Working Papers,
Copenhagen Business School, Department of Finance

Abstract: This paper investigates the short-run price adjustment around the acquisition announce-ment

and the long-run upward bias of the cross-sectional average buy-and-hold returns.

We apply the geometric Brownian motion model to decompose the cross-sectional ave r-age

long-run returns into mean components and volatility components. The decomposi-tion

is necessary in order to interpret security performance correctly using the measure of

wealth relatives. This procedure is useful for any studies of long-run security perform-ance.

The most surprising finding is that the long-horizon abnormal return after three

years is not significantly different from zero. This implies that the acquiring firms do not

under perform significantly compared to the market. That result stands in contrast to

findings of other studies, and it may reflect that earlier studies do not adjust for the vola-tility

component. This indicates that the market efficiency hypothesis is intact in the long

run. It is only in the very short run, i.e. a few days around the acquisition announcements,

that the market makes a significant adjustment to uphold the efficiency hypothesis.

Keywords: Event-study methods; wealth relatives; long-run returns; acquisitions

JEL-codes: G14; G34

30 pages, October 1, 1999

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