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A Dynamic Analysis of Growth via Acquisition

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  • Margsiri, Worawat
  • Melloy, Antonio S.
  • Ruckesz, Martin E.
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    Abstract

    Firms 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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    File URL: http://hermes-ir.lib.hit-u.ac.jp/rs/bitstream/10086/15740/1/WP2008-8a.pdf
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    Bibliographic Info

    Paper provided by Center for Economic Institutions, Institute of Economic Research, Hitotsubashi University in its series CEI Working Paper Series with number 2008-8.

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    Length: 53, [3] p.
    Date of creation: Apr 2008
    Date of revision:
    Handle: RePEc:hit:hitcei:2008-8

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    Keywords: Corporate Investment; Acquisitions;

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    References

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    1. Bar-Ilan, Avner & Strange, William C, 1996. "Investment Lags," American Economic Review, American Economic Association, vol. 86(3), pages 610-22, June.
    2. Matthew Rhodes-Kropf & S. Viswanathan, 2004. "Market Valuation and Merger Waves," Journal of Finance, American Finance Association, vol. 59(6), pages 2685-2718, December.
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    Cited by:
    1. Hankir, Yassin & Rauch, Christian & Umber, Marc P., 2011. "Bank M&A: A market power story?," Journal of Banking & Finance, Elsevier, vol. 35(9), pages 2341-2354, September.
    2. Dirk Hackbarth & Jianjun Miao, . "The Timing and Returns of Mergers and Acquisitions in Oligopolistic Industries," Boston University - Department of Economics - Working Papers Series wp2008-022, Boston University - Department of Economics.
    3. Habib, Michel A. & Mella-Barral, Pierre, 2013. "Skills, core capabilities, and the choice between merging, allying, and trading assets," Journal of Mathematical Economics, Elsevier, vol. 49(1), pages 31-48.

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