Abstract - A Dynamic Analysis of Growth via Acquisition

Firms have the choice to grow via acquisition or to grow through internal investment. While internal growth takes time, an acquisition provides cash flows immediately, as the acquirer benefits from past investments of previous owners. The opportunity to grow internally has an effect on the price of an acquisition as it is a fall-back option for the acquirer, should negotiation talks break down. As a consequence, internal growth opportunities speed up acquisitions when integration costs are signifcant or synergies not too large. Because investors do not have full information about the time required to grow internally, acquirers earn positive returns before the announcement of an acquisition, and there are negative stock price reactions to acquisition announcements for a wide range of parameter values.

Martin Ruckes
University of Wisconsin, Madison
09.May 2006

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