The 'post-acquisition returns puzzle' is a documented capital market 'anomaly' that describes how takeover bidders, especially those funding the acquisition with their own stock, earn systematically negative abnormal returns for several years subsequent to the bid. This thesis attempts to explain the 'puzzle' with a behavioural finance approach. It is hypothesised that firms 'hype their stock' using voluntary disclosure policy prior to a takeover bid in an attempt to ensure their shares are overvalued at the date of the bid. This in turn leads to negative abnormal returns throughout the post-bid period as investor expectations inflated by the 'hype' are disappointed.
Using the methodology of Lang and Lundholm (2000), eighty firms making acquisitions in the United States between 1993 and 1997 are examined to test this hypothesis. While the evidence does not allow the conclusion that bidding firms, on average, 'hype their stock' by increasing their level of disclosure, it does indicate that scrip for scrip bidders that have sufficient incentive and/or opportunity will engage in 'hyping'. Further investigation shows that pre-bid disclosure change is negatively related to post-bid abnormal returns amongst firms bidding with scrip, suggesting that these firms are able to successfully 'hype their stock' in preparation for the takeover bid, effectively reducing the cost of the acquisition and resulting in negative abnormal returns over the subsequent long-run period.