Measuring the Quality of Mergers and Acquisitions

Atif Ellahie (), Shenje Hshieh () and Feng Zhang ()
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Atif Ellahie: David Eccles School of Business, University of Utah, Salt Lake City, Utah 84112
Shenje Hshieh: College of Business, City University of Hong Kong, Hong Kong
Feng Zhang: Cox School of Business, Southern Methodist University, Dallas, Texas 75275

Management Science, 2025, vol. 71, issue 1, 779-802

Abstract: We develop a measure of merger and acquisition (M&A) quality using accounting theory. This measure, implied return-on-equity improvement (IRI), quantifies the minimum improvement in the target’s post-acquisition return on equity (ROE) the acquirer must attain to break even on the acquisition price. Employing a large sample of M&As from 1980 to 2018, we find that a high IRI is, on average, less attainable ex post and predicts worse acquirer financial performance. The acquirer’s ROE growth over the first three years after the M&A is 11 percentage points lower for high-IRI M&As compared with low-IRI M&As. Worse high-IRI acquirer performance is observable through higher operating costs, tighter financial constraints, lower investments, and larger and more frequent goodwill impairments. We also find that IRI increases with acquiring chief executive officers’ overconfidence, incentive misalignment, and difficulty in estimating synergies; IRI decreases with acquirers’ financial discipline and due diligence effort. As such, overestimating synergies and managerial incentives that drive overpayment are potential mechanisms underlying IRI’s negative association with acquirers’ post-M&A performance.

Keywords: mergers and acquisitions; deal quality; post-acquisition performance; overpayment; overestimation of synergies (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:inm:ormnsc:v:71:y:2025:i:1:p:779-802

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