Abnormal returns and the regulation of nonprofit hospital sales and conversions

During the 1990s, concerns that nonprofit (NP) hospitals were being sold at below-market prices to investor-owned (IO) chains helped to prompt the widespread adoption of state laws regulating the sale and conversion of nonprofits. In this paper, we provide a simple test of under-pricing using the IO acquirer's abnormal stock market returns at the time of the acquisition. Prior to regulation, we find that IO chains did not earn abnormal returns from their acquisitions of NPs and earned greater returns from purchasing other IO and privately owned hospitals. In states that subsequently adopted regulations, acquisition activity slowed significantly and acquirer returns became negative. Efficient markets theory suggests that, absent regulation, expected merger synergies were already being transferred to the NP target and that regulation may have reduced expected synergies or increased the costs of acquiring NP hospitals.