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Do Acquirers with More Uncertain Growth Prospects Gain Less from Acquisitions?

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Author Info
Moeller, Sara B. (Southern Methodist U)
Schilngemann, Frederik P. (U of Pittsburgh)
Stulz, Rene M. (Ohio State U)
Abstract

Behavioral finance models imply that an increase in shares outstanding leads to a lower stock price for firms with greater diversity in opinion among investors. Information asymmetry models imply that share issues by firms with greater information asymmetries are accompanied by larger share price decreases. Valuation models predict a negative relation between uncertainty resolution and share prices. Acquisition announcements are used to investigate these predictions. We find acquirer abnormal returns for acquisitions of public firms paid for with equity (but not for acquisitions of private firms paid for with equity) are lower for firms with higher dispersion of analyst forecasts, larger change in dispersion of analyst forecasts, and higher idiosyncratic volatility. The opposite result holds for acquisitions of public firms paid for with cash for idiosyncratic volatility. We show that this evidence can best be explained by models that emphasize information asymmetries, but the behavioral models and valuation models explain part of the evidence.

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Paper provided by Ohio State University, Charles A. Dice Center for Research in Financial Economics in its series Working Paper Series with number 2004-19.

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Date of creation: Aug 2004
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Handle: RePEc:ecl:ohidic:2004-19

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G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Investment Policy

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  6. McCardle, Kevin F & Viswanathan, S, 1994. "The Direct Entry versus Takeover Decision and Stock Price Performance around Takeovers," Journal of Business, University of Chicago Press, vol. 67(1), pages 1-43, January. [Downloadable!] (restricted)
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  10. Moeller, Sara B. & Schlingemann, Frederik P. & Stulz, Rene M., 2004. "Firm size and the gains from acquisitions," Journal of Financial Economics, Elsevier, vol. 73(2), pages 201-228, August. [Downloadable!] (restricted)
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  17. Harrison Hong & Jose Scheinkman & Wei Xiong, 2005. "Asset Float and Speculative Bubbles," NBER Working Papers 11367, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  18. Schlingemann, Frederik P. & Stulz, Rene M. & Walkling, Ralph A., 2002. "Divestitures and the liquidity of the market for corporate assets," Journal of Financial Economics, Elsevier, vol. 64(1), pages 117-144, April. [Downloadable!] (restricted)
  19. Maloney, Michael T & McCormick, Robert E & Mitchell, Mark L, 1993. "Managerial Decision Making and Capital Structure," Journal of Business, University of Chicago Press, vol. 66(2), pages 189-217, April. [Downloadable!] (restricted)
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  26. Krasker, William S, 1986. " Stock Price Movements in Response to Stock Issues under Asymmetric Information," Journal of Finance, American Finance Association, vol. 41(1), pages 93-105, March. [Downloadable!] (restricted)
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(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Malcolm Baker & Joshua Coval & Jeremy C. Stein, 2004. "Corporate Financing Decisions When Investors Take the Path of Least Resistance," NBER Working Papers 10998, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  2. William R. Latham & Helen Bowers, 2005. "Information Asymmetries, Litigation Risk and the Demand for Fairness Opinions: Evidence from U.S. Mergers & Acquisitions, 1980-2002," Working Papers 05-17, University of Delaware, Department of Economics. [Downloadable!]
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