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Endogenous mergers: Bidder momentum and market reaction

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Author Info
Gerhard Kling ()
Utz Weitzel ()

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Abstract

Recent empirical studies on stock misvaluation as a possible determinant of mergers are inconclusive concerning the central hypothesis that over(under)valuation is negatively (positively) associated with merger announcement returns in stock mergers, but not in cash mergers. We provide empirical support for this hypothesis. In contrast to prior research, we employ a two-stage model to account for endogenous mergers and suggest an alternative specification of misvaluation based on an asset-pricing model (bidder momentum). In the first stage, we specify panel logit models to predict U.S. mergers from 1981 to 2003 and find that bidder momentum triggers stock mergers, but not cash mergers. In a second stage, we regress cumulated abnormal returns on merger probabilities to control for the endogeneity of mergers. This reveals a lower market response for stock mergers compared to cash mergers, which we identify as market correction of misvalued acquirers.

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Paper provided by Utrecht School of Economics in its series Working Papers with number 09-22.

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Length: 31 pages
Date of creation: Aug 2009
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Handle: RePEc:use:tkiwps:0922

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Related research
Keywords: Mergers and acquisitions; overvaluation; endogeneity; momentum;

Find related papers by JEL classification:
G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies
G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

This paper has been announced in the following NEP Reports:

References listed on IDEAS
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    Other versions:
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    Other versions:
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    Other versions:
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    Other versions:
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