When do firms benefit from their rivals' acquisitions? The role of acquirers' competitive behavior

Prior research suggests that acquistions can have both positive and negative effects on direct rivals’ stock returns. We adopt competitive dynamics and signalling perspectives to reveal when investors will reward or penalize rivals’ stock performance after an acquisition. We argue that the effect of acquisitions on rival abnormal stock returns depends on the signals sent to investors by acquirers’ pre-acquisition competitive behavior. Where acquirers have exhibited very aggressive competitive behavior, investors may expect them to continue consolidating their industries, rashly pursue growth, and destroy value for themselves, thereby generating positive returns for rivals and their investors. Moreover, investors will anticipate that rivals will benefit most when aggressive acquirers have exhibited a) simplistic prior competitive behavior or b) ineffective prior behavior. Such benefits are expected to decline under opposite circumstances. These predictions are confirmed in a study of 170 major horizontal M&A transactions from 2001 to 2014.