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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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  • Jakobsen, Jan

    (Department of Finance, Copenhagen Business School)

  • Voetmann, Torben

    (Department of Finance, Copenhagen Business School)

Abstract

This paper investigates the short-run price adjustment around the acquisition announce-ment and the long-run upward bias of the cross-sectional average buy-and-hold returns. We apply the geometric Brownian motion model to decompose the cross-sectional ave r-age long-run returns into mean components and volatility components. The decomposi-tion is necessary in order to interpret security performance correctly using the measure of wealth relatives. This procedure is useful for any studies of long-run security perform-ance. The most surprising finding is that the long-horizon abnormal return after three years is not significantly different from zero. This implies that the acquiring firms do not under perform significantly compared to the market. That result stands in contrast to findings of other studies, and it may reflect that earlier studies do not adjust for the vola-tility component. This indicates that the market efficiency hypothesis is intact in the long run. It is only in the very short run, i.e. a few days around the acquisition announcements, that the market makes a significant adjustment to uphold the efficiency hypothesis.

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File URL: http://openarchive.cbs.dk/cbsweb/handle/10398/7190
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Bibliographic Info

Paper provided by Copenhagen Business School, Department of Finance in its series Working Papers with number 2000-4.

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Length: 30 pages
Date of creation: 01 Oct 1999
Date of revision:
Handle: RePEc:hhs:cbsfin:2000_004

Contact details of provider:
Postal: Department of Finance, Copenhagen Business School, Solbjerg Plads 3, A5, DK-2000 Frederiksberg, Denmark
Phone: +45 3815 3815
Email:
Web page: http://www.cbs.dk/departments/finance/
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Related research

Keywords: Event-study methods; wealth relatives; long-run returns; acquisitions;

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References

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  1. 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.
  2. Mitchell, Mark L & Stafford, Erik, 2000. "Managerial Decisions and Long-Term Stock Price Performance," The Journal of Business, University of Chicago Press, vol. 73(3), pages 287-329, July.
  3. 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.
  4. 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.
  5. Sung C. Bae & Sivagnanam Sakthivel, 2000. "An Empirical Analysis of Exchange Ratio Determination Models for Merger: A Note," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 27(3&4), pages 511-521.
  6. repec:bla:jbfnac:v:27:y:2000:i:5&6:p:523-554 is not listed on IDEAS
  7. Paul Draper & Krishna Paudyal, 1999. "Corporate Takeovers: Mode of Payment, Returns and Trading Activity," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 26(5&6), pages 521-558.
  8. Jurgen A Doornik & Henrik Hansen, . "An omnibus test for univariate and multivariate normalit," Economics Papers W4&91., Economics Group, Nuffield College, University of Oxford.
  9. Robert W. Faff & David Hillier & Joseph Hillier, 2000. "Time Varying Beta Risk: An Analysis of Alternative Modelling Techniques," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 27(5&6), pages 523-554.
  10. Sung C. Bae & Sivagnanam Sakthivel, 2000. "An Empirical Analysis of Exchange Ratio Determination Models for Merger: A Note," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 27(3-4), pages 511-521.
  11. Brown, Stephen J. & Warner, Jerold B., 1985. "Using daily stock returns : The case of event studies," Journal of Financial Economics, Elsevier, vol. 14(1), pages 3-31, March.
  12. 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.
  13. Loughran, Tim & Ritter, Jay R, 1995. " The New Issues Puzzle," Journal of Finance, American Finance Association, vol. 50(1), pages 23-51, March.
  14. 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.
  15. 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.
  16. Franks, Julian R & Harris, Robert & Mayer, Colin, 1987. "Means of Payment in Takeovers: Results for the UK and US," CEPR Discussion Papers 200, C.E.P.R. Discussion Papers.
  17. 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.
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