finance, American Finance Association, vol. 53(1), pages 403-416, 02. [Downloadable!] (restricted)
  6. Sung C. Bae & Sivagnanam Sakthivel, 2000. "An Empirical Analysis of Exchange Ratio Determination Models for Merger: A Note," Journal of Business Finance & Accounting, Blackwell Publishing, vol. 27(3-4), pages 511-521. [Downloadable!] (restricted)
  7. Loughran, Tim & Ritter, Jay R, 1995. " The New Issues Puzzle," Journal of Finance, American Finance Association, vol. 50(1), pages 23-51, March. [Downloadable!] (restricted)
  8. Bradley, Michael & Desai, Anand & Kim, E. Han, 1983. "The rationale behind interfirm tender offers : Information or synergy?," Journal of Financial Economics, Elsevier, vol. 11(1-4), pages 183-206, April. [Downloadable!] (restricted)
  9. Barber, Brad M. & Lyon, John D., 1997. "Detecting long-run abnormal stock returns: The empirical power and specification of test statistics," Journal of Financial Economics, Elsevier, vol. 43(3), pages 341-372, March. [Downloadable!] (restricted)
  10. De Bondt, Werner F M & Thaler, Richard, 1985. " Does the Stock Market Overreact?," Journal of Finance, American Finance Association, vol. 40(3), pages 793-805, July. [Downloadable!] (restricted)
  11. Sung C. Bae & Sivagnanam Sakthivel, 2000. "An Empirical Analysis of Exchange Ratio Determination Models for Merger: A Note," Journal of Business Finance & Accounting, Blackwell Publishing, vol. 27(3&4), pages 511-521. [Downloadable!] (restricted)
  12. Robert S. Harris & Julian Franks & Colin Mayer, 1987. "Means of Payment in Takeovers: Results for the U.K. and U.S," NBER Working Papers 2456, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  13. Agrawal, Anup & Jaffe, Jeffrey F & Mandelker, Gershon N, 1992. " The Post-merger Performance of Acquiring Firms: A Re-examination of an Anomaly," Journal of Finance, American Finance Association, vol. 47(4), pages 1605-21, September. [Downloadable!] (restricted)
  14. Conrad, Jennifer & Kaul, Gautam, 1993. " Long-Term Market Overreaction or Biases in Computed Returns?," Journal of Finance, American Finance Association, vol. 48(1), pages 39-63, March. [Downloadable!] (restricted)
  15. Paul Draper & Krishna Paudyal, 1999. "Corporate Takeovers: Mode of Payment, Returns and Trading Activity," Journal of Business Finance & Accounting, Blackwell Publishing, vol. 26(5&6), pages 521-558. [Downloadable!] (restricted)
  16. repec:bla:jbfnac:v:27:y:2000:i:5&6:p:523-554 is not listed on IDEAS
  17. Robert W. Faff & David Hillier & Joseph Hillier, 2000. "Time Varying Beta Risk: An Analysis of Alternative Modelling Techniques," Journal of Business Finance & Accounting, Blackwell Publishing, vol. 27(5&6), pages 523-554. [Downloadable!] (restricted)
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