Huainan Zhao

Long-Run Post Merger Stock Performance of UK Acquiring Firms: A Stochastic Dominance Perspective

Using the idea of stochastic dominance, the long-run post-merger stock performance of UK acquiring firms is studied. Performance is compared by using the entire distribution of returns rather than only the mean as in traditional event studies. The main results are as follows: First, it is found that, in general, acquiring firms do not significantly underperform in three years after merger since no evidence of first- or second-order stochastic dominance relation between acquirer and benchmark portfolios is observed. Second, it is found that acquirers paying excessively large premiums are stochastically dominated by their benchmark portfolio implying that overpayment is a possible reason for post-merger underperformance. Consistent with previous studies, it is found that cash financed mergers outperform stock financed ones. Finally, no evidence is observed that glamour acquirers underperform value ones as no stochastic dominance relations between the two. In general, the results underline the importance of examining long-run post-merger stock performance from alternative perspectives.

The Epstein–Zin Model with Liquidity Extension

In this paper, we extend the Epstein–Zin model with liquidity risk and assess the extended models performance against the traditional consumption pricing models. We show that liquidity is a significant risk factor, and it adds considerable explanatory power to the model. The liquidity‐extended model produces both a higher cross‐sectional R2 and a smaller Hansen and Jagannathan distance than the traditional consumption‐based capital‐asset pricing model and the original Epstein–Zin model. Overall, we show that liquidity is both a priced factor and a key contributor to the extended Epstein–Zin models goodness‐of‐fit.