The role of learning in M&A

What better way to kick off "summer" than with a really cool paper from Aktas, de Bodt, and Roll?

Short version: The paper confirms the now well known finding that Cumulative Abnormal Returns (CARs) drop with subsequent takeover announcements. The authors proceed to separate takeovers that are done by "rational CEOs" and those that are done by "hubris infected" CEOs. Both groups do show learning in subsequent takeovers (for instance taking over larger firms and with less time between deals), but the hubris group is doing takeovers less often.

Longer version: Aktas, de Bodt, and Roll show once again that when firms do multiple takeovers, the market has correctly forecasted the likelihood of these deals and thus the market reaction to the deal announcement is muted. This finding is consistent with Schipper and Thompson's 1983 JFE article.

What is interesting is that this is true for "rational" CEOs (who have their CARs decrease towards zero) as well as "hubris infected" CEOs (who have their CARS increase towards zero).

A key to the paper is the sample definition. The authors break the overall sample of deals into a rational and a hubris-infected sample (I love the name!). The actual sample selection will no doubt be somewhat controversial (although any definition of a hubris sample would likely suffer the same fate). The authors create the hubris sample by ranking firms in decreasing order of the CAR of their first deal. Thus by definition if a deal results in a large positive CAR, it was rational. (and yes this first deal is then ignored for subsequent analysis).

Key findings:

1. The subsequent CARs are closer to zero for both sub-samples.

2. Learning does play a significant role (as evidenced by subsequent deals being larger and coming closer together. This is true for both sub-samples.

3. The "Hubris-infected" group has its time between deals decrease but at a slower rate than the "rational" group.

A very thought-provoking paper. Definitely recommended reading!

Cite:
Nihat Aktas, Eric de Bodt, and Richard Roll. 2006. Hubris, Learning, and M&A Decisions: Empirical Evidence. UCLA working paper



BTW: I was good and did not mention the "Cars" and the "new" Cars (with Todd Rundgren replacing Rik Ocasek) even once, until now.