| dc.description.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. | en_US |
