Information Signaling and Competitive Effects of M&A: Long-Term Performance of Rival Companies

Abstract

In this paper, we investigate the long term performance of rival companies related to acquisition targets. Using a sample of 2,511 deals from 1985 to 2005, we document an under-reaction of capital markets to the information contained in M&A announcements. Following 6,138 large rival gain events due to positive information signaling and 5,408 large rival loss events due to the negative competitive effects of the deal, we observe a return drift for up to 12 months after the announcement. Hence, our results indicate that capital markets do not immediately incorporate the effects of M&A announcements into rival stock prices.

Keywords: Mergers & acquisitions, rival companies, long-term performance

JEL Classification: G12, G14