Acquisitions, Common Ownership, and the Cournot Merger Paradox

Abstract

Diversified acquirer shareholders can profit from value-destroying acquisitions not only through their target stakes, but also through stakes in non-merging rival firms. Announcement losses are largely mitigated for the average acquirer shareholder when accounting for wealth effects on their rival stakes. Ownership by acquirer shareholders in non-merging rivals is negatively associated with deal quality and positively associated with deal completion. Funds with more rival ownership are more likely to vote in favor of the acquisition. Overall, these results show that many so-called “bad deals” are often in the interest of acquirer-firm shareholders.