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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. Schultz

    ()

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    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 Utrecht School of Economics in its series Working Papers with number 05-17.

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    Length: 45 pages
    Date of creation: Aug 2004
    Date of revision:
    Handle: RePEc:use:tkiwps:0517

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    Related research

    Keywords: Acquisitions; bidder returns; analyst earnings forecasts; information asymmetries; divergence of opinion.;

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    References

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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. 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.

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