Neglected Peers in Merger Valuations

Using novel merger valuation data, we show that firms selected by investment banks as “comparable peers” are more than twice as likely to later become takeover targets themselves compared to matched control firms. Peer firms not subsequently acquired attract more institutional ownership and analyst coverage, deliver strong operating performance, reduce investments, and increase payouts. Investors are inattentive, though, to peer identification at the time of merger filings’ public disclosure. A portfolio that longs peers and shorts controls earns up to 15.6 alpha annually, which mainly comes from the long leg and is difficult to explain by short-sale constraints.Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.