Do Efficient Firms Make Better Acquisitions?

51 Pages Posted: 25 Feb 2009 Last revised: 24 Jun 2010

See all articles by J. Tyler Leverty

J. Tyler Leverty

University of Wisconsin - Madison

Yiming Qian

University of Connecticut

Date Written: June 23, 2010


Corporate control theory suggests mergers and acquisitions protect shareholder value by allowing good managers to take control of the assets of bad managers. It therefore predicts (1) the acquisitions of poorly-managed targets by well-managed bidders will create more value than other acquisitions, and (2) the target CEO is more likely to be replaced when well-managed firms acquire poorly-managed firms. We examine these predictions. We measure how well a firm is managed using frontier efficiency analysis – the method compares the output of each firm to that of a hypothetical best-performing firm with the same inputs and characteristics as the original firm. We find: (1) the market reacts more positively to acquisitions of efficient firms. (2) Acquisitions by efficient firms are more likely to be all-cash deals and less likely to be all-equity deals. (3) The wealth gains to both the target and the acquirer improve as the efficiency difference between the acquirer and the target increases. (4) The target CEO is less likely to be retained by the merged firm when the efficiency difference increases. (5) The market reacts more negatively to target CEO retention when the target is less efficient than the acquirer.

Keywords: Market for Corporate Control, Mergers, Acquisitions, Takeover, Efficiency, Method of Payment, Synergy, Frontier Efficiency Analysis, CEO Retention

JEL Classification: G34, G14, D24

Suggested Citation

Leverty, J. Tyler and Qian, Yiming, Do Efficient Firms Make Better Acquisitions? (June 23, 2010). Available at SSRN: or

J. Tyler Leverty (Contact Author)

University of Wisconsin - Madison ( email )

716 Langdon Street
Madison, WI 53706-1481
United States

Yiming Qian

University of Connecticut ( email )

2100 Hillside Road U-1041F, Room 452
Storrs, CT 06269
United States
860-486-2774 (Phone)

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