Do Long‐Term Shareholders Benefit From Corporate Acquisitions?

Using 947 acquisitions during 1970-89, this article finds a relationship between the postacquisition returns and the mode of acquisition and form of payment. During a five-year period following the acquisition, on average, firms that complete stock mergers earn significantly negative excess returns of -25.0 percent whereas firms that complete cash tender offers earn significantly positive excess returns of 61.7 percent. Over the combined preacquisition and postacquisition period, target shareholders who hold on to the acquirer stock received as payment in stock mergers do not earn significantly positive excess returns. In the top quartile of target to acquirer size ratio, they earn negative excess returns. Copyright 1997 by American Finance Association.

[1]  Paul A. Gompers,et al.  Myth or Reality? The Long-Run Underperformance of Initial Public Offerings: Evidence from Venture and Nonventure Capital-Backed Companies , 1997 .

[2]  Paul H. Malatesta.  The wealth effect of merger activity and the objective functions of merging firms , 1983 .

[3]  Elroy Dimson,et al.  Event study methodologies and the size effect , 1986 .

[4]  R. Hansen,et al.  A Theory for the Choice of Exchange Medium in Mergers and Acquisitions , 1987 .

[5]  P. Healy,et al.  The Challenges of Investor Communication: The Case of Cuc International, Inc , 1995 .

[6]  J. Hoffmeister,et al.  Valuation Consequences of Cash Tender Offers , 1978 .

[7]  G. Mandelker,et al.  The Post-Merger Performance of Acquiring Firms: A Re-examination of an Anomaly , 1992 .

[8]  Richard S. Ruback,et al.  Tender offers and stockholder returns: An empirical analysis , 1977 .

[9]  Richard S. Ruback,et al.  The Market for Corporate Control: The Scientific Evidence , 2002 .

[10]  Tim Loughran,et al.  The New Issues Puzzle , 1995 .

[11]  T. C. Langetieg,et al.  An application of a three-factor performance index to measure stockholder gains from merger , 1978 .

[12]  P. Asquith.  Merger bids, uncertainty, and stockholder returns☆ , 1983 .

[13]  Michael C. Jensen,et al.  The market for corporate control , 1983 .

[14]  D. Spiess,et al.  Underperformance in long-run stock returns following seasoned equity offerings , 1995 .

[15]  Brad M. Barber,et al.  Detecting abnormal operating performance: The empirical power and specification of test statistics , 1996 .

[16]  G. Mandelker.  Risk and return: The case of merging firms , 1974 .

[17]  E. Fama,et al.  The Cross‐Section of Expected Stock Returns , 1992 .

[18]  Peter R. Dodd,et al.  Merger proposals, management discretion and stockholder wealth , 1980 .

[19]  Anand M. Vijh.  S&P 500 Trading Strategies and Stock Betas , 1994 .

[20]  Kenneth J. Martin,et al.  Postacquisition performance of acquiring firms , 1992 .

[21]  Michael Bradley,et al.  Synergistic gains from corporate acquisitions and their division between the stockholders of target and acquiring firms , 1988 .

[22]  Josef Lakonishok,et al.  Contrarian Investment, Extrapolation, and Risk , 1993 .

[23]  Kenneth J. Martin,et al.  Corporate Performance, Corporate Takeovers, and Management Turnover , 1991 .

[24]  Brad M. Barber,et al.  Detecting Long-Run Abnormal Stock Returns: The Empirical Power and Specification of Test Statistics , 1997 .

[25]  Theo Vermaelen,et al.  Market Underreaction to Open Market Share Repurchases , 1994 .

[26]  Kenneth J. Martin.  The Method of Payment in Corporate Acquisitions, Investment Opportunities, and Management Ownership , 1996 .

[27]  Kevin J. Murphy,et al.  Glamour, value and the post-acquisition performance of acquiring firms 1 We would like to thank Euge , 1998 .

[28]  Robert S. Harris,et al.  The postmerger share-price performance of acquiring firms , 1991 .