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

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