EPS-Sensitivity and Mergers

59 Pages Posted: 1 Feb 2019 Last revised: 30 Jan 2020

See all articles by Sudipto Dasgupta

Sudipto Dasgupta

Chinese University of Hong Kong, ABFER, CEPR, and ECGI

Jarrad Harford

University of Washington; European Corporate Governance Institute (ECGI)

Fangyuan Ma

Chinese University of Hong Kong (CUHK) - Department of Finance

Date Written: January 17, 2019

Abstract

Announcements of mergers where the target is offered stock very often discuss the impact of the deal on the acquirer’s earnings per share (EPS), especially when the deal is EPS-accretive for the acquirer. In this paper, we document that the acquirer’s EPS-sensitivity affects how deals are structured, the premium that is paid, and the types of deals that are done. We provide evidence that acquirer managers prefer to do EPS-accretive deals when (a) shareholder approval is required for deals (b) institutional investor horizon is shorter, and (c) managers’ compensation is tied to EPS. Our results suggest that the relative popularity of deals financed in cash since early 2000 could be a consequence of acquirers’ EPS-sensitivity and low value-multiple acquirers pursuing high value-multiple targets.

Keywords: mergers, acquisitions, EPS, short-termism, method-of-payment

JEL Classification: G34

Suggested Citation

Dasgupta, Sudipto and Harford, Jarrad and Ma, Fangyuan, EPS-Sensitivity and Mergers (January 17, 2019). Available at SSRN: https://ssrn.com/abstract=3317922 or http://dx.doi.org/10.2139/ssrn.3317922

Sudipto Dasgupta (Contact Author)

Chinese University of Hong Kong, ABFER, CEPR, and ECGI ( email )

CUHK, Cheng Yu Tung Building, Room 1224
Shatin, NT
Hong Kong
Hong Kong

Jarrad Harford

University of Washington ( email )

Box 353226
Seattle, WA 98195-3226
United States
206-543-4796 (Phone)
206-543-7472 (Fax)

HOME PAGE: http://faculty.washington.edu/jarrad/

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Fangyuan Ma

Chinese University of Hong Kong (CUHK) - Department of Finance ( email )

Cheng Yu Tung Building
12 Chak Cheung Street
Shatin, N.T.
Hong Kong

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