Market Misreaction? Evidence from Cross-Border Acquisitions

Cnv Krishnan,Jialun Wu

doi:10.3390/jrfm15020093

Cnv Krishnan, Jialun Wu

Open Access

https://doi.org/10.3390/jrfm15020093

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Abstract

Our goal in this paper is to answer this research question: Do investors understand the longer-term value-implications of cross border mergers and acquisitions, as at the time of their announcements? We examine acquirers’ operating efficiencies around and after cross-border acquisitions and relate this to the announcement-period stock-market reaction. Using a dataset of cross-border mergers and acquisitions (M&A) entailing U.S. acquirers over the period 1990–2013, and using a bootstrapped-DEA (Data Envelopment Analysis) model because any one indicator may not reflect the whole performance of the merger, we find that the operating efficiency of the acquirers decreases around the acquisition, and up to three years after. However, we document evidence of stock market mis-reaction at announcement: the announcement-period acquirer abnormal stock-price return is not significantly associated with acquirer’s operating efficiency post-acquisition. Therefore, investors should be careful interpreting the announcement-period stock-price reaction in cross-border mergers and acquisitions as indicative of merger efficiency gains.

Highlights

Since 1985, more than 325,000 merger and acquisition (M&A) transactions have been announced, aggregating to more than USD 34,900 billion
Acquirers that experienced negative cumulative abnormal return (CAR) experienced a significant decrease in operating efficiency pre-acquisition, while the acquirers with positive CAR did not
Our results that the competitive advantages acquirers may obtain from cross-border acquisitions may not offset the challenges such acquisitions bring and may be contrary to the conclusions in some of the extant literature, which show that cross-border acquisitions may entail positive merger efficiency

Summary

Introduction

Since 1985, more than 325,000 merger and acquisition (M&A) transactions have been announced, aggregating to more than USD 34,900 billion. With the rise of globalization, cross-border M&As have become increasingly prevalent. It is important to assess whether cross-border M&As enhance operating efficiency for acquirers in the face of a recent trend towards de-globalization and trade frictions. Our goal in this paper is to answer this research question: Do investors understand the longer-term value-implications of cross border mergers and acquisitions, as at the time of their announcements? We examine acquirers’ operating efficiencies around and after cross-border acquisitions, and relate this to the announcement-period stock-market reaction. We examine 822 cross-border mergers involving U.S acquirers from the 1990 to 2013. The challenges that acquirers face may be offset by the advantages that the cross-border M&As could bring (e.g., Hofstede 1980; Aybar and Ficici 2009). That is why we chose U.S acquirers and examine their announcement period stock price reactions

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