Hostname: page-component-586b7cd67f-rcrh6 Total loading time: 0 Render date: 2024-12-02T13:32:03.608Z Has data issue: false hasContentIssue false
  • English
  • Français

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

Published online by Cambridge University Press:  12 August 2015

Sandra Mortal  and
Michael J. Schill
Sandra Mortal
Affiliation:
[email protected], University of Memphis, Fogelman College of Business and Economics, Memphis, TN 38152
Michael J. Schill*
Affiliation:
[email protected], University of Virginia, Darden Graduate School of Business Administration, Charlottesville, VA 22906.
*
*Corresponding author: [email protected]
Get access Rights & Permissions [Opens in a new window]

Abstract

A 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.

Type
Research Articles
Information
Journal of Financial and Quantitative Analysis , Volume 50 , Issue 3 , June 2015 , pp. 477 - 507
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2015 

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Agrawal, A., and Jaffe, J. F.. The Post-Merger Performance Puzzle. Advances in Mergers and Acquisitions. Copper, C. and Gregory, A., eds. Stamford, CT: JAI Press (2000).Google Scholar
Ahern, K. R., and Sosyura, D.. “Who Writes the News? Corporate Press Releases during Merger Negotiations.” Journal of Finance, 69 (2014), 241–291.Google Scholar
Akbulut, M. E. “Do Overvaluation-Driven Stock Acquisitions Really Benefit Acquirer Shareholders?” Journal of Financial and Quantitative Analysis, 48 (2013), 1025–1055.Google Scholar
Anderson, C. W., and Garcia-Feijoo, L.. “Empirical Evidence on Capital Investment, Growth Options, and Security Returns.” Journal of Finance, 61 (2006), 171–194.Google Scholar
Ang, J., and Cheng, Y.. “Direct Evidence of Market-Driven Acquisitions Theory.” Journal of Financial Research, 29 (2006), 199–216.Google Scholar
Asquith, P. “Merger Bids, Uncertainty and Stockholder Returns.” Journal of Financial Economics, 11 (1983), 51–83.Google Scholar
Ben-David, I.; Drake, M. S.; and Roulstone, D. T.. “Acquirer Valuation and Acquisition Decisions: Identifying Mispricing Using Short Interest.” Journal of Financial and Quantitative Analysis, 50 (2015), 1–32.CrossRefGoogle Scholar
Berk, J. B.; Green, R. C.; and Naik, V.. “Optimal Investment, Growth Options, and Security Returns.” Journal of Finance, 54 (1999), 1553–1607.Google Scholar
Bouwman, C.; Fuller, K.; and Nain, A.. “Market Valuation and Acquisition Quality: Empirical Evidence.” Review of Financial Studies, 22 (2009), 633–679.Google Scholar
Broussard, J. P.; Michayluk, D.; and Neely, W.. “The Role of Growth in Long-Term Investment Returns.” Journal of Applied Business Research, 21 (2005), 93–104.Google Scholar
Chan, L. K. C.; Karceski, J; Lakonishok, J.; and Sougiannis, T.. “Balance Sheet Growth and the Predictability of Stock Returns.” Working Paper, University of Florida (2008).Google Scholar
Cochrane, J. H. “Production-Based Asset Pricing and the Link between Stock Returns and Economic Fluctuations.” Journal of Finance, 46 (1991), 209–237.Google Scholar
Cochrane, J. H. “A Cross-Sectional Test of an Investment-Based Asset Pricing Model.” Journal of Political Economy, 104 (1996), 572–621.Google Scholar
Cooper, I., and Priestley, R.. “Real Investment and Risk Dynamics.” Journal of Financial Economics, 101 (2011), 182–205.Google Scholar
Cooper, M.; Gulen, H.; and Schill, M.. “Asset Growth and the Cross-Section of Stock Returns.” Journal of Finance, 63 (2008), 1609–1651.Google Scholar
Davis, J. L.; Fama, E. F.; and French, K. R.. “Characteristics, Covariances, and Average Returns: 1929–1997.” Journal of Finance, 55 (2000), 389–406.Google Scholar
Dong, M.; Hirshleifer, D.; Richardson, S.; and Teoh, S. H.. “Does Investor Misvaluation Drive the Takeover Market?” Journal of Finance, 61 (2006), 725–762.Google Scholar
Erickson, M., and Wang, S.. “Earnings Management by Acquiring Firms in Stock for Stock Acquisitions.” Journal of Accounting and Economics, 27 (1999), 149–176.CrossRefGoogle Scholar
Fairfield, P. M.; Whisenant, S. J.; and Yohn, T.. “Accrued Earnings and Growth: Implications for Future Profitability and Market Mispricing.” Accounting Review, 78 (2003), 353–371.Google Scholar
Fama, E. F., and French, K. R.. “Common Risk Factors in the Returns on Stocks and Bonds.” Journal of Financial Economics, 33 (1993), 3–56.Google Scholar
Fama, E. F., and French, K. R.. “Dissecting Anomalies.” Journal of Finance, 63 (2008), 1653–1678.Google Scholar
Fama, E. F., and MacBeth, J. D.. “Risk, Return and Equilibrium: Empirical Tests.” Journal of Political Economy, 81 (1973), 607–636.Google Scholar
Firth, M. “Takeovers, Shareholder Returns, and the Theory of the Firm.” Quarterly Journal of Economics, 94 (1980), 235–260.CrossRefGoogle Scholar
Franks, J. R., and Harris, R. S.. “Shareholder Wealth Effects of Corporate Takeovers: The U.K. Experience 1955–1985.” Journal of Financial Economics, 23 (1989), 225–249.Google Scholar
Fu, F.; Lin, L.; and Officer, M. S.. “Acquisitions Driven by Stock Overvaluation: Are They Good Deals?” Journal of Financial Economics, 109 ( 2013), 24–39.CrossRefGoogle Scholar
Gaspar, J.; Massa, M.; and Matos, P.. “Shareholder Investment Horizons and the Market for Corporate Control.” Journal of Financial Economics, 76 (2005), 135–165.Google Scholar
Gilchrist, S.; Himmelberg, C. P.; and Huberman, G.. “Do Stock Price Bubbles Influence Corporate Investment?” Journal of Monetary Economics, 52 (2005), 805–827.Google Scholar
Gomes, J. F.; Kogan, L.; and Zhang, L.. “Equilibrium Cross-Section of Returns.” Journal of Political Economy, 111 (2003), 693–732.Google Scholar
Gong, G.; Louis, H.; and Sun, A.. “Earnings Management, Lawsuits, and Stock-for-Stock Acquirer’s Market Performance.” Journal of Accounting and Economics, 46 (2008), 62–77.Google Scholar
Gregory, A. “An Examination of the Long-Run Performance of U.K. Acquiring Firms.” Journal of Business Finance and Accounting, 24 (1997), 971–1002.CrossRefGoogle Scholar
Harford, J.; Humphery-Jenner, M. L.; and Powell, R. G.. “The Sources of Value Destruction in Acquisitions by Entrenched Managers.” Journal of Financial Economics, 106 (2012), 247–261.Google Scholar
Jensen, M. C. “Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers.” American Economic Review, 76 (1986), 323–329.Google Scholar
Jensen, M. C. “The Modern Industrial Revolution, Exit, and the Failure of Internal Control Systems.” The Journal of Finance, 48 (1993), 831–880.Google Scholar
Jensen, M. C. “Agency Costs of Overvalued Equity.” Financial Management, 34 (2005), 5–19.Google Scholar
Jensen, M. C., and Ruback, R.. “The Market for Corporate Control: The Scientific Evidence.” Journal of Financial Economics, 11 (1983), 5–50.Google Scholar
Kimbrough, M. D., and Louis, H.. “Voluntary Disclosure to Influence Investor Reactions to Merger Announcements: An Examination of Conference Calls.” Accounting Review, 86 (2011), 637–667.Google Scholar
Li, E. X. N.; Livdan, D.; and Zhang, L.. “Anomalies.” Review of Financial Studies, 22 (2009), 4301–4334.CrossRefGoogle Scholar
Lipson, M.; Mortal, S.; and Schill, M. J.. “On the Scope and Drivers of the Asset Growth Effect.” Journal of Financial and Quantitative Analysis, 46 (2011), 1651–1682.Google Scholar
Livermore, S. “The Success of Industrial Mergers.” Quarterly Journal of Economics, 50 (1935), 68–96.Google Scholar
Loughran, T., and Ritter, J. R.. “The New Issues Puzzle.” Journal of Finance, 50 (1995), 23–51.Google Scholar
Loughran, T., and Vijh, A. M.. “Do Long-Term Shareholders Benefit from Corporate Acquisitions?” Journal of Finance, 52 (1997), 1765–1790.Google Scholar
Louis, H. “Earnings Management and the Market Performance of Acquiring Firms.” Journal of Financial Economics, 74 (2004), 121–148.Google Scholar
Lyandres, E.; Sun, L.; and Zhang, L.. “The New Issues Puzzle: Testing the Investment-Based Explanation.” Review of Financial Studies, 21 (2008), 2825–2855.CrossRefGoogle Scholar
Mitchell, M., and Stafford, E.. “Managerial Decisions and Long-Term Stock Price Performance.” Journal of Business, 73 (2000), 287–329.Google Scholar
Moeller, S. B.; Schlingemann, F. P.; and Stulz, R. M.. “Wealth Destruction on a Massive Scale? A Study of Acquiring-Firm Returns in the Recent Merger Wave.” Journal of Finance, 60 (2005), 757–782.Google Scholar
Mortal, S., and Schill, M. J.. “Are Acquisitions Unique? Evidence of the Pedestrian Nature of Post-Merger Returns.” Working Paper, University of Virginia (2012).Google Scholar
Petersen, M. “Estimating Standard Errors in Finance Panel Data Sets: Comparing Approaches.” Review of Financial Studies, 22 (2009), 435–479.Google Scholar
Polk, C., and Sapienza, P.. “The Stock Market and Corporate Investment: A Test of Catering Theory.” Review of Financial Studies, 22 (2009), 187–217.CrossRefGoogle Scholar
Rau, P. R., and Vermaelen, T.. “Glamour, Value and the Post-Acquisition Performance of Acquiring Firms.” Journal of Financial Economics, 49 (1998), 223–253.Google Scholar
Rhodes-Kropf, M., and Viswanathan, S.. “Market Valuation and Merger Waves.” Journal of Finance, 59 (2004), 2685–2718.Google Scholar
Savor, P. G., and Lu, Q.. “Do Stock Mergers Create Value for Acquirers?” Journal of Finance, 64 (2009), 1061–1097.Google Scholar
Shleifer, A., and Vishny, R. W.. “Stock Market Driven Acquisitions.” Journal of Financial Economics, 70 (2003), 295–311.Google Scholar
Song, W. “Does Overvaluation Lead to Bad Mergers?” Working Paper, University of Cincinnati (2007).Google Scholar
Spiess, D. K., and Affleck-Graves, J.. “The Long-Run Performance of Stock Returns Following Debt Offerings.” Journal of Financial Economics, 54 (1999), 45–73.Google Scholar
Titman, S.; Wei, K. C. J.; and Xie, F.. “Capital Investments and Stock Returns.” Journal of Financial and Quantitative Analysis, 39 (2004), 677–700.Google Scholar
Titman, S.; Wei, K. C. J.; and Xie, F.. “Access to Equity Markets, Corporate Investments and Stock Returns: International Evidence.” Working Paper, University of Texas at Austin (2010).Google Scholar
Tobin, J. “A General Equilibrium Approach to Monetary Theory.” Journal of Money, Credit and Banking, 1 (1969), 15–29.Google Scholar
Watanabe, A.; Xu, Y.; Yao, T.; and Yu, T.. “The Asset Growth Effect: Insights from International Equity Markets.” Journal of Financial Economics, 108 (2013), 529–563.Google Scholar
Xing, Y. “Interpreting the Value Effect through the Q-Theory: An Empirical Investigation.” Review of Financial Studies, 21 (2008), 1767–1795.Google Scholar
Yoshikawa, H. “On the ‘Q’ Theory of Investment.” American Economic Review, 70 (1980), 739–743.Google Scholar
Zhang, L. “The Value Premium.” Journal of Finance, 60 (2005), 67–103.Google Scholar