Copyright

Geoff Meeks and J. Gay Meeks

Published On

2022-06-23

Page Range

pp. 71–76

Language

  • English

8. Inefficient Mergers in an ‘Efficient’ Market

  • Geoff Meeks (author)
  • J. Gay Meeks (author)
Chapter of: The Merger Mystery: Why Spend Ever More on Mergers When So Many Fail? (pp. 71–76)

This chapter advances a claim which is contentious and at first sight counter-intuitive: that a stock market which is in a certain sense ‘efficient’ can facilitate and stimulate M&A which brings no gain in operating profit for the merging firms, and sometimes losses. It explores different notions of efficiency, drawing on the writings of Tobin and Fama. Incomplete information or misinformation afflict the M&A process in a number of ways. The limited information available to investors in ‘semi-strong efficient’ stock markets can give rise to overreaction and volatility in share prices unwarranted by the variation shown in the subsequent earnings the prices are supposed to reflect. This fosters acquisitions where insiders take advantage of their superior information to buy a target using their own overvalued shares as currency, or to buy a target which is ‘undervalued’ in light of their private information. In neither case need the motive have anything to do with increasing operating profit. Statistical evidence is provided on the excess volatility of share prices. And illustrations are given of acquisitions taking advantage of this volatility.

Contributors

Geoff Meeks

(author)
Emeritus Professor of Financial Accounting at University of Cambridge

Geoff Meeks is Emeritus Professor and Senior Research Associate at the Judge Business School, University of Cambridge, where he has served as Professor of Financial Accounting, Head of the Finance and Accounting Group, Director of Teaching, Director of Research, and Acting Dean. His previous positions were at Price Waterhouse, Edinburgh University, and the Cambridge Economics Faculty, where he was Director of Graduate Studies. He has been Visiting Scholar at Harvard Business School, INSEAD, and London School of Economics, and has held a Fellowship at Darwin College, Cambridge and an Academic Fellowship at the Institute of Chartered Accountants in England and Wales.

J. Gay Meeks

(author)
Senior Research Associate, Centre of Development Studies at University of Cambridge

J. Gay Meeks is Senior Research Associate in the Centre of Development Studies, University of Cambridge. Her previous positions were at St. Anne's College, Oxford and in the Cambridge Economics Faculty. She has taught Moral Philosophy at the University of Glasgow; served as Fellow and Director of Studies in Economics at Robinson College, Cambridge; and won Cambridge's Student-led Lecturer of the Year Award for 2016–2017 for her M Phil course.