Merger & Acquisition:Generation Of Growth Options And Expected Stock Returns

Firm’s total assets are composed of two parts:assets-in-place and growth options, and investment expending or generating growth options has important effects on expected stock return by influencing the proportion of these two parts. M&A enlarges the proportion of growth options by generating growth options for firms and has positive effects on expected stock return. Furthermore, the positive effect from M&A will vary at different life cycle stages because of different proportions of growth options.Based on the review of relevant theories and researches, this paper uses A-share listed non-financial firms during 1998 to 2014 in Shanghai and Shenzhen Exchanges as samples, and uses Fama & French portfolio analysis method and Fama & Macbeth two-step regression method to examine the effect of M&A on expected stock return. Then we give evidence for options generation from M&A, and test the M&A suppression effect on negative relation between expending options invetsment and expected stock return. At last we study the effects of M&A at different life cycle stages.The empirical results show that M&A and its intensity lead to positive expected stock return through generating growth options. We also find M&A can restrain the negative effect on expected stock return from capital expenditure. By combining M&A with firm life cycle, we come to a conclusion that the positive effect from M&A is more apparent for mature firms because mature firms have lower proportion of growth options which expands marginal effect of growth options generated by M&A.