Lies, Damned Lies, and Finance Papers

We have a new award-winner for a specious quasi-academic finance paper. Published by London Business School and Towers Perrin, the study purports to show that firms are getting better at M&As, with deal results beating the market. Specifically, 7% of transactions outperformed the market in 2004, compared with 3% and 6%, respectively, in a 1988 and 1998.

Leaving aside the vanishingly small percentages, there is another problem with the result. The studied analyzed performance for a one-year period — six months before and six months after the deal closed — to see what level of financial success has been obtained. The trouble is, of course, that six months is waaaay too short a post-merger window. At that point most firms involved in large mergers are still sorting through the financial flotsam.


  1. Brent Buckner says:

    Ah yes, the firms are still sorting through the financial flotsam, but the mighty prognosticating equity markets, harnessing the immense power of *The Wisdom of Crowds* ™, have within six months produced unbiased estimates of future results.
    Seriously, I dimly recall that six months would fit within the standards for event studies that one would see in peer-reviewed finance journals. Is my recollection incorrect?
    Anyhow, I’m sure your implicit assertion that they don’t have a big enough n to reject the null is correct.
    BTW, according to the article 7% isn’t the number that outperformed the market, it’s the number by which they outperformed (i.e. S&P500 total return + 7%).