Journal of Business Finance & Accounting, 34(3) & (4), 461–466, April/May 2007, 0306-686X doi: 10.1111/j.1468-5957.2007.02047.x Discussion of Divergence of Opinion and Post Acquisition Performance Gilad Livne ∗ In efficient friction-free security markets, prices will be a sufficient and unbiased measure of investors’ beliefs about share values. However, in the presence of certain frictions, this assertion may not hold. For example, if trading on unfavourable beliefs is restricted, it is possible that prices will reflect only a subset of the belief distribution, namely the more favourable views. Alexandridis, Antoniou and Petmezas (2007), hereafter AAP, employ this argument to investigate whether acquirers’ stock returns under-perform when divergence in opinion is high. More specifically, in the presence of short-sales restrictions, higher divergence of opinion implies some unfavourable opinions may not be impounded in prices. This, in turn, will drive the price upward because of the disproportionate effect of favourable opinions. AAP conjecture that greater degree of divergence of opinion will be associated with greater post-acquisition underperformance owing to these trading constraints. This is because: (1) shares are initially overpriced; and (2) subsequent to the acquisition, market participants will learn the true state of affairs through public information events and acquirers’ share price will decline in the post-event period. The rich evidence they present is, to my knowledge, among the first of its kind for the UK. It also seems, at first blush, to support the underlying conjecture. However, I believe that such a conclusion may be premature and that care should be taken with interpreting the paper’s finding. I elaborate on my concerns below, first discussing the underlying theory in Section 1, then pointing out limitations of the data and variables used in Section 2. My main discussion centres on the interpretation of the results – see Section 3 where I advance an alternative explanation to the paper’s findings. Section 4 concludes. 1. MOTIVATION AND BASIC THEORY Miller’s (1977) theory about the link between short-sales restriction, divergence of opinion and subsequent negative returns seems plausible in the context of information ∗ The author is from Cass Business School. He would like to thank L. Shivakumar for helpful comments and George Alexandridis for being patient with his questions. All errors are the author own. Address for correspondence: Gilad Livne, Cass Business School, City University, 106 Bunhill Row, London EC1Y 8TZ,UK. e-mail: g.livne@city.ac.uk C  2007 The Author Journal compilation C  2007 Blackwell Publishing Ltd, 9600 Garsington Road, Oxford OX4 2DQ, UK and 350 Main Street, Malden, MA 02148, USA. 461