Measuring the Quality of Mergers and Acquisitions

66 Pages Posted: 29 Jan 2021

See all articles by Atif Ellahie

Atif Ellahie

University of Utah - David Eccles School of Business

Feng Zhang

University of Utah - Department of Finance

Date Written: January 2021

Abstract

We use accounting theory to develop a new measure of the quality of mergers and acquisitions, implied return-on-equity improvement (IRI), which quantifies the minimum improvement in the target’s accounting returns after acquisition needed to justify the offer price. We validate our measure by showing that it captures disclosed synergies and estimated EPS accretion. Consistent with larger performance improvements being less achievable, we find that high-IRI acquirers have worse post-acquisition ROE and more frequent and larger goodwill impairments. We also show that this worse long-run performance is likely driven by overconfident and poorly incentivized managers undertaking acquisitions of inferior quality.

Keywords: mergers and acquisitions, deal quality, long-run performance, goodwill impairment

JEL Classification: M41, G13, G14

Suggested Citation

Ellahie, Atif and Zhang, Feng, Measuring the Quality of Mergers and Acquisitions (January 2021). Available at SSRN: https://ssrn.com/abstract=3765106 or http://dx.doi.org/10.2139/ssrn.3765106

Atif Ellahie (Contact Author)

University of Utah - David Eccles School of Business ( email )

1645 E Campus Center Dr
Salt Lake City, UT 84112-9303
United States

Feng Zhang

University of Utah - Department of Finance ( email )

David Eccles School of Business
Salt Lake City, UT 84112-9303
United States

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