Predictability of Industry Returns After M&A Announcements


This essay documents a strong and prevalent drift in longterm industry returns after M&A announcements. Specifically, industries that experience positive average announcement reactions continue to do well in the future, while industries that experience negative average announcement reactions continue to do poorly. Industry M&A investment strategies, which buy positively reacting industries and sell negatively reacting industries, appear profitable even after controlling for size and book-to-market effects in returns. Profitability has strengthened over time and seems to exist also for the largest stocks. The evidence suggests that capital markets underreact to the industrywide information provided by merger announcements.


Stock Return Abnormal Return Cumulative Abnormal Return Average Industry Announcement Return 
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