Merger Activity, Stock Prices, and Measuring Gains from M&A
Speaker(s)
With five percent of U.S. public firms acquired in a typical year, we show rational expectations perpetually embed a significant portion of acquisition gains into firms’ stock prices. We estimate 10% of a typical firm’s stock price can be attributed to general merger anticipation. As a result, the unobserved (anticipated) portion of the merger premium is roughly one-third of the observed premium, implying M&A event studies greatly understate the gain from mergers. Consistent with this hypothesis, announced deal premiums are strongly negatively correlated with the probability a firm will be acquired. Finally, we show a strong link from merger activity to stock prices, with each dollar of announced merger premiums associated with up to $44 of increased aggregate market valuation.
With five percent of U.S. public firms acquired in a typical year, we show rational expectations perpetually embed a significant portion of acquisition gains into firms’ stock prices. We estimate 10% of a typical firm’s stock price can be attributed to general merger anticipation. As a result, the unobserved (anticipated) portion of the merger premium is roughly one-third of the observed premium, implying M&A event studies greatly understate the gain from mergers. Consistent with this hypothesis, announced deal premiums are strongly negatively correlated with the probability a firm will be acquired. Finally, we show a strong link from merger activity to stock prices, with each dollar of announced merger premiums associated with up to $44 of increased aggregate market valuation.