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Finance Seminar

Authors:

• Ludovic Phalippou
  Oxford University

• Huainan Zhao
  University of Nottingham

• Fangming Xu
  University of Bristol

The average abnormal stock return of a firm announcing an acquisition of a publicly listed firm is -0.98%. These returns decrease monotonically in the number of prior acquisitions made by the target, reaching -6.22% when the target has made five or more acquisitions over the previous three years. When neither the target nor the acquirer has made any acquisitions, there are no abnormal announcement returns. Results are magnified when the acquiring firm displays poorer corporate governance, higher agency costs and in industries where firms are of similar size. Acquisitions are less likely to be completed when the target has made more acquisitions in the past. Announcement returns are persistent; if announcement returns for the acquisitions made by the target are low, then the acquirer of that target has low announcement returns too. The recent ‘eat or be eaten' theory of Gorton, Kahl and Rosen (2009) seems consistent with our results.