Stock Merger Activity and Industry Performance

Abstract

We propose a merger activity variable (MAV) as an alternative to industry merger waves. Unlike discrete merger waves that separate periods of extreme activity from the rest, our continuous MAV captures information in the entire spectrum of stock merger activity. We rank industries by MAV within each quarter and arrange into 12 bucket portfolios. During 1989-2018, prior and subsequent three-year excess portfolio returns are positively and negatively related to bucket numbers and with each other, consistent with a build-up of misvaluation (undervaluation of less merger-active industries and overvaluation of more merger-active industries) followed by a proportional correction. We estimate differences of 4.49% and -3.43% between prior and subsequent annual alphas of most and least merger-active industries. Operating performance results provide further evidence in favor of the misvaluation theory of industry stock merger activity. Such return and operating performance based evidence for entire industries has not been documented before.