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RFS Advance Access originally published online on December 11, 2007
Review of Financial Studies 2009 22(2):633-679; doi:10.1093/rfs/hhm073
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© The Author 2007. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For permissions, please e-mail: journals.permissions@oxfordjournals.org.

Market Valuation and Acquisition Quality: Empirical Evidence

Christa H. S. Bouwman
Case Western Reserve University

Kathleen Fuller
University of Mississippi

Amrita S. Nain
McGill University

Address correspondence to A. S. Nain, McGill University, 1001 Sherbrooke Street West, Montreal, Quebec H3A 1G5, Canada; telephone: 514-398-8440; email: amrita.nain{at}mcgill.ca.

JEL Classification: G34


  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.

The authors thank an anonymous referee and Matt Spiegel for helpful suggestions, and Arnoud Boot, Sreedhar Bharath, Sugato Bhattacharyya, Jayant Kale, Gautam Kaul, E. Han Kim, Marc Lipson, Jeffry Netter, David Robinson, Nejat Seyhun, Anjan Thakor, "Vish" Viswanathan, Guojun Wu, participants of the University of Michigan Business School Finance Department Brown Bag Seminar, University of Mississippi 2004 seminar series, University of Missouri–Kansas City 2004 seminar series, the 2002 Estes Park Conference, and the 2003 Financial Management Association Conference for useful comments. The 3rd author thanks the Institut de Finance Mathématique de Montreal for research support.


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