Market Valuation and Acquisition Quality: Empirical Evidence
- 11 December 2007
- journal article
- research article
- Published by Oxford University Press (OUP) in The Review of Financial Studies
- Vol. 22 (2), 633-679
- https://doi.org/10.1093/rfs/hhm073
Abstract
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 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.Keywords
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