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Stock Returns in Mergers and Acquisitions




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    • Hackbarth is from Washington University in St. Louis. Morellec is from the University of Lausanne, Swiss Finance Institute and the CEPR. We especially thank Michael Brennan and the referee for many valuable comments on the paper. We also thank Wolfgang Bühler, Ilan Cooper, Thomas Dangl, Alex Edmans, Diego Garcia, Armando Gomes, Michael Lemmon, Lubos Pastor, Robert Stambaugh (the editor), Neal Stoughton, Ilya Strebulaev, Josef Zechner, Lu Zhang, and Alexei Zhdanov and seminar participants at the UBC summer finance conference, the UNC–Duke conference on corporate finance, the 2006 EFA meetings in Zürich, the conference on Asset Returns and Firm Policies at the University of Verona, Goethe University, Rice University, the University of Illinois at Urbana-Champaign, the University of Mannheim, the University of Vienna, and Washington University in St. Louis for helpful comments. Morellec acknowledges financial support from the Swiss Finance Institute and from NCCR FINRISK of the Swiss National Science Foundation.


This paper develops a real options framework to analyze the behavior of stock returns in mergers and acquisitions. In this framework, the timing and terms of takeovers are endogenous and result from value-maximizing decisions. The implications of the model for abnormal announcement returns are consistent with the available empirical evidence. In addition, the model generates new predictions regarding the dynamics of firm-level betas for the period surrounding control transactions. Using a sample of 1,086 takeovers of publicly traded U.S. firms between 1985 and 2002, we present new evidence on the dynamics of firm-level betas, which is strongly supportive of the model's predictions.