Empirical literature documents that acquirers of public targets earn zero or negative announcement period returns, while acquirers of both private and subsidiary targets earn positive returns. Brattle principal Torben Voetmann recently co-authored a paper in the Journal of Corporate Finance that attempts to explain this differential.

This “acquirer return” differential is important to a number of parties involved in acquisitions: managers of acquiring firms should be aware of the differential when selecting targets; the information likely improves the bargaining ability of both acquirer and target managers; knowledge of the differential should enhance the monitoring function of both acquiring and target stockholders; and awareness of acquirer returns should inform public policy on takeovers and their regulation.

In this paper, the authors first confirm that the acquirer return differential exists in a large sample of U.S. acquisitions, is statistically significant, and persists over several sub periods. They then analyze explanations of the acquirer return differential related to synergy, target financial liquidity, target valuation uncertainty, and target bid resistance and do not find a relation between any of these three variables and acquirer returns. They conclude that none of these theories explain the difference in acquirer performance. The result suggests that the announcement return differential between subsidiaries and public targets continues as an unexplained empirical phenomenon.

The paper, “Returns to Acquirers of Public and Subsidiary Targets,” was co-authored by Dr. Voetmann and Jeffrey Jaffe of The Wharton School at the University of Pennsylvania, Jan Jindrab of the U.S. Securities and Exchange Commission, and David Pedersenc of the Rutgers School of Business-Camden. The full paper is available for download below.

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