The effect of undervaluation on abnormal returns during M&A’s

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Although mergers and acquisitions (M&A’s) have been widely studied for the past decades uncertainties remain till today. Uncertainties about the determinants of M&A’s and its abnormal returns for example. The valuation of a firm, expressed in its Q-ratio, is said to be one of those factors. This research contributes to the existing literature by analyzing returns and firm characteristics with a focus on Q-ratio. The majority of current literature centers its attention on U.S. firms in the past century. This study focusses on European firms for the years 1990-2014. An event study methodology based on Brown and Warner (1985) is used with the help of a dummy for the Q-ratio of a firm. Several control variables like deal size and payment method were included. The results are split up into short term, medium term and long term. Short term results are only significant for acquirer firms and not for target firms. Examining the 1 and 3 year period, both periods show significant results for the Q-ratio dummy. A remark must be made that some control variables included show contradicting results based on expectations formed by historical literature. Keywords: Mergers and Acquisitions, Q-ratio, Tobin’s Q, Abnormal returns
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