Abstract
This paper examines the link between the causes and effects of mergers and acquisitions. By using a sample of UK acquisitions, which have the distinct characteristics of limited use of stock as means of payment and dominance of private acquisitions, the evidence shows that, on average, there is a substantial price run-up for acquirers prior to an acquisition announcement followed by a significant drop of bidder’s price in the post-event period. This indicates, to an extent, that corporate acquisitions are the effect of good performance rather than the cause. However, the results also reflect that a relatively better acquisition strategy for a firm to create value is by making many small acquisitions rather than a small number of large acquisitions, implying that acquisitions also drive performance. Overall, the evidence found is mixed and suggests that in the UK market, acquisition returns cannot be solely based on the market driven explanation.