An Investment-based Explanation for the Post-merger Underperformance Puzzle

This paper proposes an investment-based explanation and resolves the post-merger performance puzzle. Traditional asset pricing models fail to take into account the link between investment and performance, and hence, resulting in post-merger performance puzzle. Upon observing that disproportionately high fraction of acquirers are high Tobin’s Q firms, a group characterized with high investment ratio and low discount rate, I use an investment-augmented Fama French model and a Q-theory based model to examine acquirer’s long-term performance and find the puzzle disappears. Empirical results show that stock-financed acquirers and glamour acquirers do not underperform once the investment factor is controlled. ∗Address for correspondence: Foster School of Business, PACCAR Hall, Box 353226, 4295 E. Stevens Way NE, Room 431, Seattle, WA 98195. Email: [email protected]