Predictability of Industry Returns After M&A Announcements

Abstract

This paper documents a strong and prevalent drift in long-term industry returns after M&A announcements. Specifically, industries that experience positive average announcement reactions continue to do well in the future, while industries that experience negative average announcement reactions continue to do poorly. Industry M&A investment strategies, which buy positively reacting industries and sell negatively reacting industries, appear profitable even after controlling for size and book-to-market effects in returns. Profitability has strengthened over time and seems to exist also for the largest stocks. The evidence suggests that capital markets underreact to the industry-wide information provided by merger announcements.

Keywords: Asset pricing, mergers & acquisitions, industry returns

JEL Classification: G12, G34