Measuring the Quality of Mergers and Acquisitions

68 Pages Posted: 29 Jan 2021 Last revised: 25 May 2022

See all articles by Atif Ellahie

Atif Ellahie

University of Utah - David Eccles School of Business

Shenje Hshieh

City University of Hong Kong

Feng Zhang

Southern Methodist University (SMU) - Finance Department

Date Written: May 18, 2022

Abstract

We develop an ex-ante measure of merger and acquisition quality using accounting theory. The measure, implied return-on-equity improvement (IRI), quantifies the minimum improvement in the target’s return-on-equity post acquisition to justify the offer price. Consistent with greater implied earnings improvements being less attainable ex-post, we find that high-IRI acquirers have worse post-acquisition accounting returns, lower returns to shareholders and debtholders, and more frequent and larger goodwill impairments. IRI’s negative association with acquirer performance is stronger among overconfident and poorly incentivized acquirer managers and weaker among financially disciplined acquirers, suggesting managerial incentives and behaviors are important economic mechanisms underlying acquisition quality.

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

JEL Classification: M41, G13, G14

Suggested Citation

Ellahie, Atif and Hshieh, Shenje and Zhang, Feng, Measuring the Quality of Mergers and Acquisitions (May 18, 2022). 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

Shenje Hshieh

City University of Hong Kong ( email )

83 Tat Chee Avenue
Kowloon
Hong Kong

Feng Zhang

Southern Methodist University (SMU) - Finance Department ( email )

SMU Cox School of Business
6212 Bishop Blvd
Dallas, TX 75275
United States

HOME PAGE: http://https://sites.google.com/view/fengzhangfin

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