A Dynamic Analysis of Growth via Acquisition
AbstractFirms have a choice: grow through internal investment, or grow through acquisition. While internal growth takes time, an acquisition provides cash flows immediately, as the acquirer benefits from the investments of previous owners. The opportunity to grow internally affects the price of an acquisition as it is a fall-back option for the acquirer should negotiations break down. Thus, internal growth opportunities speed up acquisitions when integration costs are significant or synergies not too great. Because investors do not have full information about the time a firm requires to grow internally, acquirers earn positive returns before announcement of an acquisition, and there are negative stock price reactions to acquisition announcements for a wide range of parameter values. This research provides novel predictions about how pre-announcement price run-up and negative announcement returns relate to high integration costs and low synergies from acquisition, without requiring learning about these variables. The model also predicts that buyer-initiated acquisitions result in more pronounced negative acquirer announcement returns than seller-initiated acquisitions.
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Bibliographic InfoPaper provided by Center for Economic Institutions, Institute of Economic Research, Hitotsubashi University in its series CEI Working Paper Series with number 2008-8.
Length: 53,  p.
Date of creation: Apr 2008
Date of revision:
Corporate Investment; Acquisitions;
Find related papers by JEL classification:
- G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
- G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
This paper has been announced in the following NEP Reports:
- NEP-ALL-2008-05-10 (All new papers)
- NEP-BEC-2008-05-10 (Business Economics)
- NEP-COM-2008-05-10 (Industrial Competition)
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.:
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Boston University - Department of Economics - Working Papers Series
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