Hidden Addition Acquisitions

Abstract

This study examines the wealth effects of hidden addition acquisitions, i.e., stock financed acquisitions by S&P 500 acquirers of non-S&P 500 targets. These acquisitions result in a re-balancing of the S&P 500, causing the acquirer’s weight in the index to increase. We classify the acquisitions as either “immediate” of “delayed” based on when the rebalancing occurs. We find that the initial acquirer wealth effect at the announcements of these deals is significantly negative. However, these firms experience a reversal in abnormal returns in the post-announcement period resulting in overall non-significant abnormal returns, with the post-announcement abnormal returns significantly positive in immediate hidden additions. We find that both the overall return and post announcement return are positively correlated with the size of the deal. We find that the reversal in large deals is statistically and economically significantly positive, indicating possible profitable opportunities for even uninformed traders. We investigate the effect of size and timing of returns to provide information for profitable trading opportunities in these deals.