Merger imbalance and returns in international equity markets

ABSTRACT

At the global level, the mispricing theory of mergers by Shleifer and Vishny (2003) may imply that a significant number of targets acquired in a given country is a sign of market-wide undervaluation whereas intense acquisition activity indicates overvaluation. The present study develops a measure of merger imbalance that compares the quantity of targets and acquirers in a local market and tests significance of this variable for country-level asset pricing. The results prove that countries with a high merger imbalance significantly outperform countries with a low merger imbalance. The research is based on data from 46 countries for the years 1999–2015. The outcomes are robust to many considerations, and the findings support the theory of stock market-driven acquisitions.

KEYWORDS:

• Mergers and acquisitions
• country-selection strategies
• country-level effects
• international asset pricing
• return predictability
• corporate-behavioural finance

JEL CODES:

• G12
• G15
• G34

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Erratum

ORCID

Adam Zaremba http://orcid.org/0000-0001-5879-9431

Notes

1. http://mba.tuck.dartmouth.edu/pages/faculty/ken.french/data_library.html (accessed 25 June 2016).

2. We use book values from month t-5 to avoid a look-ahead bias.

3. The treatment of dividends and taxes on dividends in short sales transactions vary across countries and across time. Thus, returns on the zero-investment portfolios in the net approach should be primarily regarded as returns on differential portfolios that accentuate the outperformance of the top portfolio over the bottom portfolios.

Additional information

Funding

This work was supported by the National Science Centre of Poland [2013/11/B/HS4/00695].