Abstract We document a strong positive initial market reaction to merger announcements from bidders with either large earnings growth or significant earnings decline, relative to those with neutral earnings change, reflecting a U-shaped pattern between bidders’ earnings growth and announcement returns. However, the higher initial returns for bidders with earnings decline subsequently reverse, whereas the higher returns for bidders with high growth do not. We further show that the return patterns are driven by a tendency for retail investors to gamble that merger and acquisition deals initiated by poorly performing bidders will generate high synergies.

Abstract Using novel merger valuation data, we show that firms selected by investment banks as “comparable peers” are more than twice as likely to later become takeover targets themselves compared to matched control firms. Peer firms not subsequently acquired attract more institutional ownership and analyst coverage, deliver strong operating performance, reduce investments, and increase payouts. Investors are inattentive, though, to peer identification at the time of merger filings’ public disclosure. A portfolio that longs peers and shorts controls earns up to 15.6% alpha annually, which mainly comes from the long leg and is difficult to explain by short-sale constraints. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.

Abstract Using manually compiled cost of equity (COE) estimates disclosed in takeover regulatory filings, we provide novel evidence on how investment bankers estimate discount rates. COE estimates are related to several risk proxies, such as beta and size. Other firm characteristics are unrelated to COE estimates or provide relations contradicting academic evidence. We also explore the role of incentives. For example, banks use significantly higher COEs in management buyouts, which potentially underestimates target value, making the bid more attractive for target shareholder approval.