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Earnings Growth and Acquisition Returns: Do Investors Gamble in the Takeover Market?

Published online by Cambridge University Press:  25 July 2022

Tingting Liu Open the ORCID record for Tingting Liu [Opens in a new window]  and
Danni Tu
Tingting Liu*
Affiliation:
Iowa State University Ivy College of Business
Danni Tu
Affiliation:
Southern Illinois University Carbondale College of Business and Analytics
*
ttliu@iastate.edu (corresponding author)
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Abstract

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We document a strong positive initial market reaction to merger announcements from bidders with either large earnings growth or significant earnings decline, relative to those with neutral earnings change, reflecting a U-shaped pattern between bidders’ earnings growth and announcement returns. However, the higher initial returns for bidders with earnings decline subsequently reverse, whereas the higher returns for bidders with high growth do not. We further show that the return patterns are driven by a tendency for retail investors to gamble that merger and acquisition deals initiated by poorly performing bidders will generate high synergies.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 58 , Issue 3 , May 2023 , pp. 1326 - 1358
Creative Commons
Creative Common License - CCCreative Common License - BY
This is an Open Access article, distributed under the terms of the Creative Commons Attribution licence (http://creativecommons.org/licenses/by/4.0), which permits unrestricted re-use, distribution and reproduction, provided the original article is properly cited.
Copyright
© The Author(s), 2022. Published by Cambridge University Press on behalf of the Michael G. Foster School of Business, University of Washington

Footnotes

We thank an anonymous referee, Audra Boone, Gjergji Cici, Arnie Cowan, Qingjie Du, Gregory Eaton, Clifton Green, Zhaozhao He, Chao Jiang, Paul Koch, Paul Malatesta (the editor), Micah Officer, Roger Stover, Julie Wu, Yaoyi Xi, and seminar participants at the 2021 Eastern Finance Association Annual Meeting, the 2021 Financial Accounting and Reporting Section (FARS) Midyear Meeting, and the Iowa State University for providing helpful comments. We also thank Ananya Kaushik for her research assistance. This research did not receive any specific grant from funding agencies in the public, commercial, or not-for-profit sectors.

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