Derek Oler

The danger of misinterpreting short-window event study findings in strategic management research: an empirical illustration using horizontal acquisitions

Short-window event studies are popular in the strategic management literature. These studies assume that the markets initial reaction to strategic events reflects their economic impact in an unbiased manner. This assumption may hold in some cases, but when an event has complex ramifications that are difficult to predict, the initial market response may be biased and/or incomplete. Acquisitions are complex events, suggesting that results from short-window event studies of acquisitions may foster incorrect inferences. Using a sample of horizontal acquisitions, this article shows that the positive initial market response to an acquisition announcement is contradicted by negative long-run post-acquisition returns, suggesting that the initial response is incorrect and that the error is rectified later. Our findings imply that short-window event studies may not accurately capture the economic impact of complex strategic actions, for the interpretation and use of event studies.

How to Review a Paper

This paper introduces the review process to new researchers, describes the institutional background for reviews, and provides advice to reviewers. The objectives of a quality review are (1) to assist the editor in his/her gatekeeping role and (2) to assist the authors in improving their work. We argue that the review process plays a critical role in the dissemination of research that ultimately provides credibility to the body of academic knowledge. This process relies on expert, anonymous reviews by established researchers (typically those who have already published in top journals on similar topics). Because reviewers are relatively scarce, and anonymous, the review process also relies on the personal ethics of reviewers. Invitations to review should only be accepted if the researcher has the skill, time, objectivity, and inclination to do a quality review. A quality review should consider the contribution, execution, and conclusions of the paper.

Governance, CEO Power, and Acquisitions

We examine whether governance matters for acquisitions. Acquisitions are frequently beneficial to the CEO of the acquiring firm, but can often be value-destructive to acquirer shareholders and other stakeholders such as employees. We find that corporate governance does not appear to influence whether a firm will become an acquirer after controlling for CEO power, but superior governance is associated with greater relatedness between the target and acquirer. We also find that the effect of CEO power on a firm’s acquisition activity varies according to the source of that power. Our results suggest that the relationships between governance, CEO power, and acquisition activity are complex.

The Characteristics and Fate of Firms that Publicly Seek to be Acquired

In this paper, we investigate 429 firms that publicly advertise a desire to be acquired (”take-me-over” or TMO firms) from 1990 to 2007. In general TMO firms show evidence of high debt levels as well as fundamental underperformance relative to industry peers, and the TMO announcement significantly increases the odds of receiving a subsequent takeover offer. Although TMO firms enjoy positive abnormal returns over the five days surrounding their announcement, their abnormal returns over the year following their announcement are significantly negative, which suggests that the TMO announcement signals bad news that is not fully anticipated by the market.

Implications of Cash-Hoarding for Shareholders

Agency theory suggests that firms with very high cash balances (“cash hoarders”) are likely to misinvest their funds. However, if investors do not fully recognize the implications of a high cash balance, then future returns may be predictable for cash-hoarding firms. We find that cash hoarders significantly underperform over the two years following their identification as hoarding. In subsequent analysis, we find that returns are significantly negative in the year that a prior cash-hoarding firm reports a significant decrease in cash. Our results suggest that investors do not fully appreciate the implications of a high cash balance for future returns, but do recognize problems when that cash is subsequently spent.

A Bold Move or Biting off More than They Can Chew: Examining the Performance of Small Acquirers

Small acquirers enjoy announcement period returns that are significantly higher than announcement returns for larger acquirers, but small acquirers significantly underperform after the acquisition is consummated. We investigate why the market appears to “get it wrong” at the announcement of an acquisition by a small firm. We provide evidence consistent with an initial optimistic overreaction, followed by a correction as updated information is revealed. Overreaction is clustered in small acquirers offering stock and acquiring relatively larger targets. Low post-acquisition returns and poor fundamental performance are clustered in small acquirers offering stock and diversifying.