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What drives acquisitions?: Market valuations and bidder performance

  • Petmezas, Dimitris

Given the recent theoretical development that documents stock market misvaluations' driven acquisition, this paper examines the relation between market valuations and bidder performance. We focus on hot stock markets and find that bidder reactions to mergers, in both the short- and long-run period, are consistent with the predictions of investors' sentiment (optimism) after controlling for target type and method of payment. Managers that undertake mergers during bullish periods are rewarded by the generalized upward trend of the market in the short-run. However, this is followed by long-term reversals as the market learns only gradually that many of the mergers undertaken during hot periods were not carefully evaluated and were made under the pressure of 'urge to merge' to take advantage of the overall market status of a particular period.

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Article provided by Elsevier in its journal Journal of Multinational Financial Management.

Volume (Year): 19 (2009)
Issue (Month): 1 (February)
Pages: 54-74

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Handle: RePEc:eee:mulfin:v:19:y:2009:i:1:p:54-74
Contact details of provider: Web page: http://www.elsevier.com/locate/mulfin

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  1. Paul Draper & Krishna Paudyal, 2006. "Acquisitions: Private versus Public," European Financial Management, European Financial Management Association, vol. 12(1), pages 57-80.
  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.
  3. Moeller, Sara B. & Schlingemann, Frederik P. & Stulz, Rene M., 2004. "Firm size and the gains from acquisitions," Journal of Financial Economics, Elsevier, vol. 73(2), pages 201-228, August.
  4. Lang, Larry H. P. & Stulz, ReneM. & Walkling, Ralph A., 1989. "Managerial performance, Tobin's Q, and the gains from successful tender offers," Journal of Financial Economics, Elsevier, vol. 24(1), pages 137-154, September.
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  7. Shleifer, Andrei & Vishny, Robert W., 2003. "Stock market driven acquisitions," Journal of Financial Economics, Elsevier, vol. 70(3), pages 295-311, December.
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  9. Mitchell, Mark L & Stafford, Erik, 2000. "Managerial Decisions and Long-Term Stock Price Performance," The Journal of Business, University of Chicago Press, vol. 73(3), pages 287-329, July.
  10. Kathleen Fuller & Jeffry Netter & Mike Stegemoller, 2002. "What Do Returns to Acquiring Firms Tell Us? Evidence from Firms That Make Many Acquisitions," Journal of Finance, American Finance Association, vol. 57(4), pages 1763-1793, 08.
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  12. Jensen, Michael C. & Ruback, Richard S., 1983. "The market for corporate control : The scientific evidence," Journal of Financial Economics, Elsevier, vol. 11(1-4), pages 5-50, April.
  13. Saeyoung Chang, 1998. "Takeovers of Privately Held Targets, Methods of Payment, and Bidder Returns," Journal of Finance, American Finance Association, vol. 53(2), pages 773-784, 04.
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  15. Richard J. Rosen, 2004. "Merger momentum and investor sentiment: the stock market reaction to merger announcements," Working Paper Series WP-04-07, Federal Reserve Bank of Chicago.
  16. Gregor Andrade & Mark Mitchell & Erik Stafford, 2001. "New Evidence and Perspectives on Mergers," Journal of Economic Perspectives, American Economic Association, vol. 15(2), pages 103-120, Spring.
  17. Mara Faccio & Ronald W. Masulis, 2005. "The Choice of Payment Method in European Mergers and Acquisitions," Journal of Finance, American Finance Association, vol. 60(3), pages 1345-1388, 06.
  18. Fama, Eugene F. & French, Kenneth R., 1993. "Common risk factors in the returns on stocks and bonds," Journal of Financial Economics, Elsevier, vol. 33(1), pages 3-56, February.
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