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Endogenous mergers: Bidder momentum and market reaction

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  • G. Kling
  • U. Weitzel

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.

Suggested Citation

  • G. Kling & U. Weitzel, 2009. "Endogenous mergers: Bidder momentum and market reaction," Working Papers 09-22, Utrecht School of Economics.
  • Handle: RePEc:use:tkiwps:0922
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    Cited by:

    1. Kose John & Ravi S. Mateti & Zhaoyun Shangguan & Gopala Vasudevan, 2013. "Does overvaluation of bidder stock drive acquisitions? The case of public and private targets," International Journal of Banking, Accounting and Finance, Inderscience Enterprises Ltd, vol. 5(1/2), pages 188-204.
    2. Jaroslav Sedláček & Zuzana Křížová & Eva Hýblová, 2011. "Development of mergers and acquisitions in the conditions of the Czech economy 2001-2010," Acta Universitatis Agriculturae et Silviculturae Mendelianae Brunensis, Mendel University Press, vol. 59(7), pages 337-346.
    3. Petr VALOUCH & Jaroslav SEDLÁCEK & Alois KONECNÝ, 2012. "Analysis of the Behavior Mergermarket in the Conditions the Financial Crisis," Economics and Applied Informatics, "Dunarea de Jos" University of Galati, Faculty of Economics and Business Administration, issue 1, pages 37-44.

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    Keywords

    Mergers and acquisitions; overvaluation; endogeneity; momentum;
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