Winning by Losing: Evidence on Overbidding in Mergers

Ulrike Malmendier, Enrico Moretti
2006 Social Science Research Network  
Do shareholders of acquiring companies profit from acquisitions, or do acquiring CEOs overbid and destroy shareholder value? Answering this question is difficult since the hypothetical counterfactual is hard to determine. We exploit merger contests to address the identification issue. In cases where there are at least two bidders with a significant ex-ante chance at winning the contest, we use the post-merger performance of the loser to calculate the counterfactual performance of the winner
more » ... out the merger. We find that the stock returns of winners and losers are closely aligned before the merger contest, but diverge afterwards. In the sample where losers have a significant ex-ante chance to win, winners underperform losers by 48 percent over the following three years. Our results imply that some of the existing approaches to measure the effects of mergers are probably biased.
doi:10.2139/ssrn.891296 fatcat:7pxtv4ypgredfc5frrprsmucwi