The cumulative abnormal return, or CAR, is the stock market’s snap reaction to an acquisition announcement. Over the last five decades, CAR has dominated academic finance: more than 92% of M&A studies in the top journals use it to measure deal quality. Its influence extends well beyond academic research: CAR is the standard framework taught in business schools, and event studies built on announcement returns are routinely used by expert witnesses in deal litigation and by regulators evaluating the competitive effects of mergers. If CAR were a reliable measure, the implications for corporate governance would be substantial—boards could use it to evaluate management’s dealmaking, compensation committees could tie incentive pay to deal-level value creation, and antitrust investigators could benchmark their enforcement decisions against the market’s verdict.

But what if CAR does not actually measure value creation?

In our article recently published in the Journal of Finance (published version; SSRN), we present comprehensive evidence that it does not. Using more than 47,000 acquisition announcements over nearly four decades (1980–2018), we find that the market’s initial reaction to a deal bears essentially no relation to how that deal actually turns out. (more…)