Measuring the Quality of Mergers and Acquisitions

Research output: Journal Publications and ReviewsRGC 21 - Publication in refereed journalpeer-review

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Original languageEnglish
Journal / PublicationManagement Science
Online published23 Apr 2024
Publication statusOnline published - 23 Apr 2024

Abstract

We develop a measure of merger and acquisition (M&A) quality using accounting theory. This measure, implied return-on-equity improvement (IRI), quantifies the minimum improvement in the target’s post-acquisition return on equity (ROE) the acquirer must attain to break even on the acquisition price. Employing a large sample of M&As from 1980 to 2018, we find that a high IRI is, on average, less attainable ex post and predicts worse acquirer financial performance. The acquirer’s ROE growth over the first three years after the M&A is 11 percentage points lower for high-IRI M&As compared with low-IRI M&As. Worse high-IRI acquirer performance is observable through higher operating costs, tighter financial constraints, lower investments, and larger and more frequent goodwill impairments. We also find that IRI increases with acquiring chief executive officers’ overconfidence, incentive misalignment, and difficulty in estimating synergies; IRI decreases with acquirers’ financial discipline and due diligence effort. As such, overestimating synergies and managerial incentives that drive overpayment are potential mechanisms underlying IRI’s negative association with acquirers’ post-M&A performance. © 2024 INFORMS.

Research Area(s)

  • mergers and acquisitions, deal quality, post-acquisition performance, overpayment, overestimation of synergies

Citation Format(s)

Measuring the Quality of Mergers and Acquisitions. / Ellahie, Atif; Hshieh, Shenje; Zhang, Feng.
In: Management Science, 23.04.2024.

Research output: Journal Publications and ReviewsRGC 21 - Publication in refereed journalpeer-review