Acquisition of Failing Firms and Stockholder Returns

Abstract

The effects of stock-exchanged acquisitions of failing firms on shareholder returns of acquiring firms are examined. This study finds that stocks of acquiring firms, on average, do not experience any significant positive abnormal returns during the announcement period. A further analysis, however, shows that there is a striking difference in the announcement effects between nonbank and bank acquisitions of failing target firms. Although nonbank acquisitions are associated with significant positive abnormal returns, bank acquisitions are associated with negative, although insignificant, abnormal returns during the announcement period. These findings are robust to the choice of a particular event-study technique. The overall results of this study suggest that investors do not perceive the acquisition of failing firms, particularly that of failing target banks, as favorable, and that the market for failing firms is overall competitive and efficient.