The Effect of Earnings Growth on Acquirer Returns: Evidence from the Norwegian Stock Market: A Study of the Relationship Between Acquirers’ Earnings Growth and Market Reactions to M&A Announcements with Empirical Evidence from the Oslo Stock Exchange in the Period 1997 - 2019

Abstract

Earnings numbers are one of the single most important measures of firm performance and is positively associated with stock returns. While M&A announcements have mixed short-term impact on acquirer stock returns, Liu and Tu (2021) find a U-shaped pattern between US acquirers’ earnings growth and announcement returns, with a subsequent return reversal for acquirers with recent earnings declines. They argue this return pattern is driven by a tendency for investors to gamble on M&A deals initiated by poorly performing acquirers to generate high synergies. Based on a sample of 126 Norwegian public acquirers listed on the Oslo Stock Exchange between 1997 and 2019, we perform a replicating study of Earnings growth and acquisition returns: Do investors gamble in the takeover market?, by Liu and Tu (2021). We assess the notion that investor overreactions, through disproportionately reacting to acquirers with earnings declines, can explain abnormal returns related to M&A announcements for a sample of 499 deals. We find that M&A announcements lead to small but positive short-term abnormal returns. These short-term positive returns do not persist, as we observe a clear return reversal pattern for acquirers with low and moderate growth. We are not able to attribute this return reversal to poor earnings performance, and we find no evidence of a meaningful relationship between earnings growth and abnormal returns. Moreover, our results are inconclusive when it comes to assessing markets overreaction to deals made by acquirers with significant earnings declines at announcement. We do, however, find evidence of several empirically established effects including a size effect, valuation effects and an effect stemming from method of payment.