Merger momentum and market valuations: the UK evidence

Abstract

This study examines the effect of merger momentum on acquirer's returns both in the shortand long-run. The focus is on high-valuation markets and the source of momentum is investigated employing three different hypotheses: the neoclassical hypothesis, the hubris hypothesis and the investor sentiment theory. The neoclassical theory predicts increase in value with no long term reversals and hubris hypothesis suggests destruction of value in both short and long-run due to managerial overconfidence. However, our results support the investor sentiment (optimism) hypothesis since investors are found to earn significant gains in the shortrun but returns are reversed in the long-run as initial expectations may not be fully met when combined firms' accomplishments become known over time. The results are robust after controlling for several acquirer and deal characteristics. JEL Classification: G14; G34.

Market valuation and acquiring firm performance in the short and long term: Out-of-sample evidence from Spain

“…The overall weak results indicate that the number of previous mergers, or their returns, does not seem to drive results. Therefore, we reject the presence of merger momentum around the announcement of acquisitions, which is contrary to previous results obtained by Rosen (2006) and Antoniou et al (2008) but we coincide with Petmezas (2009). Besides, results suggest that the recent merger history of the over-all market does not affect the value creation of a merger.…”

“…An issue that has been the subject of analysis regarding the existence of abnormal short-run returns around M&As is whether they are due to merger momentum (Rosen, 2006;Antoniou et al, 2008;Petmezas, 2009). Rosen (2006) defined merger momentum as the correlation between the market reaction to a merger announcement and recent market conditions and explains that it can be originated by three different causes.…”

“…We analyze whether short-run abnormal returns show price reaction to value creation or are caused by merger momentum by conducting cross-sectional regression analysis. Following Rosen (2006) and Antoniou et al (2008), the dependent variable in the model is the market reaction to a merger in the short-run and the independent variables are merger momentum, market momentum and bidderspecific stock momentum and some control variables.…”

“…In line with the irrational investors approach, the investor sentiment theory predicts that the acquisition performance is the result of optimistic beliefs of investors in Market valuation and acquiring firm performance in the short and long term: Out-of-sample evidence from Spain periods of high market valuations (Rosen, 2006;Antoniou et al, 2008;Petmezas, 2009). In high valuation periods, investors are more likely to overestimate potential synergies and under-estimate the risks associated with the merger.…”

An Analysis of Short-Term Performance of UK Cross-Border Mergers and Acquisitions by Chinese Listed Companies

“…However, the results for acquiring companies are mixed. Antonios et al (2007) used UK-listed frequent acquirers from 1987-2004 as a sample to show a significant +1.26% accumulative abnormal return between -2 to +2 event windows. Conversely, a huge body of literature reveals the opposite result.…”