Euphoria in financial markets: How Indian companies generate value in their cross-border acquisitions

• We investigate the effect of euphoria on returns derived by Indian companies in their cross-border acquisitions.
• Cognitive legitimacy is created at the country-level due to exogenous events.
• Post-legitimacy period helps firms derive higher returns from internationalization.
• But, legitimacy affect is short-lived; we define this as the euphoria effect.
• Indian firms did not experience short-term abnormal returns in their cross-border acquisitions in later years.

In this paper, we investigate the effect of euphoria on returns derived by Indian companies in their cross-border acquisitions. Cognitive legitimacy generated at the country level facilitated firms in deriving higher value from internationalization. In addition, overoptimism after the legitimacy-building event led to euphoria in financial markets and short-term abnormal returns. Hence we argue that the springboard effect created by legitimacy is short-lived, as euphoria fades away over time. Using cross-border and domestic acquisitions by Indian companies during 1999–2009, and controlling for fundamental factors, both financial and non-financial, we find support for our euphoria hypothesis. Because of overoptimism, Indian companies experienced short-term abnormal returns in their cross-border acquisitions in the few years following the legitimation process, but not in later years.