Are Investor Reactions to Mergers and Acquisitions Dependent upon the Economic Cycle?

Abstract

This paper utilizes an event study methodology to investigate the possible differences in market reactions to same- and cross-industry merger and acquisition activity during different economic cycles. Target firms from same- and cross-industry mergers experience larger positive cumulative abnormal returns during recessions than in non-recessions. This suggests that good news in bad times is worth more than good news in good times. The study also finds evidence that same-industry acquirers experience small but significantly higher CARs than cross-industry acquirers during non-recessions. This result may indicate the market’s preference for synergistic same-industry mergers over diversifying mergers.