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Do Acquirers With More Uncertain Growth Prospects Gain Less From Acquisitions?

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  • Sara B. Moeller
  • Frederik P. Schlingemann
  • Rene M. Stulz

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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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 10773.

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Date of creation: Sep 2004
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Publication status: published as Moeller, Sara B., Frederik P. Schlingemann and Rene M. Stulz. "Firm Size And The Gains From Acquisitions," Journal of Financial Economics, 2004, v73(2,Aug), 201-228
Handle: RePEc:nbr:nberwo:10773

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Cited by:
  1. 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.
  2. Baker, Malcolm & Coval, Joshua & Stein, Jeremy C., 2007. "Corporate financing decisions when investors take the path of least resistance," Journal of Financial Economics, Elsevier, vol. 84(2), pages 266-298, May.
  3. Song, Moon H. & Walkling, Ralph A., 2005. "Anticipation, Acquisitions and Bidder Returns," Working Paper Series 2005-11, Ohio State University, Charles A. Dice Center for Research in Financial Economics.

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