Glamour, Value and The Post-Acquisition Performance of Acquiring Firms

Journal of Financial Economics 49 (1998) 223—253
Glamour, value and the post-acquisition performance of

acquiring firms1
P. Raghavendra Rau!,*, Theo Vermaelen",#
! Krannert Graduate School of Management, Purdue University, West Lafayette, IN 47907, USA
" INSEAD, Fontainebleau Cedex, France
# Maastricht University, Maastricht, The Netherlands
Received 26 September 1996; received in revised form 11 November 1997
Abstract
This paper uses a methodology robust to recent criticisms of standard long-horizon

event study tests to show that bidders in mergers underperform while bidders in tender
offers overperform in the three years after the acquisition. However, the long-term
underperformance of acquiring firms in mergers is predominantly caused by the poor
post-acquisition performance of low book-to-market “glamour” firms. We interpret this
finding as evidence that both the market and the management overextrapolate the
bidder’s past performance (as reflected in the bidder’s book-to-market ratio) when they
assess the desirability of an acquisition. ( 1998 Elsevier Science S.A. All rights reserved.
JEL classification: G14; G34
Keywords: Mergers; Post-acquisition performance; Long-horizon event studies; Boot-

strapping
* Corresponding author. Tel.: 765/494-4488; fax: 765/494-9658; E-mail: rau@mgmt.purdue.edu.

1 We would like to thank Eugene Fama for providing us with monthly factor returns. We would
also like to thank Brad Barber, Chun Chang, Dave Denis, Eugene Fama, Kenneth French (the
referee), Paolo Fulghieri, Gabriel Hawawini, Pierre Hillion, Ravi Jagannathan, Dave Ikenberry,
Murgie Krishnan, Tim Loughran, Arijit Mukherji, Kevin Murphy, Abraham Ravid, Bill Schwert
(the editor), Kiran Verma, and seminar participants at the 1996 Western Finance Association
meetings, the 1996 European Finance Association meetings, the 1996 Financial Management
Association meetings, the 1996 European Financial Management Association meetings, the 1996
French Finance Association meetings, Erasmus University, ESSEC, London Business School,
Maastricht University, the University of Minnesota at Minneapolis Saint-Paul, University of North
Carolina at Chapel Hill, Oxford University, Purdue University, Rice University, and Yale Univer-
sity for comments on previous drafts of this paper.
0304-405X/98/$19.00 ( 1998 Elsevier Science S.A. All rights reserved

PII S 0 3 0 4 - 4 0 5 X ( 9 8 ) 0 0 0 2 3 - 3
224 P.R. Rau, T. Vermaelen/Journal of Financial Economics 49 (1998) 223—253
1. Introduction
Mergers and acquisitions have been extensively researched in finance. How-

ever, a number of issues still remain controversial, in particular the long-run
price behavior of bidders in mergers and tender offers. We investigate two basic
issues in this paper: bidders’ underperformance (if any) in the long run after the
acquisition and the determinants of this underperformance. These issues are
important because the conclusion that mergers and acquisitions increase the
combined wealth of bidder and target shareholders is based on the results of
numerous short-term event studies that find returns to bidders to be small or at
least insignificantly different from zero in the short run.
In their classic survey of the empirical research in this area, Jensen and
Ruback (1983) summarize the results of six studies that examine the returns to
bidders in the year following the takeover. The evidence shows that after tender
offers, bidders earn statistically insignificant positive abnormal returns, while
after mergers, bidding firms systematically underperform. However, this evid-
ence on long-term post-merger bidder performance is controversial, with differ-
ent researchers finding contrasting results. Bradley and Jarrell (1988), Langetieg
(1978), and Franks, Harris and Titman (1991), for example, do not find signifi-
cant underperformance in the two to three years after the acquisition. Others,
such as Asquith (1983) and Agrawal et al. (1992), conclude that these firms do
experience significantly negative abnormal returns in the first few years after the
merger. Loderer and Martin (1992) find some evidence of negative returns in the
first three years following the acquisition, but none after the fourth year. Also,
they find that the negative abnormal performance progressively diminishes
through the 1960s and the 1970s and disappears in the 1980s.
In contrast to event studies over short horizons, long-term event studies are
sensitive to the model used for computing normal returns, which may partially
explain the conflicting conclusions of past research. The most recent papers,
Agrawal et al. (1992) and Loderer and Martin (1992), both adjust for firm size
and beta risk. However, Fama and French (1992) have recently shown that
beta does not capture much of the cross-sectional variation in average stock
returns. Firm size and book-to-market equity combine to explain a much
larger proportion of the variation in average stock returns. Consequently, Fama
and French (1993) criticize the Agrawal, Jaffe, and Mandelker results for
ignoring the book-to-market effect. They conjecture (pp. 54—55) that acquiring
firms might tend to be large, successful firms with low book-to-market ratios.
Hence, they argue that a methodology controlling for the below-average returns
of low book-to-market firms would reveal no persistent negative abnormal
returns.
Moreover, some studies (Kothari and Warner, 1997; Barber and Lyon, 1997)
have recently questioned the validity of standard parametric tests in testing the
statistical significance of long-horizon abnormal returns. Barber and Lyon, for
P.R. Rau, T. Vermaelen/Journal of Financial Economics 49 (1998) 223—253 225
example, document that long-horizon t-statistics are negatively biased, in many

cases detecting significant abnormal performance when none is present.
The first contribution of this paper is to examine the issue of long-horizon
bidder performance in mergers and acquisitions after explicitly adjusting for
both firm size and book-to-market effects, as suggested by Fama and French
(1993). We also test the statistical significance of these results using bootstrap-
ping (see Ikenberry et al., 1995), a methodology that is robust to the problems
that plague standard long-horizon tests of statistical significance. As Kothari
and Warner (1997) point out, the bootstrap procedure represents a state-of-the-
art procedure for recognizing and attempting to adjust for systematic biases in
assessing statistical significance. Barber et al. (1998) prove that the bootstrap
method not only yields well-specified test statistics but is also more powerful
than the control firm method, a method that has also been used to detect
abnormal performance in some recent long-horizon event studies.
We examine a sample of 3169 mergers and 348 tender offers with acquirors
listed on both the Center for Research in Security Prices (CRSP) NYSE/AMEX/
Nasdaq tapes and COMPUSTAT, and bids announced between January 1980
and December 1991. We find that bidding firms do not overwhelmingly tend to
be successful firms with low book-to-market ratios. The distribution of bidding
firms across the spectrum of book-to-market ratios of firms listed on CRSP is
relatively uniform.
Adjusting for both firm size and book-to-market ratio, we find that, on
average, acquirors in mergers underperform equally weighted control portfolios
with similar sizes and book-to-market ratios by a statistically significant 4%
over a period of three years after the merger completion date. On the other hand,
acquirors in tender offers earn a statistically significant positive abnormal return
of 9%, on average. Hence, in contrast to Fama and French’s (1993) conjecture,
the negative abnormal returns to bidding firms in mergers are not simply
a result of not adjusting for book-to-market ratios.
To explain the cross-sectional variation in long-run bidder returns, we exam-
ine three hypotheses: the performance extrapolation hypothesis, the means of
payment hypothesis, and the earnings per share (EPS) myopia hypothesis.
According to the performance extrapolation hypothesis, the market overex-
trapolates the past performance of the bidder when it assesses the value of an
acquisition. At the same time, managers and other decision makers (such as
large shareholders and the board of directors) who have to approve an acquisi-
tion, indirectly receive feedback on the quality of the bidder’s management from
the market. Specifically, we argue that in companies with low book-to-market
ratios (‘glamour’ firms), managers are more likely to overestimate their own
abilities to manage an acquisition, i.e., they will be infected by hubris (Roll,
1986). Indeed, glamour firms are firms with high past stock returns and high past
growth in cash flow and earnings (see Lakonishok et al., 1994), which should
presumably strengthen the management’s belief in its own actions. Moreover,
other stakeholders in these firms, such as the board of directors and large
shareholders, are more likely to give the management the benefit of the doubt
and approve its acquisition plans. On the other hand, in companies whose
management has a poor track record, such as companies with high book-to-
market ratios (‘value’ stocks), managers, directors, and large shareholders will be
more prudent before approving a major transaction that may well determine the
survival of the company. Because these acquisitions are not motivated by hubris,
they should create shareholder value rather than destroy it.
The performance extrapolation hypothesis also assumes that the market only
gradually reassesses the quality of the bidder as the results of the acquisition
become clear. Hence, while in the short run, i.e., around the announcement of
the acquisition, glamour bidders will experience higher abnormal returns than
value bidders, in the long run this performance will reverse. Consistent with this
extrapolation story, Lang et al. (1989) and Servaes (1991) report that short-term
announcement returns are significantly negatively correlated with Tobin’s Q
(which is negatively correlated with the book-to-market ratio). Hayward and
Hambrick (1995) also report that managerial behavior in acquisitions is in-
fluenced by past success, a crucial assumption in the performance extrapolation
hypothesis. In a survey of 106 publicly traded American companies involved in
large acquisitions in 1989 and 1992, they find that acquisition premiums are
positively correlated to measures of recent organizational performance, CEO
pay relative to the other executives in the firm, and recent media praise for the
CEO. Moreover, the size of acquisition premiums is inversely related to share-
holder losses following an acquisition.
If managers are better informed about the long-term prospects of their firm
than is the market, they will tend to pay for their acquisitions with shares when
they believe that their stock is overvalued and use cash otherwise. Hence, the
means of payment hypothesis predicts that, on average, long-run abnormal
returns to bidders will be negative in share-financed acquisitions and positive in
cash-financed acquisitions. Note that such a timing strategy will only work if the
market (and especially the target shareholders) underestimates the extent of
over- or undervaluation of the bidder. This hypothesis also requires that the
short-term negative announcement returns to bidders in all-stock mergers and
positive announcement returns to bidders in all-cash mergers reported by
Travlos (1987) do not fully reflect the extent of bidder mispricing. Loughran and
Vijh (1997) find that acquirors paying for acquisitions by issuing shares earn
significantly negative abnormal returns while cash acquirors earn significantly
positive abnormal returns in the five years following the acquisition, which is
consistent with the means of payment hypothesis.
Finally, the EPS myopia hypothesis predicts that mergers with a positive
impact on EPS will ceteris paribus, perform the worst. Suppose both the market
and the bidding firm’s management are fixated on EPS. Merging with a com-
pany with a lower price—earnings ratio than the buyer’s and paying for the
acquisition with shares may inflate the buyer’s EPS. Managers find it easier to
justify an acquisition if it is accompanied by an EPS increase rather than
a decrease. In fact, there is a widespread belief that companies should not
acquire others with higher price—earnings ratios than their own (Brealey and
Myers, 1996 pp. 921—923). Consequently, managers might be willing to pay
higher prices (and possibly overpay) for target firms if the acquisition results in
an increase in earnings per share. Alternatively, the market might overvalue
acquiring firms when the acquisition results in an increase in EPS. In an analysis
of AT&T’s acquisition of NCR in 1991, Lys and Vincent (1995) report that
AT&T was willing to pay as much as $500 million extra to satisfy pooling
accounting, although the only effect of the accounting change was to boost EPS
by around 17% without any cash flow implications. In an investigation of
conglomerate and predatory acquisitions in the 1960s, Barber et al. (1995) find
some evidence that friendly acquisitions in particular were concentrated along
targets with low P/Es and high return on equity, which is consistent with the
EPS myopia hypothesis.
These three hypotheses can be easily characterized in a simple manner. The
means of payment hypothesis says that the bidder is mispriced before the
merger, but the management is aware of the mispricing. Both the performance
extrapolation hypothesis and the EPS myopia hypothesis say that the bidder is
mispriced immediately after the acquisition announcement but the management
is not aware of the mispricing. The EPS myopia hypothesis assumes that the
mispricing occurs because the market is preoccupied with earnings per share,
while the performance extrapolation hypothesis assumes that all parties in-
volved (the market and the corporate decision makers) are too focused on past
performance.
After testing the various hypotheses, we conclude that the performance
extrapolation hypothesis is more consistent with the data than the other two
hypotheses. Specifically, we find that value bidders far outperform glamour
bidders in the three years after the completion of a merger or tender offer. After
adjusting for size and book-to-market ratio, we find that value acquirors earn
statistically significant positive abnormal returns of 8% in mergers and 16% in
tender offers, while glamour acquirors earn statistically significant negative
abnormal returns of !17% in mergers and insignificant abnormal returns of
4% in tender offers. The finding that value bidders outperform glamour bidders
is remarkably robust. Our conclusions are unchanged when we exclude small
acquisitions, Nasdaq bidders, or periods when events are clustered.
We hasten to add that, although the performance extrapolation hypothesis is
the most consistent with the data, many of the results are also consistent with
the means of payment hypothesis. In particular, post-acquisition returns in
mergers are negative while in tender offers they are positive. This is predicted by
the means of payment hypothesis because in mergers, bidders tend to pay with
shares, while in tender offers, they pay with cash. Moreover, at least in the
merger sample, glamour bidders pay more frequently with stock than value
bidders.
The remainder of the paper is organized as follows. In Section 2, we describe
the data and our methodology. Section 3 reports the long-run performance of
acquiring firms in mergers and tender offers and explores how the different
hypotheses can explain the results. Section 4 concludes.
2. Data and methodology
2.1. The data
We examine the long-term underperformance (over the three years following

the date of completion of the merger) of bidding firms in mergers and tender
offers, with bids announced and completed between January 1980 and Decem-
ber 1991. Our sample is drawn from the Securities Data Corporation (SDC)
on-line Mergers and Corporate Transactions database, using the following
criteria:
f the transaction is classified either as a merger or an acquisition of majority

interest (for mergers) or as a tender offer,
f the transaction is listed as completed, and
f the announcement date and effective date of the merger lie between January 1,
1980 and December 31, 1991, respectively.
Our full sample is composed of 3169 mergers and 348 tender offers. We
classify cases as tender offers when the bidder first launches a tender offer to
acquire control and this is followed by a merger agreement whereby the
acquiring company agrees to purchase the remaining shares not tendered under
the offer. (Reclassifying these situations as mergers does not significantly change
the analysis.) We require acquirors to be on both CRSP’s monthly
NYSE/AMEX/Nasdaq tapes and COMPUSTAT. Targets in the full sample
may be publicly or privately owned, but sometimes we consider only acquisi-
tions in which the target is publicly traded. This requirement reduces the sample
to 709 mergers and 278 tender offers. Almost all of the acquirors in tender offers
trade on the NYSE, and over 35% of the acquirors in mergers trade on Nasdaq.
Table 1 shows the distribution of sizes and book-to-market ratios of the
acquiring firms, relative to the universe of firms listed on the NYSE and AMEX
covered by both CRSP and COMPUSTAT, with size and book-to-market
deciles computed every month. Panel A ranks the acquiring firms into size
deciles, with size deciles measured on the basis of market equity value relative
to the universe of all NYSE, AMEX, and Nasdaq stocks covered by both
CRSP and COMPUSTAT. Our sample of acquiring firms tilts towards large
Table 1
Descriptive statistics for mergers and tender offers announced and completed between January 1980
and December 1991
Panel A reports the distribution of size decile rankings of acquirors in mergers and tender offers for
U.S. targets by acquirors listed on NYSE/AMEX and Nasdaq, covered by both COMPUSTAT and
CRSP, listed on the SDC Mergers and Corporate Transactions on-line database, and announced
and completed between January 1980 and December 1991. Each type of acquisition is listed for two
sets of targets: all targets, irrespective of their public or private status, and only public targets, listed
on CRSP as well as COMPUSTAT. Size deciles are computed every month for all firms in the
universe of NYSE /AMEX and Nasdaq stocks. Decile 1 is the smallest. Panel B reports the
distribution of book-to-market decile rankings, where book-to-market deciles are similarly com-
puted every month for all firms in the universe of NYSE/AMEX and Nasdaq stocks.
Panel A: Size deciles of acquiror at the time of announcement of merger or tender offer
Size decile Mergers! Tender offers!
All targets Only public All targets Only public

targets targets
1—2 126 (4.2%) 24 (3.6%) 8 (2.5%) 7 (2.7%)

3—4 282 (9.4%) 52 (7.7%) 10 (3.1%) 6 (2.3%)
5—6 516 (17.2%) 84 (12.4%) 30 (9.3%) 22 (8.5%)
7—8 815 (27.2%) 156 (23.1%) 99 (30.6%) 74 (28.5%)
9—10 1258 (42.0%) 359 (53.2%) 177 (54.6%) 151 (58.1%)
Total 2997 675 324 260
Average" (Median) $986 ($214) $1755 ($380) $2161 ($402) $2335 ($583)
Panel B: Book-to-market deciles of acquiror at the time of announcement of merger or tender offer
Book-to-market Mergers# Tender offers#
decile
All targets Only public All targets Only public
targets targets
1—2 557 (19.7%) 117 (18.2%) 27 (8.5%) 22 (8.6%)

3—4 741 (26.2%) 163 (25.3%) 72 (22.8%) 60 (23.5%)
5—6 685 (24.3%) 167 (26.0%) 94 (29.7%) 65 (25.5%)
7—8 518 (18.3%) 131 (20.4%) 79 (25.0%) 68 (26.7%)
9—10 322 (11.4%) 65 (10.1%) 44 (13.9%) 40 (15.7%)
Total 2823 643 316 255
Average (Median) 1.788 (0.576) 1.187 (0.582) 5.218 (0.675) 6.279 (0.670)
! Using the Wilcoxon rank-sum test, the null hypothesis that bidder sizes are distributed among the
deciles in the same proportions for the unrestricted and the restricted samples can be rejected at the 1%
level for mergers. Bidding firms for all targets, whether public or private, are smaller on average than
those bidding for public targets only. For tender offers, we cannot reject the null even at the 10% level.
" In millions of dollars.
# Using the Wilcoxon rank-sum test, the null hypothesis that bidder book-to-market ratios are
distributed among the deciles in the same proportions for the unrestricted and the restricted samples
cannot be rejected at any reasonable level of significance for either mergers or tender offers.
acquirors — over 40% of the acquirors are in the largest two deciles. Bidders in
mergers involving only public targets (our restricted sample) tend to be much
larger than those involving both private and public targets (the unrestricted
sample). On the other hand, for tender offers, there are no significant differences
in the distribution of sizes across the two samples. Panel B ranks the acquiring
firms on the basis of their book-to-market ratios, with the book-to-market
quintiles similarly calculated relative to the universe of all NYSE, AMEX, and
Nasdaq stocks covered by both CRSP and COMPUSTAT. There is no major
bias in our sample towards low book-to-market acquirors; book-to-market
ratios are relatively evenly distributed across deciles, though there is a relative
paucity of bidding firms in the two highest deciles (with the highest book-to-
market ratios). It is also interesting to note that in tender offers, there is less of
a tendency for bidders to be glamour firms than in mergers.
We also measure the sizes of public targets relative to acquiror firms four
weeks before the announcement date. Our targets are reasonably significant
targets for the acquirors, with a median size ratio of 10% for mergers (383 firms)
and 17% for tender offers (200 firms).
2.2. Methodology
To measure abnormal performance, we use the common technique of com-

puting cumulative abnormal returns relative to a size- and book-to-market-
based benchmark. (Using a size-based benchmark does not significantly alter
the results.) To calculate abnormal returns based on size and book-to-market,
we use the sequential sort procedure employed by Ikenberry et al. (1995), Barber
and Lyon (1997), Barber et al. (1998), and Kothari and Warner (1997) among
others. Specifically, we form ten size deciles at the end of every month on the
basis of the market capitalization of NYSE and AMEX firms listed on both
CRSP and COMPUSTAT. Then we rank each firm on the NYSE and AMEX
listed on both CRSP and COMPUSTAT into one of ten portfolios formed on
the basis of these breakpoints. This decile breakpoint formation and ranking
procedure is repeated every month between January 1980 and December 1994.
These deciles are further sorted into quintiles using book-to-market ratios.
Portfolio returns are then formed every month by averaging the monthly
returns for these 50 portfolios. These returns are then used as benchmarks to
calculate abnormal performance. Abnormal returns are calculated for each firm
relative to its size and book-to-market benchmark (as the difference between its
monthly return and that of its control portfolio) every month for 36 months after
the merger completion date. CARs are calculated by averaging across all
acquiror firms every month and then summing these averages over time.
To estimate significance levels for the monthly CARs, we use the bootstrap-
ping approach as applied by Ikenberry, Lakonishok, and Vermaelen. For each
merger or tender offer in our sample, we randomly select, with replacement,
a firm listed on NYSE or AMEX that has the same size and book-to-market
ranking at that point in time. This matching firm is treated as though it had
completed an acquisition at that point in time. We carry out this process for
each firm in our acquiror sample, ending up with a pseudo-portfolio consisting
of a randomly drawn firm matched in size, book-to-market, and time for each
firm in our acquiror sample. We repeat this process till we have 1000 pseudo-
portfolios and thus 1000 abnormal return observations. This gives us an empiri-
cal distribution for the abnormal returns drawn under the null model specific to
our hypothesis. The significance levels we report represent the probability that
a randomly drawn portfolio from our empirical distribution will have an
abnormal return greater than our sample. For comparison purposes, we also
report t-statistics using the crude dependence adjustment method as described
by Brown and Warner (1980) and a 24-month holdout period (months !12 to
!24 relative to the merger or tender offer completion date).
As has been noted in other studies (for example, Ikenberry, Lakonishok, and
Vermaelen), the bootstrapping approach also avoids the problems associated
with standard t-tests over long horizons, such as assumptions of normality,
stationarity, and time independence of observations. If these problems exist in
long-horizon returns, they are also present in our pseudo-portfolios and are thus
controlled for in our tests.
There are, however, some important methodological issues connected with
the monthly rebalancing procedure we use in our bootstrapping methodology,
which have not been noted previously. Other studies use either an annual
rebalancing method, whereby the size deciles and the book-to-market quintiles
are formed once a year with monthly returns calculated for these portfolios for
the following 12 months (see, for example, Ikenberry, Lakonishok, and
Vermaelen), no rebalancing (see, for example, Mitchell and Stafford, 1997), or
a control firm approach, whereby a matching firm is chosen on the basis of size
and book-to-market characteristics and held for the period over which abnor-
mal returns are calculated (see, for example, Loughran and Vijh, 1997). Monthly
rebalancing avoids some problems associated with these alternative methods.
First, the book-to-market and size characteristics for our sample firms change
over the year, as glamour firms perform poorly compared to value firms in the
long term following the classification. Fig. 1 depicts the evolution of glamour
and value status for acquirors in mergers and tender offers. It shows the average
book-to-market decile ranking for the firms in our glamour and value merger
and tender offer samples, relative to the universe of NYSE/AMEX and Nasdaq
firms. Over the three years after acquisition completion, the average book-to-
market decile ranking for glamour acquirors in mergers sharply increases from
2.37 to 4.57, while in tender offers, the ranking increases from 3.27 to 4.41.
Hence, two years after the merger announcement, glamour bidders have lost
most of their glamour status. In our 50 size and book-to-market portfolios, only
19% of the sample firms in our merger sample are classified in the same portfolio
Fig. 1. Evolution of glamour and value status for acquirors in mergers and tender offers. This graph
shows the average book-to-market decile rankings for glamour and value acquirors in mergers and
tender offers, respectively. Acquirors are ranked into deciles relative to the universe of NYSE,
AMEX, and Nasdaq firms every month for 36 months after the acquisition completion.
three years after the acquisition completion. Similarly, Mitchell and Stafford, in
their analysis of the long-run abnormal performance of a sample of acquirors
listed on the CRSP EVENTS database, report that most firms in their sample
change portfolio assignments following the event. In particular, they report that
only 25% of their sample firms remain in their original size and book-to-market
portfolio three years after the event. Using either annual rebalancing, no
rebalancing, or the control firm approach does not adequately control for the
changing risk characteristics of our sample firms over time.
Second, in order to test the performance extrapolation hypothesis, we rank
the firms in the acquiring firm sample into separate subsamples based on their
book-to-market ratios at the time of announcement of the acquisition in some of
our later analyses. As Barber et al. (1998) note, the bootstrap approach could
yield biased measures of mean abnormal returns and test statistics when the
sample firms are drawn from the subsamples consisting of the firms with the
highest or the lowest book-to-market ratios. This is because sample firms with
low book-to-market ratios will tend to cluster around the lower end of their size
and book-to-market reference partition. The bootstrap approach assumes that
all firms constituting a particular reference partition have the same expected
return. On average, therefore, if there is a large difference between the returns of
the firms with the largest and the smallest book-to-market ratio within each of
the reference partitions, the pseudo-portfolios created for firms with low book-
to-market ratios will tend to have higher returns than the sample firms, which
leads to a negative bias in the abnormal returns and in the t-statistics. Similarly,
firms with high book-to-market ratios will exhibit a positive bias in their
abnormal returns and the t-statistics.
To estimate the possible magnitude of this bias, we further sort each of our 50
reference partitions on the basis of book-to-market ratio and measure the
difference between the average return to the top half of the partition and the
second half. This procedure is equivalent to creating a reference partition twice
as fine as before. We find that over the entire 1980—1994 period, this difference is
0.64% per month on average for all reference partitions, ranging from a low of
!1.18% per month to a high of 1.1% per month. This could potentially lead to
a bias in the returns of as much as $12% per year with annual rebalancing.
Our monthly rebalancing method mitigates the extent of this bias. As can be
seen from Fig. 1, both glamour and value firms experience changes in their
original size and book-to-market characteristics after the completion of the
acquisition. Hence, with monthly rebalancing, they will no longer cluster around
the extreme ends of the reference partition.
Our methodology is nevertheless susceptible to some biases. First, the CARs
we calculate over the three-year horizon after the acquisition completion are
subject to the measurement, new listing, and skewness biases described by
Barber and Lyon (1997). Using monthly rebalancing instead of annual rebalanc-
ing or the control firm approach exacerbates the total bias in long-horizon
CARs, most notably by accentuating the new listing and rebalancing biases.
In addition, it creates yet another bias, which we refer to as the momentum
bias.2 Monthly rebalancing implies that the firms in the universe are reclassified
2 Thanks are due to Dave Ikenberry for helpful discussions on this point.
into the glamour and value benchmarks every month. However, as Chan et al.
(1996) note, the returns of glamour ‘winner’and value ‘loser’ stocks exhibit
positive and negative drifts, respectively, up to six months after their classifica-
tion into winner and loser portfolios. Hence, firms that are classified as glamour
firms in any month continue to be winner firms the following month, while firms
classified as value firms continue to be loser firms. Consequently, CARs cal-
culated with respect to the glamour benchmarks tend to be negatively biased
while CARs calculated with respect to the value benchmarks are positively
biased. Our empirical distribution therefore has a negative mean when we
examine glamour firms, while the mean is positive when we examine value firms.
Similarly, Ikenberry et al. (1995) find that the mean return for the bootstrap
distribution for their glamour repurchasers sample is !4.31% (see Kothari and
Warner, 1997, fn. 4). The bias decreases if we decrease the frequency with which
we rebalance.
These three biases make it difficult to judge the economic significance of our
long-horizon CARs. We therefore report in our tables a bias-adjusted CAR
(BCAR) obtained in each case by subtracting the mean CAR for the empirical
distribution from the CAR value for the sample. The BCAR value gives us
a better idea of the economic significance of our results. Note however that the
p-values computed through bootstrapping and the statistical significance of the
results are unaffected by these biases.
Second, as noted by Kothari and Warner, another potential bias can occur if
the universe of firms from which the pseudo-portfolios are formed does not have
the same survival characteristics as the sample firms. A disproportionate num-
ber of IPOs, which perform poorly in the long run, are listed on Nasdaq.
Consequently, including Nasdaq firms in the universe from which the pseudo-
portfolios are drawn biases our empirical distribution of abnormal returns
negatively. Loughran (1993) reports that small NYSE securities earn average
annual returns that are 6% higher than those earned by similarly sized Nasdaq
firms and concludes that this return differential is largely due to the preponder-
ance of IPOs listing on Nasdaq. To alleviate this possible bias, we draw our
pseudo-firms only from the universe of NYSE/AMEX stocks. An alternate
approach might be to include, in addition to the NYSE/AMEX stocks, only
Nasdaq stocks that had been in existence for at least three years at the time of
inclusion in the pseudo-universe. However, this procedure would add tremen-
dously to the computational requirements of the bootstrapping program. To
check if our methodology is robust to excluding Nasdaq firms, we repeat the
analysis excluding all Nasdaq acquirors from our sample. This does not affect
our results (see Section 3.2.2).
The fact that long-horizon returns are sensitive to the methodology employed
may explain the difference between our results and the conclusions drawn by
Mitchell and Stafford (1997). They compute three-year buy-and-hold abnormal
returns relative to a benchmark portfolio adjusted for size and book-to-market
ratio (without rebalancing), include Nasdaq firms in their pseudo-universe, and

do not distinguish between mergers and tender offers. Consequently, it is not
surprising that they find different results from the ones reported in this paper.
3. The long-term performance of acquiring firms
3.1. Do bidders underperform?
Table 2 reports the long-term underperformance for both mergers and tender
offers taken as a whole, for size- and book-to-market-adjusted returns. Unless
specified otherwise, all the abnormal returns we report throughout the paper are
computed over a period of three years after the completion of the acquisition
Table 2
Long-term performance for acquirors in mergers and tender offers announced and completed
between January 1980 and December 1991
This table reports cumulative abnormal returns (in percent) for acquirors in mergers and tender
offers. Results are reported for two sets of targets: all targets, irrespective of their public or private
status, and only public targets, listed on CRSP as well as COMPUSTAT. Abnormal returns are
computed with reference to a size- and book-to-market-based benchmark portfolio, consisting of
stocks listed on the NYSE and AMEX exchanges (formed using size deciles computed every month
for all firms in the universe of NYSE and AMEX stocks and then subdividing these size deciles into
five quintiles based on book-to-market ratios). The abnormal returns are then adjusted for the bias
in the empirical distribution by subtracting the mean of the empirical distribution in each case from
the abnormal return for the sample. The first number in parentheses is the significance level, i.e., the
probability that a random portfolio from the empirical distribution computed through bootstrap-
ping will have an abnormal return greater than the sample abnormal return. The second number is
the standard t-statistic, computed using the crude dependence adjustment method, using a 24-month
holdout period, i.e., !122!36 months. With 23 degrees of freedom, the absolute value of the 5%
confidence level for the t-test is 2.07 and the 1% level is 2.81.
Bias-adjusted CARs for acquiring firms in mergers and tender offers (in %)
Period Mergers Tender offers
Only public All mergers Only public All tender

targets (N"643) (N"2823) targets (N"255) offers (N"316)
1—12 !1.39 !1.76 3.78 3.95

(0.84, !2.94) (1.00, !6.39) (0.02, 1.17) (0.01, 1.34)
13—24 !2.80 !2.72 2.26 1.90
(0.98, !3.58) (1.00, !7.09) (0.10, 0.78) (0.14, 0.59)
25—36 1.61 !0.44 2.53 3.00
(0.09, !0.61) (0.25, !2.76) (0.10, 0.67) (0.04, 1.07)
1—36 !2.58 !4.04 8.56 8.85
(0.90, !4.12) (1.00, !9.39) (0.00, 1.51) (0.00, 1.73)
and are bias-adjusted by subtracting the mean of the empirical distribution from
the CAR for the sample. Acquiring firms underperform an equally weighted
control portfolio with a similar size and book-to-market ratio by a statistically
significant 4.04% and outperform the control portfolio in tender offers, earning
a statistically significant positive bias-adjusted abnormal return of 8.85% over
a period of three years after the completion of the acquisition. It is interesting to
note that these bias-adjusted CAR values are broadly consistent with the
abnormal returns reported by Mitchell and Stafford, who find that acquiring
firms in mergers and tender offers underperform their benchmarks by a statist-
ically significant 4% in the three years following the acquisition.
In addition, the magnitude of our unadjusted CARs, !15.23% and 4.94% for
acquiring firms in mergers and tender offers, respectively, is broadly consistent
with Agrawal et al. (1992), who find that acquiring firms in mergers earn a statist-
ically significant negative cumulative average abnormal return of !13.85% in
the 36 months following merger completion. They also report that abnormal
returns for tender offers are small and insignificantly different from zero.
However, the statistical significance of our results is different from those
reported by other studies, which do not use bootstrapping. The standard t-
statistics appear to be negatively biased. Calculating these statistics using the
crude dependence approach leads us to the same conclusions as those obtained
by Agrawal, Jaffe, and Mandelker. Bootstrapping, however, reveals that bidders
in tender offers earn highly significant positive abnormal returns, outperforming
all 1000 pseudo-portfolios in our unrestricted sample and 997 portfolios in the
public targets sample. Similarly, bidders in mergers underperform all 1,000
pseudo-portfolios in the unrestricted sample. The reason standard t-statistics
are biased can be seen when examining the mean of the empirical distribution.
The distribution is not centered at zero: the average firm in the pseudo-universe
of firms that did not make acquisitions earned negative abnormal returns of
!11.2% in mergers and !3.92% in tender offers.
3.2. Test of the performance extrapolation hypothesis
We sort all acquirors in our sample into equal subsamples of ‘glamour’,

‘neutral’, and ‘value’ firms by sorting on book-to-market ratio measured in the
month of the acquisition announcement. Book value is taken from COMPUS-
TAT (annual data item number 60) for the previous fiscal year while market
value is taken from CRSP and computed as the number of shares outstanding
times the price at the end of the announcement month. If firms do not have
a book-to-market value reported at the time of acquisition, to minimize the loss
of data, we use the last six months before the announcement and take the last
available value as the book-to-market ratio for the firm.
Table 3 reports some descriptive statistics for glamour, neutral, and value
bidders. It follows a pattern similar to Table 1, showing the distribution of sizes
Table 3
Descriptive statistics for glamour, neutral, and value acquirors in mergers and tender offers for
acquisitions announced and completed between January 1980 and December 1991
Panel A reports the distribution of size decile rankings of acquirors in mergers and tender offers for
U.S. firms. Acquirors are classified as glamour, neutral, and value based on their book-to-market
ratio at the announcement date. Acquirors are NYSE/AMEX and Nasdaq firms, covered by both
COMPUSTAT and CRSP, listed on the SDC Mergers and Corporate Transactions on-line
database, and announced and completed between January 1980 and December 1991. Each type of
acquisition is listed for all targets irrespective of their public or private status. Size deciles are
computed every month for all firms in the universe of NYSE/AMEX and Nasdaq stocks. Decile 1 is
the smallest. Panel B reports the distribution of book-to-market decile rankings, where book-to-
market deciles are similarly computed every month for all firms in the universe of NYSE/AMEX and
Nasdaq stocks. Panel C reports the sizes of publicly listed targets relative to glamour, neutral, and
value acquirors four weeks before the announcement date of the merger or tender offer.
Panel A: Size deciles of glamour, neutral, and value acquirors at the time of announcement of merger or
tender offer
Size Decile All mergers! All tender offers!
Glamour Neutral Value Glamour Neutral Value
1—2 38 15 58 2 0 5
3—4 100 56 87 3 1 6
5—6 149 145 154 12 7 9
7—8 251 240 279 27 33 35
9—10 394 503 353 61 46 49
Total 932 959 931 105 107 104
Average" $11901 $1129 $788 $3544 $1700 $1396
(Median) ($234) ($339) ($172) ($751) ($719) ($233)
Panel B: Book to market deciles of glamour, neutral, and value acquirors at the time of announcement of
merger or tender offer
B/M Decile All mergers All tender offers
1—2 549 8 0 27 0 0
3—4 381 357 3 66 6 0
5—6 2 533 150 17 67 15
7—8 0 62 456 0 34 45
9—10 0 0 322 0 0 44
Total 932 960 931 105 107 104
Average 0.222 0.574 4.607# 0.302 0.662 14.870#
(Median) (0.247) (0.576) (1.066) (0.349) (0.677) (1.118)
Table 3. Continued.
Panel C: Sizes of publicly listed targets relative to glamour, neutral, and value acquirors four weeks
before the announcement date of the merger or tender offer
Public target mergers$ Public target tender offers$

(N"80) (N"130) (N"110) (N"68) (N"66) (N"64)
Average 0.25 0.19 1.22 0.29 0.41 5.40

Maximum 5.50 1.20 89.27 2.11 3.24 105.30
Minimum 0.00 0.00 0.00 0.00 0.00 0.01
Median 0.08 0.09 0.11 0.10 0.15 0.30
! Using the Wilcoxon rank-sum test, the null hypothesis that bidder sizes are distributed among the
deciles in the same proportions for the three types of acquirors can be rejected at the 1% level for
both mergers and tender offers. Glamour acquirors are larger on average than neutral or value
acquirors.
" In millions of dollars.
# The book-to-market ratios of the value firms are marked by several extreme outliers, which affect
the average.
$ Using the median score test, the null hypothesis that the three types of acquirors have the same
median ratio of relative size of target to bidder cannot be rejected at the 5% level for tender offers
and at any reasonable level of significance for mergers.
and book-to-market ratios of the acquiring firms relative to the universe of firms
listed on the NYSE, AMEX, and Nasdaq covered by both CRSP and COM-
PUSTAT. As in Table 1, Panel A ranks the firms into size deciles, with size
deciles again measured on the basis of market equity value relative to the
universe of all NYSE/AMEX and Nasdaq stocks covered by both CRSP and
COMPUSTAT. We see that glamour acquirors are, on average, much larger
than value acquirors. Panel B ranks the firms on the basis of their book-to-
market ratios, with the book-to-market quintiles calculated as before, relative to
the universe of all NYSE/AMEX and Nasdaq stocks covered by both CRSP and
COMPUSTAT. As can be seen, by construction, glamour acquirors have
book-to-market ratios much lower than value acquirors and also tend to rank in
the lowest deciles of book-to-market ratio in comparison to the universe of
NYSE/AMEX and Nasdaq stocks.
Panel C reports statistics on the target-acquiror size ratio. The median target-
acquiror size ratio is between 8% and 11% for the three types of acquirors
in mergers and varies between 10% and 30% for tender offers. We cannot
reject the hypothesis that the median target-acquiror size ratio is constant across
the three types of acquirors. The pattern for the exchange listings of the
acquirors is broadly the same as before, with most of the acquirors listed on the
NYSE.
3.2.1. Results for the total sample

Consistent with the performance extrapolation hypothesis, the three types
of bidders exhibit a striking pattern in their long-term performance after
the acquisition. Table 4, Panel A, shows that glamour bidders in mergers
significantly underperform other glamour firms in the 36 months following the
acquisition, earning negative bias-adjusted abnormal returns of !17% on
average in our unrestricted sample. Glamour bidders in tender offers earn
statistically insignificant bias-adjusted abnormal returns of 4% in the three
years after the acquisition. Panel C shows that value acquirors, on the other
hand, outperform other firms with similar sizes and book-to-market ratios,
earning statistically significant positive bias-adjusted abnormal returns of
15.5% for tender offers and 7.64% for mergers. The relation between book-to-
market ratio and subsequent performance is relatively smooth, with neutral
acquirors performing neither as badly as glamour acquirors nor as well as value
acquirors.
The negative bias in the standard t-statistics is again visible in this table. The
negative abnormal performance found using standard t-statistics is not always
confirmed by the bootstrapping methodology, unless the value for the t-statistic
is strongly negative. Similarly, when we find statistically significant positive
abnormal returns for tender offers using bootstrapping, we do not find statistical
significance using the traditional methodology.
We also calculate abnormal returns based on the Fama and French (1993)
three-factor model. The results of these three-factor regressions carried
out on the full sample are broadly similar. The alphas show the same pat-
tern as our results using the BCAR approach. Value stocks, for example,
have an alpha of 0.11% per month while glamour stocks, have an alpha
of !0.27% per month. None of the alphas is statistically significant at
the 5% level, though the alpha for glamour firms is significant at the 10%
level. However, the Fama—French three-factor approach requires some
unreasonable assumptions, most notably that the regression estimates are
constant over the estimation period. It also assumes that the firm’s size,
book-to-market, and market characteristics are stable over time, a rather
implausible assumption, especially if bidders experience significant ab-
normal returns subsequent to an acquisition (see Fig. 1). In addition,
Barber and Lyon (1997) find that the model yields negatively biased esti-
mates at a 12-month horizon and positively biased estimates at a 36-month
horizon.
3.2.2. Robustness check

The pattern observed in our results is remarkably robust. We check the per-
formance of glamour, neutral, and value acquirors for a subsample of the
public targets sample in which the size of the target is greater than 20% of the
size of the acquiror. This gives us a sample size of 171 mergers and 111 tender
Table 4
Long-term performance for acquirors in mergers and tender offers, classifying acquirors as glamour,
neutral, or value firms
Panel A reports abnormal returns (in percent) for glamour acquirors in mergers and tender offers,
while Panel B reports the same statistics for neutral acquirors and Panel C for value acquirors.
Acquirors are classified as value, neutral, or glamour on the basis of their book-to-market ratios at
the time of announcement. Results are reported for two sets of targets: all targets, irrespective of their
public or private status, and only public targets, listed on CRSP as well as COMPUSTAT.
Abnormal returns are computed with reference to a size- and book-to-market-based benchmark
portfolio. The abnormal returns are then adjusted for the bias in the empirical distribution by
subtracting the mean of the empirical distribution in each case from the abnormal return for the
sample. The first number in parentheses is the significance level, i.e., the probability that a random
portfolio from the empirical distribution computed through bootstrapping will have an abnormal
return greater than the sample abnormal return. The second number is the standard t-statistic,
computed using the crude dependence adjustment method, using a 24-month holdout period, i.e.,
!122!36 months. With 23 degrees of freedom, the absolute value of the 5% confidence level for
the t-test is 2.07 and the 1% level is 2.81.
Panel A: Bias-adjusted CARs for glamour acquiring firms in mergers and tender offers (in %)

targets targets offers
(N"213) (N"932) (N"85) (N"105)
1—12 !5.55 !6.25 3.06 2.12

(0.98, !3.98) (1.00, !9.35) (0.15, !2.32) (0.23, !3.12)
13—24 !5.37 !7.97 3.25 2.67
(0.98, !3.75) (1.00, !9.66) (0.15, !1.99) (0.16, !2.55)
25—36 0.10 !3.03 !1.38 !0.53
(0.47, !2.00) (0.99, !6.03) (0.67, !3.07) (0.58, !3.29)
1—36 !10.82 !17.26 4.92 4.25
(1.00, !5.63) (1.00, !14.45) (0.18, !4.26) (0.18, !5.17)
Panel B: Bias-adjusted CARs for neutral acquiring firms in mergers and tender offers (in %)

(N"218) (N"960) (N"86) (N"107)
1—12 !5.59 !1.37 5.23 4.14

(1.00, !4.16) (0.92, !6.28) (0.02, 0.84) (0.05, 0.73)
13—24 !1.19 !1.70 0.38 !1.10
(0.72, !2.05) (0.97, !5.90) (0.45, !0.11) (0.70, !0.67)
25—36 !0.34 !1.23 2.64 1.76
(0.55, !1.39) (0.91, !4.79) (0.15, 0.85) (0.23, 0.39)
1—36 !7.12 !4.29 8.24 4.79
(0.99, !4.39) (1.00, !9.80) (0.03, 0.70) (0.10, 0.26)
Table 4. Continued.
Panel C: Bias-adjusted CARs for value acquiring firms in mergers and tender offers (in %)

(N"212) (N"931) (N"84) (N"104)
1—12 5.58 1.83 2.54 4.93

(0.00, 4.70) (0.04, 8.52) (0.26, 3.38) (0.04, 4.21)
13—24 !1.06 0.88 2.22 3.48
(0.68, 1.74) (0.20, 6.69) (0.27, 3.02) (0.12, 3.72)
25—36 5.36 4.93 5.07 7.13
(0.01, 4.18) (0.00, 9.45) (0.08, 3.35) (0.01, 4.16)
1—36 9.87 7.64 9.81 15.53
(0.00, 6.13) (0.00, 14.23) (0.05, 5.63) (0.00, 6.98)
The absolute value of the t-statistic to test the null hypothesis that there is no difference between size
and book-to-market adjusted abnormal returns for glamour mergers vs. value mergers is 17.92
(p-value: 0.0001). For glamour tender offers vs value tender offers, the absolute value of the t-statistic
is 7.06 (p-value: 0.0001).
offers. We obtain broadly similar results in this sample, with glamour acquirors
earning a statistically significant negative bias-adjusted abnormal return of
!22.8% in mergers and a statistically significant positive return of 17.24% in
tender offers. Value acquirors earn a statistically significant positive bias-
adjusted abnormal return of 14.45% in mergers and 23.25% in tender offers.
Similarly, as noted earlier, we also exclude Nasdaq acquirors from our
analysis to see if our results are robust to our methodology of excluding Nasdaq
stocks from our pseudo-universe while bootstrapping. This does not change
our results significantly. Glamour acquirors earn a statistically significant
negative bias-adjusted abnormal return of !6.47% in mergers and an insigni-
ficant !1.92% in tender offers. Value acquirors earn a statistically significant
positive bias-adjusted abnormal return of 6.1% in mergers and 8.8% in tender
offers.
Lastly, over 50% of the mergers in our sample were announced between
1982—85, while over 50% of our tender offers were announced between 1986—89.
Brav (1996) shows that the nonparametric bootstrap method, which ignores
residual covariation in the returns, can lead to biased inferences in periods when
there is a significant clustering of the events. We therefore repeat the analysis
excluding the two merger wave and tender offer wave periods. Again, we obtain
broadly the same results, with glamour acquirors earning a statistically signifi-
cant negative bias-adjusted abnormal return of !20.2% in mergers and an
insignificant 9.87% in tender offers, while value acquirors earn a statistically
significant positive bias-adjusted abnormal return of 4.88% in mergers and

18.51% in tender offers.
3.3. The means of payment vs. the performance extrapolation hypothesis
In order to test whether the findings in Table 4 can be explained by the means
of payment used by the bidding firms, we investigate the methods of payment
used by bidders in the tender offers and mergers in our sample. For each firm in
our sample, we check if the total value of the transaction as reported by SDC is
equal to the value paid through common shares or through cash. If so, we
classify the merger as 100% stock- or 100% cash-financed respectively. Other-
wise, the ratio of the amount of common financing to the total value of the deal
is used to judge the degree of stock financing of the merger or tender offer.
Because we are interested in investigating whether glamour bidders exploit their
overvaluation by paying with (overvalued) shares, we treat other methods of
compensation, such as the value paid through preferred shares or through some
form of debt securities, as equivalent to cash. For simplicity, we refer to all these
mergers as cash-financed. Table 5 summarizes the results of the nonparametric
tests we use in testing our various hypotheses.
As can be seen, we can reject the initial hypothesis that mergers and tender
offers are financed in the same way, even at the 1% level. Consistent with other
results in the literature (see, for example, Travlos, 1987; Agrawal et al., 1992 pp.
1611—1612), we find that mergers are much more likely than tender offers to be
paid for by shares — the average merger in our sample is over 50% paid for by
shares, while only 7% of the value of the average tender offer is payment in stock.
3.3.1. Glamour, value, and the means of payment

We cannot reject the hypothesis that tender offers are identical in their
payment method across glamour, value, and neutral acquirors, even at the 10%
level. All three types of acquirors in tender offers use insignificantly different and
small proportions of stock financing in their acquisitions. In mergers, on the
other hand, glamour acquirors use stock to a significantly greater degree than
value acquirors, with 54% stock financing for glamour acquirors on average as
opposed to only 38% for value acquirors. This is also consistent with Martin
(1996), who finds that mergers and tender offers paid for in stock tend to have
much higher market-to-book ratios than cash-financed acquisitions.
To some extent, the combined results of Tables 2, 4 and 5 are consistent with
the predictions of the means of payment hypothesis. First, bidders in mergers
typically pay with shares, while in tender offers they pay with cash. Hence, as
predicted by the means of payment hypothesis, the post-acquisition return is
significantly negative in the merger sample, but significantly positive in the
tender offer sample (Table 2). Second, glamour bidders in mergers pay more
frequently with stock than do value bidders, which explains why glamour
Table 5
Nonparametric tests for differences in payment mechanisms across mergers and tender offers
This table reports Wilcoxon two-sample rank-sum z-scores (or the Kruskal-Wallis H-test s2 approx-
imation for more than two samples) for comparing methods of financing of different combinations of
merger and tender offers. The method of financing is computed using the value paid through
common shares, VCOM, and the value of the transaction, VAL, reported in the SDC database.
Acquirors are classified as value or glamour on the basis of their book-to-market ratios at the time of
announcement.
Samples/analyzed Mean proportion Z (p-value) s2 (p-value)

financed through
stock (%)
1. All tender offers (N"247) 7.5 !12.92 166.93

All mergers (N"971) 50.7 (0.00) (0.00)
2. Public targets sample:
Glamour mergers (N"145) 62.1 16
Neutral mergers (N"151) 56.8 (0.00)
Value mergers (N"103) 38.9
Glamour tenders (N"79) 8.3 3.07
Neutral tenders (N"78) 8.9 (0.22)
Value tenders (N"61) 3.8
4. All targets sample:
Glamour mergers (N"336) 54.5 !4.08 16.64
Value mergers (N"212) 37.6 (0.00) (0.00)
5. All targets sample:
Glamour tenders (N"92) 11.0 !1.60 2.56
Value tenders (N"59) 3.9 (0.11) (0.11)
bidders significantly underperform value bidders (Table 4, Panel A). However,

the significant difference between value bidders and glamour bidders in tender
offers cannot be explained by the means of payment hypothesis: although both
bidder types typically pay with cash, glamour bidders perform significantly
worse than value bidders (compare Panels A and C of Table 4).
To test further the relation between the method of payment and performance,
we classify all firms in the unrestricted targets subsample into three groups on
the basis of whether they were 100% stock-financed, 100% cash-financed, or
financed using a mixture of stock and cash. For mergers, this gives us 409
cash-financed mergers, 332 stock-financed mergers, and 970 mixtures. For
tender offers, the numbers are 217, 7, and 247, respectively. Owing to the lack of
data on stock-financed tender offers, we do not analyze this subsample. We then
classify the firms in each sample into glamour or value stocks based on their
book-to-market ratio at the time of announcement.
Table 6 shows size and book-to-market adjusted BCARs for stock- and
cash-financed mergers and cash-financed tender offers. The results for mixtures
Table 6
Long-term performance for acquirors in stock- or cash-financed mergers and tender offers, classify-
ing acquirors as glamour or value firms
Panel A reports abnormal returns (in percent) for glamour and value acquirors in mergers which are
100% stock-financed, while Panel B reports the same statistics for tender offers and mergers which
are 100% cash-financed. The method of financing is computed using the VCOM and VAL variables
in the SDC database. Acquirors are classified as value or glamour on the basis of their book-to-
market ratios at the time of announcement. Targets are all targets, whether public or private.
Abnormal returns are computed with reference to a size- and book-to-market-based benchmark
portfolio. The abnormal returns are then adjusted for the bias in the empirical distribution by
subtracting the mean of the empirical distribution in each case from the abnormal return for the
sample. The first number in parentheses is the significance level, i.e., the probability that a random
portfolio from the empirical distribution computed through bootstrapping will have an abnormal
return greater than the sample abnormal return. The second number is the standard t-statistic,
computed using the crude dependence adjustment method, using a 24-month holdout period, i.e.,
!122!36 months. With 23 degrees of freedom, the absolute value of the 5% confidence level for
the t-test is 2.07 and the 1% level is 2.81.
Panel A: Bias-adjusted CARs for acquiring firms in 100% stock-financed Mergers* (in %)
Period Mergers
Glamour acquirors (N"150) Value acquirors (N"150)
1—12 !7.03 (0.99, !4.53) !4.80 (0.98, !1.30)

13—24 !1.49 (0.68, !3.30) 1.25 (0.32, 0.96)
25—36 5.49 (0.03, !0.93) 2.19 (0.17, 1.19)
1—36 !3.05 (0.73, !5.06) !1.37 (0.63, 0.49)
Panel B: Bias-adjusted CARs for acquiring firms in 100% cash-financed merger and tender offers (in %)
Period Mergers! Tender offers!
Glamour Value Glamour Value

(N"187) (N"187) (N"100) (N"100)
1—12 !1.25 3.97 4.95 3.95

(0.69, !4.00) (0.05, 2.63) (0.03, !1.21) (0.10, 3.84)
13—24 !9.45 0.61 4.89 2.57
(1.00, !6.38) (0.39, 1.50) (0.04, !0.86) (0.20, 3.41)
25—36 !0.81 7.12 !1.34 5.94
(0.61, !2.87) (0.00, 3.37) (0.68, !2.42) (0.04, 3.88)
1—36 !11.51 11.69 8.49 12.43
(0.99, !7.65) (0.00, 4.33) (0.04, !2.59) (0.01, 6.43)
*100% stock-financed tender offers are not analyzed as there were only seven such offers in the
sample. The absolute value of the t-statistic to test the null hypothesis that there is no difference
between size- and book-to-market-adjusted abnormal returns for glamour mergers vs. value mergers
is 3.46 (p-value: 0.001).
!The absolute value of the t-statistic to test the null hypothesis that there is no difference between
size and book-to-market adjusted abnormal returns for glamour mergers vs. value mergers is 8.27
(p-value: 0.0001). For glamour tender offers vs value tender offers, the absolute value of the t-statistic
is 5.08 (p-value: 0.0001).
are similar and are not reported. As can be seen, glamour firms perform worse
than value firms in every case, regardless of the payment method. In stock-
financed mergers, value acquirors earn a statistically insignificant three-year
positive abnormal return, while glamour acquirors earn a statistically insignific-
ant three-year negative abnormal return. In the first 12 months after the merger
completion, however, both value and glamour bidders earn statistically signifi-
cant negative abnormal returns and the return to glamour acquirors (!7%) is
worse than the return to value acquirors (!4.8%). In addition, we can reject the
hypothesis that the three-year abnormal returns earned by value acquirors are
identical to those earned by glamour acquirors. In cash-financed acquisitions,
value acquirors far outperform glamour acquirors in both mergers and tender
offers. Specifically, in cash-financed mergers, value acquirors earn significant
positive three-year abnormal returns of 11.7%, in contrast to a significant
negative three-year abnormal return of !11.51% for glamour acquirors. We
conclude that, while all results presented so far are consistent with the perfor-
mance extrapolation hypothesis, many results are inconsistent with the hypoth-
esis that the post-acquisition returns of bidders are simply driven by the method
of payment.
We also investigate why the long-term abnormal returns for bidders in tender
offers are higher than the returns to bidders in mergers by dividing a sample of
100% cash-financed mergers and tender offers into glamour, neutral, and value
bidders depending on whether the book-to-market ratios of the bidders at the
time of announcement was less than 0.47, between 0.47 and 0.73, and higher
than 0.73, respectively (the cutoff points divide the sample roughly at the 33rd
and the 67th percentile, respectively). Interestingly, even after controlling for
both method of payment and the book-to-market ratio of the bidder, bidders in
tender offers continue to perform better than bidders in mergers, with glamour
bidders earning statistically significant negative bias-adjusted abnormal returns
of !9.9% in mergers and significant bias-adjusted positive abnormal returns of
10.9% in tender offers over the three years after the acquisition completion.
Neutral bidders earn statistically insignificant three-year bias-adjusted abnor-
mal returns of !5.6% in mergers but strongly significant positive three-year
bias-adjusted abnormal returns of 11.3% in tender offers. Value bidders in both
mergers and tender offers earn significant positive three-year bias-adjusted
abnormal returns of 15.5% and 9.6%, respectively. Why this difference in
performance remains is a puzzle, which the data do not allow us to investigate in
this paper. For example, as opposed to mergers, tender offers tend to be more
hostile transactions. Perhaps this leads to more fundamental change in the
target and consequently results in greater value creation after the acquisition.
3.3.2. Determinants of takeover premiums: glamour status or means of payment

According to the performance extrapolation hypothesis, glamour firms
should pay higher takeover premiums than value firms. Indeed, managers
of glamour firms will tend to overestimate their ability to create synergies in the
target and should therefore be willing to pay more than managers of value firms.
This should be particularly relevant in tender offers because there is typically
more competition for the target. The means of payment hypothesis would
predict that acquirors will pay higher premiums in acquisitions paid with shares
than in acquisitions paid with cash. Indeed, if the bidder believes its shares are
overvalued, it can afford to pay a higher ‘apparent’ premium in a stock-financed
transaction, as the ‘real’ premium is much smaller. Moreover, if target share-
holders are concerned about the bidders’ opportunistic behavior, they may
require a higher premium if the bidder chooses to pay with shares.
We therefore investigate the acquisition premiums paid by bidders in the
tender offers and mergers in our sample. We measure the acquisition premium
as the difference between the highest price paid per share in the transaction and
the target share price four weeks before the announcement of the acquisition, as
a percentage of the target share price four weeks before the announcement date.
Table 7 consolidates the results of our tests of these hypotheses.
As can be seen from Table 7, there is no evidence in mergers as a whole
that acquisition premiums differ across types of acquiror. In tender offers,
however, we can reject at the 3% level the hypothesis that tender offers pay
similar acquisition premiums. In tender offers, glamour bidders pay premiums
of 66% on average, while value bidders pay premiums of only 47%. Tender
offers tend to be cash-financed while mergers tend to be more stock-financed. To
distinguish between our two main hypotheses, we divide our sample as before
into 100% cash-financed and 100% stock-financed acquisitions. While glamour
and value bidders in cash-financed mergers tend to pay similar acquisition
premiums of around 52% for their targets, glamour bidders in stock-financed
mergers tend to pay far higher acquisition premiums than value bidders, paying
58% as opposed to 37%. Our results for cash-financed tender offers remain
similar.
The results for tender offers are consistent with the performance extrapolation
hypothesis. Glamour firms pay significantly higher takeover premiums than
value firms. However, the results for mergers are not consistent with this
hypothesis: on average, the takeover premium is independent of the book-to-
market ratio of the bidder. Only in 100% stock-financed acquisitions do
glamour firms pay larger takeover premiums than value firms. Note, however,
that the results are generally not consistent with the means of payment hypothe-
sis: on average, bidders do not pay higher takeover premiums in stock-financed
acquisitions than in acquisitions financed with cash.
3.4. Are glamour bidders myopic about EPS?
With their tendency towards high P/E ratios and stock financing of acqui-
sitions, (the Pearson correlation coefficient between market-to-book ratio
Table 7
Nonparametric tests for differences in acquisition premiums across mergers and tender offers
This table reports Wilcoxon two-sample rank-sum z-scores (or the Kruskal-Wallis H-test s2 approx-
imation for more than two samples) for comparing acquisition premiums for different combinations
of merger and tender offers. Acquisition premiums are defined as the difference between the highest
price paid per share and the target share price four weeks before the announcement date as
a percentage of the target share price four weeks before the announcement date, measured by the
PREM4WK variable in the SDC database. Acquirors are classified as value, neutral, or glamour on
the basis of their book-to-market ratios at the time of announcement.
Samples analyzed Mean (Median) Z (p-value) s2 (p-value)

acquisition
premium (%)

Glamour mergers (N"127) 52.36 (41.8) 0.122
Neutral mergers (N"124) 51.74 (40.8) (0.94)
Value mergers (N"103) 51.69 (42.9)

Glamour tenders (N"68) 66.29 (60.9) 6.90
Neutral tenders (N"63) 53.70 (49.5) (0.03)
Value tenders (N"60) 47.16 (43.9)
3. Acquirors in 100% cash-financed mergers:

Glamour mergers (N"47) 51.58 (39.5) 0.67 0.46
Value mergers (N"38) 51.54 (42.0) (0.50) (0.50)
4. Acquirors in 100% stock-financed mergers:

Glamour mergers (N"50) 57.99 (53.2) 2.73 7.49
Value mergers (N"51) 37.35 (28.8) (0.01) (0.01)
5. Acquirors in 100% cash-financed tender offers:

Glamour tender offers (N"76) 62.64 (60.75) !1.88 3.56
Value tender offers (N"66) 49.63 (46.35) (0.05) (0.05)
and P/E ratio is 0.61 for tender offers and 0.47 for mergers), glamour
acquirors seem most likely to exhibit an EPS fixation. A firm with a
high P/E buying a company with a lower P/E ratio and financing the
acquisition through shares may inflate its EPS. This will be easier for
the firm’s managers to justify and can cause them to overpay for an acqui-
sition.
To test if this EPS myopia is also a determinant of glamour bidder underper-
formance, we use a subsample of our public targets sample with the criterion
that the target is 100% owned by the bidder after the completion of the merger.
This leaves us with 613 mergers. Results for tender offers are similar and are not
reported. We then measure the impact on acquiror EPS for each transaction. To
do this, we adopt a procedure similar to the procedure outlined by Lys and
Vincent (1995).
Under generally accepted accounting principles (GAAP), acquirors can re-
cord business combinations in one of two ways: pooling of interests or purchase.
The two methods differ in their treatment of intangible assets. The pooling
method simply uses the book value of net assets of the target as the basis for the
target. Under the purchase method, the difference between the market value
paid for the target and the book value of net assets of the target is recorded as
goodwill and has to be amortized over the life of the acquired assets. SEC
permission to use the pooling of interests method rather than the purchase
method depends on the structure of the transaction and the history of the two
companies.
The non-merger EPS of the acquiror is defined as the EPS if the acquiror had
not carried out the merger. It is computed as the net income in the year before
the merger completion year divided by the last available value for number of
shares outstanding for the acquiror between the announcement date and six
months before the merger completion date. The reason for this definition is that
if the bidder used its common shares as (part) payment for the acquisition, we
rarely have data on exactly when and how many of these shares were first issued
for the transaction, especially if the acquiror makes another acquisition in the
same period.
If the pooling method is used in the merger, then the merger EPS is defined
as the sum of the acquiror net income and the target net income in the last
12 months before the acquisition divided by the last available figure for the
number of shares outstanding for the acquiror up to one month after the
merger completion date. If the pooling method is not used, we subtract
from the sum of the acquiror and target net incomes (above) the difference
between the value of the transaction and the book value of net assets amortized
over a period of ten years and then divide the result by the number of
shares of the acquiror outstanding one month after the merger completion.
This assumes that the entire difference between the transaction value and
the book value of net assets is purchased goodwill. Inasmuch as we ignore
the tax effects on depreciation of the target’s assets, we underestimate the
resulting change in EPS. If part of the transaction is financed either by borrow-
ing or through an issue of debt securities, we assume that the entire non-
common-stock portion of the payment is financed with debt at an interest
rate of 8% and the tax rate is the tax actually paid by the company in the
previous year. If the tax rate figure is missing, the federal statutory tax rate of
34% is assumed.
The growth in EPS (calculated as the difference between the merger EPS after
the above adjustments and the non-merger EPS, normalized by the absolute
value of the non-merger EPS) is taken as the EPS impact of the acquiror.
A high-EPS-impact merger would therefore be a merger with a large growth in

the EPS of the acquiror as a result of the merger.3
Rejecting companies for lack of availability of data on the value of the
transaction, the value paid for through shares, and the book value of net assets
leads to a sample of 333 mergers. We divide these into low-, medium-, and
high-EPS-impact categories, ranking on the EPS impact for the acquiror as
computed above. Table 8 reports our results for our normal CAR analysis. As
can be seen, the results do not support the EPS myopia hypothesis. All three
types of companies earn statistically insignificant abnormal returns. Results for
tender offers (not reported) are similar.
To check whether the high-EPS-impact mergers are in fact composed largely
of high P/E companies buying companies with lower P/Es, an indicator that the
high-EPS-impact mergers are perhaps partially motivated by EPS fixation, we
examine the P/Es of the acquiring and acquired companies directly. These are
reported in the footnotes to Table 8. In the range of the worst-performing
companies, 19% of the bidders had, in fact, a P/E higher than the target while
22% of the bidders had a P/E smaller than the target P/E. For the best-
performing companies, 30% of the companies had a P/E higher than the target
P/E, while 22% of the companies had a lower P/E than that of their target. We
also carry out a sign test on the differences between acquiror P/E and target P/E
(reported in the footnotes). However, we are unable to reject the null hypothesis
that acquiror P/E is on average no different from target P/E, for any of the
merger types. Hence, our results do not support the EPS myopia hypothesis.
4. Conclusions
Using a methodology robust to the criticisms of the standard long-horizon

event study methodology, we find that acquirors in mergers underperform in the
three years after the acquisition while acquirors in tender offers earn a small but
3 To illustrate these calculations, consider the takeover of Monolithic Memories Inc by Advanced
Micro Devices Inc. announced on April 30, 1987 and completed on August 13, 1987. The value of the
transaction was $441 million, entirely paid for through common shares and with the assumption of
the options and warrants of the target by the acquiror. The net assets of the target were $236.8
million and the net income (latest 12 months) for Advanced Micro Devices and Monolithic
Memories were !$95.87 and $12.7 million, respectively. Advanced Micro Devices had 57.159
million shares outstanding six months before the merger completion date and 77.300 million shares
outstanding one month after the completion date. The non-merger EPS of Barnett is therefore
!1.677. Since this was not classified as a pooling-of-assets transaction, the difference between the
value of the target and its net assets ($204.2) was amortized over ten years, which implies that the
merger EPS is S1.34. Therefore, the EPS grew by 20.1% as a result of the merger and this is taken as
the merger impact.
Table 8
Long-term performance for acquirors in mergers, classifying acquirors on the basis of the impact on
their EPS due to the acquisition
This table reports abnormal returns (in percent) for acquirors in mergers that have the smallest
growth in merger EPS as opposed to the EPS had the merger not taken place, mergers with
intermediate EPS impact, and mergers with the highest growth in merger EPS as compared to the
non-merger EPS. Targets are listed on CRSP as well as COMPUSTAT. Abnormal returns are
computed with reference to a size- and book-to-market-based benchmark portfolio, and adjusted for
the bias in the empirical distribution by subtracting the mean of the empirical distribution in each
case from the abnormal return for the sample. The number in parentheses reports the significance
level, i.e., the probability that a random portfolio from the empirical distribution computed through
bootstrapping will have an abnormal return greater than the sample abnormal return. To facilitate
the analysis, we assume that the acquisition takes place on December 31 of the year preceding the
actual completion date of the merger (because after the merger only consolidated financial state-
ments are issued and it is impossible to construct separate financials for each company in the year); if
the pooling method is not used, we assume that the excess of the value paid for the transaction (VAL)
over the net assets of the target (NETASS) is amortized over ten years; if debt securities or
borrowings are used to finance the acquisition, we assume that the non-common stock portion of the
compensation (VAL-VCOM) is financed through debt at an interest rate of 8%. We use the tax rate
actually paid by the company for the previous year if available; otherwise, the federal statutory tax
rate of 34% is used. Footnotes to the table give details on the P/E ratios of the bidder and target and
the results of a sign test under the null hypothesis that there is no difference in the two. The
significance level in the test reports the probability of a greater absolute value for the sign statistic
under the null hypothesis of no difference.
Bias-adjusted CARs for acquiring firms in mergers (in %)

Period Low EPS impact Medium EPS impact High EPS impact
(N"110)! (N"114)" (N"109)#
1—12 !2.97 (0.78) !2.22 (0.81) 0.19 (0.44)

12—24 !4.92 (0.92) 0.31 (0.45) 0.15 (0.46)
24—36 2.02 (0.25) !1.67 (0.25) 1.15 (0.34)
1—36 !5.88 (0.85) !0.24 (0.53) 1.50 (0.35)
! Sample size: 110 firms, of which 21(19%) had an acquiror P/E greater than the target’s P/E four
weeks before the date of announcement and 24 (22%) had an acquiror P/E less than the target’s P/E
four weeks before the date of announcement. For 65 firms there is no information on one or both of
the acquiror or target P/Es four weeks before the announcement date. Sign Test: M(Sign): !1.5
Significance level: 75%
" Sample size: 114 firms, of which 30 (26%) had an acquiror P/E greater than the target’s P/E four
the acquiror or target P/Es four weeks before the announcement date. Sign Test: M(Sign): 0.5
Significance level: 100%
# Sample size: 109 firms, of which 33 (30%) had an acquiror P/E greater than the target’s P/E four
the acquiror or target P/Es four weeks before the announcement date. Sign Test: M(Sign): 5.5
Significance level: 17%.
statistically significant positive abnormal return. However, the long-term under-

performance of acquiring firms in mergers is not uniform across firms. It is
predominantly caused by the poor post-acquisition performance of low book-
to-market ‘glamour’ acquirors, who perform much worse than other glamour
stocks and earn significant negative bias-adjusted abnormal returns of !17%
in mergers. This conclusion is independent of the method of payment. Specifi-
cally, in contrast to value bidders, glamour bidders in both 100% cash-financed
and 100% equity-financed mergers significantly underperform after the merger.
The fact that glamour bidders in tender offers perform significantly worse than
value bidders suggests that companies with low book-to-market ratios tend to
make relatively poor acquisition decisions, in general. Our results are also very
robust. They hold up when we exclude smaller acquisitions, Nasdaq bidders, or
periods when events are clustered.
We argue that these findings are consistent with the hypothesis that the
market overextrapolates the past performance of the bidder management when
it assesses the benefits of an acquisition decision. As a result, the market, as well
as the management, the board of directors and large shareholders overestimate
the ability of the glamour bidder to manage other companies. At the same time,
the market tends to be too pessimistic about the managerial capacities of
bidders with poor past performance (value firms). Unlike in glamour firms,
bidder managers are not affected by hubris and are likely to face tougher
scrutiny from directors and large shareholders before they are allowed to engage
in an acquisition. This performance extrapolation hypothesis is also consistent
with the fact that in the short run, stock prices of glamour bidders increase much
more than stock prices of value bidders around the announcement of the
acquisition (Lang et al., 1989; Servaes, 1991). It is also consistent with the results
of Hayward and Hambrick (1995), who report that takeover premiums are
positively correlated with proxies for past managerial performance such as
recent organizational success and media praise for the CEO. In some ways, the
market fails to understand that past managerial performance is not necessarily
a good indicator of future performance, at least in the case of acquisitions.
Although, glamour bidders in mergers exhibit a much stronger tendency than
value bidders to finance their acquisitions by issuing shares, one cannot explain
the results of this paper by the hypothesis that glamour firms ‘time’ their
acquisitions by paying with overvalued shares. The means of payment hypothe-
sis cannot explain (1) why, both in mergers and tender offers, glamour acquirors
perform worse than value acquirors, even when they pay for their acquisitions
with cash, (2) why, in tender offers and in 100% equity-financed mergers,
glamour bidders tend to pay higher takeover premiums than value bidders, and
(3) why, in general, bid premiums are uncorrelated with the method of financing.
Moreover, because post-acquisition returns are uncorrelated with the short-
term impact on earnings per share, one cannot simply explain the results by
earnings per share myopia. So we conclude that, although the three hypotheses
are not mutually exclusive, the performance extrapolation hypothesis is more

consistent with the data than either of the others.
The paper also adds to a growing body of evidence that short-term measure-
ments of abnormal performance do not capture the full effects of the market
reaction to an event, a common assumption in many event studies. Examples of
such delayed reactions occur with share repurchases, IPOs, SEOs, proxy con-
tests, etc. Ritter (1991) for example, finds poor long-term stock performance
following initial public offerings. Loughran and Ritter (1997) and Spiess and
Affleck-Graves (1995) find similar underperformance for seasoned equity offer-
ings. Dharan and Ikenberry (1995) find that firms switching stock exchanges
subsequently underperform. Ikenberry et al. (1995) find that value stocks an-
nouncing open market share repurchases outperform other value stocks in the
four years following the announcement. Concerns about the appropriateness of
short-term measurements of abnormal performance are justified. Hence, future
research must explain why market participants systematically tend to react
sluggishly to corporate financial and strategic decisions. This paper also offers
some evidence that standard long-horizon t-statistics are biased, detecting
abnormal performance when none is present and failing to detect abnormal
performance when it is present. Such tests should be used with caution.
References
Agrawal, A., Jaffe, J.F., Mandelker, G.N., 1992. The post-merger performance of acquiring firms:
a re-examination of an anomaly. Journal of Finance 47, 1605—1621.
Asquith, P., 1983. Merger bids, uncertainty and stockholder returns. Journal of Financial Econ-
omics 11, 51—83.
Barber, B.M., Lyon, J.D., 1997. Detecting long-run abnormal stock returns: the empirical power and
specification of test statistics. Journal of Financial Economics 43, 341—372.
Barber, B.M., Lyon, J.D., Tsai, C.-L., 1998. Improved methods for tests of long-run abnormal stock
returns. Journal of Finance, forthcoming.
Barber, B.M., Palmer, D.A., Wallace, J., 1995. Determinants of conglomerate and predatory
acquisitions: evidence from the 1960’s. Journal of Corporate Finance 1, 283—318.
Bradley, M., Jarrell, G., 1988. Comment. In: Coffee, J., Lowenstein, L., Rose-Ackerman, S. (Eds.),
Knights, Raiders and Targets. Oxford University Press, Oxford, UK, pp. 252—259.
Brav, A., 1996. Inference in long-horizon event studies: a parametric bootstrap approach with
application to initial public offerings. Unpublished working paper, University of Chicago,
Chicago, IL.
Brealey, R.A., Myers, S.C., 1996. Principles of Corporate Finance. McGraw-Hill, New York.
Brown, S.J., Warner, J.B., 1980. Measuring security price performance. Journal of Financial Econ-
omics 8, 205—258.
Chan, L.K.C., Jegadeesh, N., Lakonishok, J., 1996. Momentum strategies. Journal of Finance 51,
1681—1714.
Dharan, B.G., Ikenberry, D., 1995. The long run negative drift of post-listing stock returns. Journal
of Finance 50, 1547—1574.
Fama, E.F., French, K.R., 1992. The cross-section of expected stock returns. Journal of Finance 47,
427—465.
Fama, E.F., French, K.R., 1993. Common risk factors in the returns on stocks and bonds. Journal of
Financial Economics 33, 3—56.
Franks, J., Harris, R., Titman, S., 1991. The postmerger share-price performance of acquiring firms.
Journal of Financial Economics 29, 81—96.
Hayward, M.L.A., Hambrick, D.C., 1995. Explaining premiums paid for large acquisitions: evidence
of CEO hubris. Unpublished working paper, Columbia University, New York, NY.
Ikenberry, D., Lakonishok, J., Vermaelen, T., 1995. Market underreaction to open market share
repurchases. Journal of Financial Economics 39, 181—208.
Jensen, M.C., Ruback, R.S., 1983. The market for corporate control: the scientific evidence. Journal
of Financial Economics 11, 5—50.
Kothari, S.P., Warner, J.B., 1997. Measuring long-horizon security price performance. Journal of
Lakonishok, J., Shleifer, A., Vishny, R.W., 1994. Contrarian investment, extrapolation, and risk.
Journal of Finance 49, 1541—1578.
Lang, L., Stulz, R., Walkling, R., 1989. Managerial performance, Tobin’s Q and the gains from
successful tender offers. Journal of Financial Economics 24, 137—154.
Langetieg, T.C., 1978. An application of a three-factor performance index to measure stockholder
gains from merger. Journal of Financial Economics 6, 365—383.
Loderer, C., Martin, K., 1992. Postacquisition performance of acquiring firms. Financial Manage-
ment 19, 69—79.
Loughran, T., 1993. NYSE vs NASDAQ returns: market microstructure or the poor performance of
initial public offerings? Journal of Financial Economics 33, 241—260.
Loughran, T., Ritter, J.R., 1997. The operating performance of firms conducting seasoned equity
offerings. Journal of Finance 52, 1823—1850.
Loughran, T., Vijh, A.M., 1997. Do long-term shareholders benefit from corporate acquisitions?
Lys, T., Vincent, L., 1995. An analysis of value destruction in AT&T’s acquisition of NCR. Journal of
Martin, K.J., 1996. The method of payment in corporate acquisitions, investment opportunities, and
management ownership. Journal of Finance 51, 1227—1246.
Mitchell, M.L., Stafford, E., 1997. Managerial decisions and long-term stock performance. Unpub-
lished working paper CRSP WP 453, University of Chicago, Chicago, IL.
Ritter, J.R., 1991. The long-run performance of initial public offerings. Journal of Finance 46, 3—27.
Roll, R., 1986. The hubris hypothesis of corporate takeovers. Journal of Business 59, 197—216.
Servaes, H., 1991. Tobin’s Q and the gains from takeovers. Journal of Finance 46, 409—419.
Spiess, D.K., Affleck-Graves, J., 1995. Underperformance in long-run stock returns following
seasoned equity offerings. Journal of Financial Economics 38, 243—268.
Travlos, N.G., 1987. Corporate takeover bids, methods of payment and bidding firms’ stock returns.

Glamour, Value and The Post-Acquisition Performance of Acquiring Firms

Uploaded by

Document Information

Original Description:

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Glamour, Value and The Post-Acquisition Performance of Acquiring Firms

Uploaded by

Copyright:

Available Formats

Journal of Financial Economics 49 (1998) 223—253

Glamour, value and the post-acquisition performance of

Received 26 September 1996; received in revised form 11 November 1997

This paper uses a methodology robust to recent criticisms of standard long-horizon

JEL classification: G14; G34

Keywords: Mergers; Post-acquisition performance; Long-horizon event studies; Boot-

* Corresponding author. Tel.: 765/494-4488; fax: 765/494-9658; E-mail: rau@mgmt.purdue.edu.

0304-405X/98/$19.00 ( 1998 Elsevier Science S.A. All rights reserved

Mergers and acquisitions have been extensively researched in finance. How-

example, document that long-horizon t-statistics are negatively biased, in many

2. Data and methodology

2.1. The data

We examine the long-term underperformance (over the three years following

f the transaction is classified either as a merger or an acquisition of majority

All targets Only public All targets Only public

1—2 126 (4.2%) 24 (3.6%) 8 (2.5%) 7 (2.7%)

1—2 557 (19.7%) 117 (18.2%) 27 (8.5%) 22 (8.6%)

To measure abnormal performance, we use the common technique of com-

ratio (without rebalancing), include Nasdaq firms in their pseudo-universe, and

3. The long-term performance of acquiring firms

3.1. Do bidders underperform?

Only public All mergers Only public All tender

1—12 !1.39 !1.76 3.78 3.95

3.2. Test of the performance extrapolation hypothesis

We sort all acquirors in our sample into equal subsamples of ‘glamour’,

Glamour Neutral Value Glamour Neutral Value

Glamour Neutral Value Glamour Neutral Value

Glamour Neutral Value Glamour Neutral Value

Average 0.25 0.19 1.22 0.29 0.41 5.40

3.2.1. Results for the total sample

3.2.2. Robustness check

Only public All mergers Only public All tender

1—12 !5.55 !6.25 3.06 2.12

Only public All mergers Only public All tender

1—12 !5.59 !1.37 5.23 4.14

Only public All mergers Only public All tender

1—12 5.58 1.83 2.54 4.93

significant positive bias-adjusted abnormal return of 4.88% in mergers and

3.3. The means of payment vs. the performance extrapolation hypothesis

3.3.1. Glamour, value, and the means of payment

Samples/analyzed Mean proportion Z (p-value) s2 (p-value)

1. All tender offers (N"247) 7.5 !12.92 166.93

bidders significantly underperform value bidders (Table 4, Panel A). However,

Glamour acquirors (N"150) Value acquirors (N"150)

1—12 !7.03 (0.99, !4.53) !4.80 (0.98, !1.30)

Glamour Value Glamour Value

1—12 !1.25 3.97 4.95 3.95

3.3.2. Determinants of takeover premiums: glamour status or means of payment

3.4. Are glamour bidders myopic about EPS?

Samples analyzed Mean (Median) Z (p-value) s2 (p-value)

1. Public targets sample:

2. Public targets sample:

3. Acquirors in 100% cash-financed mergers:

4. Acquirors in 100% stock-financed mergers:

5. Acquirors in 100% cash-financed tender offers:

A high-EPS-impact merger would therefore be a merger with a large growth in

Using a methodology robust to the criticisms of the standard long-horizon

Bias-adjusted CARs for acquiring firms in mergers (in %)

1—12 !2.97 (0.78) !2.22 (0.81) 0.19 (0.44)

statistically significant positive abnormal return. However, the long-term under-

are not mutually exclusive, the performance extrapolation hypothesis is more

You might also like