Long-Run Stock Performance and Its Determinants for Asset Buyers

This work examines the long-term stock performance of asset purchases and its major determinants by evaluating cross-sectional differences. The findings show that buyers’ stocks, on average, underperform their benchmarks following purchases. The buy-and-hold abnormal returns of buyers acquiring related assets are significantly higher than returns of those acquiring unrelated assets, which is consistent with the focus hypothesis. Asset buyers with superior prior stock performance experience poorer long-run performance after the asset purchase than buyers with inferior prior stock performance, consistent with the prior performance hypothesis. The empirical analysis supports the earnings management hypothesis: Asset acquirers that have managed earnings upward experience poorer long-term abnormal stock performance than acquirers with downward earnings management. The long-term return evidence is to some degree consistent with the governance hypothesis. We find little support for the free cash flow hypothesis