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Review of Finance Advance Access published online on May 14, 2008
Review of Finance, doi:10.1093/rof/rfn015
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The Authors 2008. Published by Oxford University Press on behalf of the European Finance Association. All right reserved. For Permissions, please email: journals.permissions@oxfordjournals.org

A Dynamic Analysis of Growth via Acquisition

Worawat Margsiri1, Antonio S. Mello2 and Martin E. Ruckes3

1 Fordham University
2 Imperial College London
3 University of Karlsruhe

Firms can grow through internal investment or through acquisition. While internal growth takes time, an acquisition provides cash flows immediately. The opportunity to grow internally affects the price of an acquisition as it is a fall-back option for the acquirer should negotiations break down. Assuming investors do not have full information about the time a firm requires to grow internally, acquirers earn positive returns before the announcement of an acquisition, and there are negative stock price reactions to acquisition announcements. This research provides predictions about how pre-announcement price run-up and negative announcement returns relate to integration costs and synergies from acquisition.

JEL Classification: G31, G34


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