Post-acquisition Returns Research Articles

Shareholders’ indifference… short-term market reaction to firms’ first and subsequent acquisitions: evidence from China

Having analysed the history of acquisitions by public Chinese companies over the period of 1996–2020, we document no persistent statistically significant short-term market reaction upon deal completion. Short-term cumulative abnormal returns are non-different from zero regardless of whether the acquisition is the first or one of many on acquirers’ record, whether it is domestic or cross-border or whether it is vertical or horizontal as well as regardless of industry and declared purpose of acquisition. In the overwhelming majority of cases, acquirers’ prior acquisition experience plays no role in shaping short-term post-acquisition returns. Lower returns are associated with serial acquirers especially if the series of acquisitions occurs within the same industry. Likewise, significantly lower cumulative returns are observed if the acquiree is a state-owned entity. Overall, the markets appear to attach no abnormal returns to firms’ inorganic growth regardless of its span across geographies, industries and time.

National cultural distance and cross-border M&A

ABSTRACT Using cross-border M&A activities and national cultural scores from the Hofstede Insights organization, we study the impact of national cultural distance on cross-border M&As from 2008 to 2017. The empirical evidence shows that both the success of M&A attempts and the post-acquisition stock returns are negatively related to national cultural distance. We also test this negative relation considering the country cluster and industry effects.

Appraisal Risk and Corporate Disclosure During Mergers and Acquisitions

I exploit a 2007 court ruling that significantly strengthens appraisal rights for shareholders of Delaware-incorporated target firms to examine how managers respond to appraisal risk during takeovers. Appraisal rights give target shareholders the right to receive a judge’s determined value for their shares in lieu of the acquirer’s offer. Target-firm disclosures play a critical role in the valuation decisions of judges; and valuation decisions pose a substantial risk to acquirers. I find that heightened appraisal risk induces target managers to withhold positive news arriving between the announcement and effective completion of the takeover. This observation is driven by target managers who are aligned with acquirers. I further document that acquirers benefit from this behavior in the form of a lower likelihood of appraisal and a higher likelihood of positive post-acquisition returns. Overall, my findings suggest that acquirer-target manager ties play an important role in facilitating the dilution of target shareholder property rights.

The Role of Confucius Institutes and One Belt, One Road Initiatives on the Values of Cross-Border M&A: Empirical Evidence from China

This study examines how national cultural policies such as Confucius Institutes and One Belt, One Road initiatives (BRI) affect the post-acquisition returns of Chinese cross-border mergers and acquisitions based on data from a sample of 192 transactions covering 2011 to 2015. We find that the cultural export of Chinese Confucius Institutes and the BRI exert a significantly positive impact on long-term acquirer returns, while cultural/institutional distance exerts a negative impact. Further evidence shows that Confucius Institutes and BRI mitigate the negative effect of cultural distance between merging firms. These results offer the first evidence that national cultural translation has substantial impacts on the long-run acquirer financial performance of cross-border mergers that decrease cultural institutional heterogeneity between countries.

Do insider CFOs deliver better acquisition performance?

We document that acquirer firms with insider CFOs achieve superior industry-adjusted operating performance in the post-acquisition period relative to firms with outsider CFOs, utilizing a sample from 1994 to 2014. Unlike insider CEOs, we find that insider CFOs do not differ from outsider CFOs in the acquisition deal types they undertake. However, they achieve significantly higher factor productivity gains after the acquisition. Our analysis suggests that the ability to identify targets that can yield higher synergy gains and the ability to integrate the target within the firm are behind the superior post-acquisition returns of insider CFOs. Our results are robust to various time-windows and a range of robustness tests regarding model specification—such as including additional firm level controls, alternative performance measures, and controls for firm overconfidence and CFO education, overconfidence and pay.

A bold move or biting off more than they can chew: examining the performance of small acquirers

Small acquirers enjoy announcement period returns that are significantly higher than announcement returns for larger acquirers, but small acquirers significantly underperform after the acquisition is consummated. We investigate why the market appears to “get it wrong” at the announcement of an acquisition by a small firm. We provide evidence consistent with an initial optimistic overreaction, followed by a correction as updated information is revealed. Overreaction is clustered in small acquirers offering stock and acquiring relatively larger targets. Low post-acquisition returns and poor fundamental performance are clustered in small acquirers offering stock and diversifying.

Examining the stock performance of acquirers where the acquirer or target hold patents

We investigate the stock returns for acquirers of firms holding registered patents (“innovative targets”). We find that acquiring innovative targets is associated with significantly positive stock performance relative to acquisitions of non-innovative targets. Specifically, acquirers of innovative targets enjoy higher announcement and interim period abnormal returns. Acquirers of innovative targets also enjoy higher post-acquisition returns, but only in settings where the acquirer’s and target’s industry is unambiguously close (i.e., they share the same 3-digit primary SIC code), suggesting that when the acquirer has familiarity and expertise in that industry the acquirer is able to better exploit the target firm’s patents. Additionally, we find that an acquirer’s innovation level can be critical to their post-acquisition stock performance; that is, acquirers holding at least one patent of their own prior to the acquisition enjoy significantly higher post-acquisition returns, and this benefit does not depend on the innovativeness of the target firm.

The impact of life cycle stage on firm acquisitions

PurposeThe purpose of the authors’ research study is to identify the impact of life cycle stage on firm acquisitions.Design/methodology/approachThe authors use a series of empirical databases to identify characteristics of acquirers and their targets. The authors then use logistic regressions and joint tests to identify significant differences between declining and non-declining acquirers.FindingsThe authors find that declining acquirers are more likely to pursue diversifying acquisitions and to pay for the acquisition with stock considerations. Acquisitions by declining acquirers result in positive abnormal returns initially, but post-acquisition returns are negative.Research limitations/implicationsThe authors’ primary limitation is their data, which only includes public acquirers and targets, and runs from January 1, 1988 to December 31, 2010.Practical implicationsThe authors’ research suggests that regulators, stakeholders and prospective stakeholders should consider the life cycle stage of an acquiring firm in setting expectations about motivations for and likely performance subsequent to the acquisition.Originality/valueThe authors’ paper is the first to consider the effect of firm life cycle stage on the motivation and subsequent success of an acquisition. Given the tremendous impact to shareholders of such significant transactions, understanding the acquisition process more completely is important to capital markets participants.

Firm-level recent profitability and acquisition performance: exploring competing theoretical perspectives

In light of the mixed findings upon whether good performers are good or bad acquirers, this paper explores the relationship between firm-level recent profitability and post-acquisition performance through the competing analysis of the managerial ability and the hubris hypotheses. The paper also builds on the organizational learning literature to examine the moderating effect played by a firm’s previous acquisition experience, as a potential contingency factor that may alter the performance effects of acquisitions. Based on a dataset of 469 acquisitions completed between 2007 and 2013, results provide support to the managerial ability hypothesis, according to which good performing firms exhibit better post-acquisition returns. Results also support the existence of learning benefits from previous acquisition experience, which further enhances the positive effect played by an acquirer’s recent profitability on post-acquisition performance.

How far does financial reporting allow us to judge whether M&A activity is successful?

Evidence from share price returns suggests that acquisitions destroy value. On the other hand, evidence from accounting measures of performance suggests that acquisitions give rise to synergies and therefore potentially create value. In this paper, we first revisit the UK evidence using an updated sample, and confirm that these findings still hold, and importantly hold in the period following the introduction of FRS10. We then reconcile the (apparently conflicting) findings from these market-based and accounting-based approaches. Using accounting measures of performance, we confirm the presence of synergies developed during acquisitions. Finally we show that post-acquisition abnormal returns are associated with news of synergistic benefits conveyed in the financial statements.

The Post-Acquisition Returns of Stock Deals: Evidence of the Pervasiveness of the Asset Growth Effect

AbstractA growing literature finds that firm asset growth rates are negatively correlated with subsequent stock returns. We show that the poor post-deal returns that have been documented for stock acquisitions are more precisely explained by the return effects associated with systematically larger asset growth rates for stock deals. We find a similar result for other cross-sectional and time-series acquisition effects, including poor returns for glamour deals, weakly monitored deals, and deals done during high-valuation periods. We suggest that the distinguishing characteristic associated with poor performing acquisitions is simply their tendency to grow assets.

Agency Risks and Long-Term Performance of Australian Publicly Listed Mergers and Acquisitions

This paper investigates the extent to which agency risks and the acquirer’s mechanisms used to avoid these risks (i.e. board of directors, ownership structure and financial leverage) influenced the post-acquisition performance of Australian publicly listed mergers and acquisitions during the period from 1992 to 2001 (pre-IFRS) in the presence of mechanisms that encourage agency behaviour (i.e. free cash flows). The results suggest that the acquirer’s board size had an inverted ‘U-shaped’ non-linear relationship with post-acquisition accounting returns, while block-holders’ ownership had a negative relationship with post-acquisition market returns. Overall, the results suggest that board size is the most important corporate governance mechanism in explaining the variance in post-acquisition accounting performance.

The Post-Acquisition Returns of Stock Deals: Evidence of the Pervasiveness of the Asset Growth Effect

A growing literature finds that firm asset growth rates are negatively correlated subsequent stock returns. We show that the poor post-deal returns that have been documented for stock acquisitions are more precisely explained by the return effects associated with systematically larger asset growth rates for stock deals. We find a similar result for other cross-sectional and time-series acquisition effects, including poor returns for glamour deals, weakly monitored deals, and deals done during high valuation periods. We suggest that the distinguishing characteristic associated with poor performing acquisitions is simply their tendency to grow assets.

Can long-term performance plans mitigate the negative effects of stock consideration and high cash for acquirers?

Following Travlos (J Finance 42: 943–963, 1987), Loughran and Vijh (J Finance 52: 1765–1790, 1997), Harford (J Finance 54: 1969–1997, 1999), and Oler (Rev Acc Stud 13: 479–511, 2008), we investigate whether acquisitions involving stock consideration and acquirers with high cash levels are associated with poor performance or not. In addition, we investigate whether including a long-term performance plan in top management’s compensation package can mitigate these negative effects. We find that acquirers with a long-term performance plan are less likely to hold a high cash balance and are less likely to use stock consideration, thus avoiding scenarios that are more likely to be value-destructive. Even if an acquirer with a long-term performance plan carries a high cash balance or uses stock, we find that the plan is associated with improved fundamental performance; however, this relationship does not flow through to improved post-acquisition returns.

Value, valuation, and the long-run performance of merged firms

We propose an alternative measure of the long-term economic impact of mergers on firm value: post-acquisition changes in intrinsic value. Consistent with the literature on post-acquisition returns, the intrinsic value of merged firms decreases on average in the three years following deal completion, especially for firms with high initial intrinsic values. The loss of intrinsic value is driven primarily by decreases in expected earnings. Finally, using return decompositions, we find evidence that the poor post-acquisition stock returns documented in other studies can be attributed primarily to lost intrinsic value rather than changes in valuation levels.

What kinds of takeover defenses are most beneficial to shareholders during and following the bidding process?

We investigate whether the strength of target antitakeover defenses impacts the market’s perception of the wealth generated for both targets and bidders shareholders in acquisitions, as well as the long-run post-acquisition returns to bidders. Our results indicate that while returns to bidder shareholders are a decreasing function of takeover defense strength, target shareholders benefit from moderate takeover defense strategies, at least in the short term. However, target shareholders are adversely affected by the highest levels of takeover defenses, both in the short run and in terms of any position they hold in the acquirer after the transaction is completed, which is reflective of value destruction during the bidding process by entrenched managers. Long run returns to successful bidders are highest when a weak defense target is acquired, and a declining function of target takeover defense strength. The lowest long run returns are experienced by bidders that acquire targets with very-strong takeover defenses. These results are confirmed by multivariate analyses. Overall, our results support the Entrenchment and Myopia theories, and partially support the bargaining power hypothesis.

The danger of misinterpreting short-window event study findings in strategic management research: an empirical illustration using horizontal acquisitions

Short-window event studies are popular in the strategic management literature. These studies assume that the market's initial reaction to strategic events reflects their economic impact in an unbiased manner. This assumption may hold in some cases, but when an event has complex ramifications that are difficult to predict, the initial market response may be biased and/or incomplete. Acquisitions are complex events, suggesting that results from short-window event studies of acquisitions may foster incorrect inferences. Using a sample of horizontal acquisitions, this article shows that the positive initial market response to an acquisition announcement is contradicted by negative long-run post-acquisition returns, suggesting that the initial response is incorrect and that the error is rectified later. Our findings imply that short-window event studies may not accurately capture the economic impact of complex strategic actions, for the interpretation and use of event studies.

Value, Valuation, and the Long-Run Performance of Merged Firms

We propose an alternative measure of the long-term economic impact of mergers on firm value: post-acquisition changes in intrinsic value. Consistent with the literature on post-acquisition returns, acquirers tend to lose industry-adjusted intrinsic values in the three years following merger completion. Further analysis indicates that managers of firms that have both a high price-to-value ratio and a low price-to-book ratio tend to make acquisitions that increase intrinsic value. Managers of firms that have low price-to-value ratios and high price-to-book ratios tend to make intrinsic value-destroying acquisitions. Finally, using a simple return decomposition, we show that changes in intrinsic value and changes in valuation levels contribute to post-acquisition stock returns.

Does acquirer cash level predict post-acquisition returns?

This paper investigates whether an acquirer’s pre-announcement cash level can predict post-acquisition returns. Harford (1999, Journal of Finance, 54, 1969–1997) shows that some cash-rich acquirers have lower announcement period returns than other acquirers, suggesting the market partially anticipates poor future performance. This paper shows that the acquirer’s cash level is also strongly and negatively predictive of post-acquisition returns, indicating that the announcement response is incomplete. Post-acquisition return on net operating assets (RNOA) is significantly decreasing in acquirer cash, suggesting that the market responds to subsequent poor operating performance as it is reported. Overall, these results are consistent with the market’s inattention to a less prominent accounting signal (acquirer cash) but attentiveness to a more prominent accounting signal (RNOA), as proposed by Hirshleifer and Teoh (2003, Journal of Accounting Economics, 36, 337–386).

Does Acquirer Cash Level Predict Post-Acquisition Returns?

Acquirers with high cash balances on the announcement date often suffer negative post-acquisition returns. High acquirer cash also predicts negative post-acquisition return on net operating assets, suggesting that the market does not fully incorporate the bad news associated with a high cash balance into the acquirer's stock price on announcement, but does respond to poor operating performance in the post-acquisition period. An implementable trading strategy combining these findings with prior research yields average annual abnormal returns of 22%. Overall, these findings suggest investors' limited attention can affect prices, consistent with the analysis in Hirshleifer and Teoh [2003].