Market Valuation and Acquisition Quality: Empirical Evidence

• Published in: The Review of financial studies Vol. 22; no. 2; pp. 633 - 679
• Main Authors: Bouwman, Christa H. S., Fuller, Kathleen, Nain, Amrita S.
• Format: Journal Article
• Language: English
• Published: Oxford Oxford University Press 01-02-2009; Oxford Publishing Limited (England)
• Subjects: Abnormal returns; Acquisitions; Acquisitions & mergers; Bear markets; Bids; Business strategies; Cash; Corporate mergers; Economic activity; Economic conditions; Economic models; Economic theory; Financial portfolios; Financing methods; Herding; Industrial market; Market value; Mergers; Price earnings ratio; Prices; Purchasing; School finance; Securities markets; Seminars; Stock exchanges; Stock prices; Stockholders; Studies; Target acquisitions; Tender offers; Valuation; G34
• ISSN: 0893-9454; 1465-7368
• DOI: 10.1093/rfs/hhm073

Existing research shows that significantly more acquisitions occur when stock markets are booming than when markets are depressed. Rhodes-Kropf and Viswanathan (2004) hypothesize that firm-specific and market-wide (mis-)valuations lead to an excess of mergers, and these will be value destroying. This article investigates whether acquisitions occurring during booming markets are fundamentally different from those occurring during depressed markets. We find that acquirers buying during high-valuation markets have significantly higher announcement returns but lower long-run abnormal stock and operating performance than those buying during low-valuation markets. We investigate possible explanations for the long-run underperformance and conclude it is consistent with managerial herding.