THE (MISSING) RELATION BETWEEN ANNOUNCEMENT RETURNS AND VALUE CREATION

ABSTRACT:
Acquisition announcement returns are widely considered market-based assessments of value creation. Unfortunately, the data do not support this conjecture. We show that commonly used and new measures of realized acquisition outcomes are correlated among themselves, though derived from different sources. Furthermore, these outcomes are predictable using standard information known at the announcement time. In contrast, announcement returns—also measured at the announcement time—are uncorrelated with these outcomes. Importantly, announcement returns even fail to predict the predictable components of these outcomes. Overall, there is no evidence that announcement returns capture expected or realized value creation.