Stock merger activity and industry performance

We propose a merger activity variable (MAV) as an alternative to industry merger waves. Unlike discrete merger waves that separate periods of extreme activity from the rest, our continuous MAV utilizes infor-mation in the full range of stock merger activity. We rank Fama-French 12 industries by MAV each quarter and arrange them into 12 bucket portfolios. We examine their prior and subsequent three-year excess re-turns using calendar-time portfolio method. The prior returns are positively related to MAV ranks while the subsequent returns are negatively related to MAV ranks. This evidence suggests a build-up of mis-valuation (undervaluation of relatively less stock merger active industries and overvaluation of relatively more active industries) followed by a correction. On average, the most active industry outperforms the least active industry by 13.46% during the prior period, but underperforms by 10.30% during the subse-quent period. Industry operating performance results further support the industry misvaluation theory of stock merger activity. (c) 2021 Elsevier B.V. All rights reserved.