Return to Invested Capital and the Performance of Mergers and Acquisitions
Forthcoming, Management Science
41 Pages Posted: 26 Jun 2014 Last revised: 12 Oct 2017
Date Written: December 28, 2016
We evaluate the efficiency of capital deployment for acquiring firms before M&As, defined as the return on invested capital net of the cost of capital, and link this measure to firms’ post-acquisition performance. Acquirers with higher, pre-acquisition net returns on investment have superior long-run operating and stock performance than do acquirers with lower returns. Acquirers with low net returns on investment also underperform matching non-acquirers. The relationship between pre-acquisition investment return and post-acquisition performance is weakened when CEO turnover occurs after deal completion. These results imply that managerial ability in deploying capital and creating value for shareholders persists through M&As.
Keywords: Merger and acquisition, invested capital, stock return, return on assets, CEO turnover
JEL Classification: G14, G34, M41
Suggested Citation: Suggested Citation