Are stock Market Reactions Related to Future Operational Performance? A study on acquisitions in Europe

Abstract

We investigate the markets’ ability to predict post-acquisition operational performance for 41 acquisitions made in Western Europe between 2002 and 2012. The methodology builds on Healy et al (1992). We find that on average there exists a positive relation between the market reaction during an acquisition window and the operational outcome. The relation is found when observing the changes in operating cash flows. Furthermore results show that changes in cash flows can be allocated to changes in the cost structure. The methodology is extended by observing how the shareholders of the bidding and the targeted firms are affected separately. The results show that shareholders of the targeted firms are more beneficial than the shareholders of the bidding firms. We do not find any significant relation between increased value to the shareholders of the bidding firm and increased cash flows. Moreover we find that bidding firms tend to pay at least the value of future potential synergies. Our results imply that the premium paid for targets can be seen as a good approximation for potential synergies captured through an acquisition.