Hostname: page-component-745bb68f8f-f46jp Total loading time: 0 Render date: 2025-01-28T03:12:55.022Z Has data issue: false hasContentIssue false
  • English
  • Français

Operating Performance and the Method of Payment in Takeovers

Published online by Cambridge University Press:  06 April 2009

Randall Heron  and
Erik Lie
Randall Heron
Affiliation:
[email protected], Kelley School of Business, Indiana University, Indianapolis, IN 46202–5151
Erik Lie
Affiliation:
[email protected], School of Business Administration, College of William and Mary, Williamsburg, VA 23187.
Get access Rights & Permissions [Opens in a new window]

Abstract

This study investigates the relation between the method of payment in acquisitions, earnings management, and operating performance for a large sample of firms that conducted acquisitions between 1985 and 1997. Prior to their acquisitions, acquirers exhibit levels of operating performance that exceed that of their respective industry peers. We find no evidence that acquirers manage their earnings prior to acquisitions, despite the possible incentives of managers who plan stock-based acquisitions to temporarily inflate their stock's purchasing power. Subsequent to acquisitions, acquirers continue to exhibit superior performance relative to their industry and experience significantly higher levels of operating performance than control firms with similar pre-event operating performance. Although the extant literature documents significant relations between the form of acquisition payment, announcement returns, and the post-acquisition excess return of acquirers, we find no evidence that the method of payment conveys information about the acquirer's future operating performance.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 37 , Issue 1 , March 2002 , pp. 137 - 155
Copyright
Copyright © School of Business Administration, University of Washington 2002

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Asquith, P., and Mullins, D.. “Equity Issues and Offering Dilution.” Journal of Financial Economics, 15 (1986), 61–89.CrossRefGoogle Scholar
Ball, R., and Brown, P.. “An Empirical Evaluation of Accounting Income Numbers.” Journal of Accounting Research, 6 (1968), p 159–178.CrossRefGoogle Scholar
Barber, B. M., and Lyon, J. D.. “Detecting Abnormal Operating Performance: The Empirical Power and Specification of Test Statistics.” Journal of Financial Economics, 41 (1996), 359–399.CrossRefGoogle Scholar
Bhagat, S.; Shleifer, A.; and Vishny, R.. “Hostile Takeovers in the 1980s: The Return to Corporate Specialization.” Brookings Papers on Economic Activity, Microeconomics, (1990), 1–72.CrossRefGoogle Scholar
Berger, P., and Ofek, E.. “Diversification's Effect on Firm Value.” Journal of Financial Economics, 37 (1995), 39–65.CrossRefGoogle Scholar
Berger, P., and Ofek, E.. “Bustup Takeovers of Value-Destroying Diversified Firms.” Journal of Finance, 51 (1996), 1175–1200.Google Scholar
Brous, P. A.; Datar, V. T.; and Kini, O.. “Is the Market Optimistic about the Future Earnings of Seasoned Equity Offering Firms?” Journal of Financial and Quantitative Analysis, 36 (2001), 141–168.CrossRefGoogle Scholar
Comment, R., and Jarrell, G.. “Corporate Focus and Stock Returns.” Journal of Financial Economics, 37 (1995), 67–87.CrossRefGoogle Scholar
Denis, D., and Sarin, A.. “Is the Market Surprised by Poor Earnings Realizations following Seasoned Equity Offerings?” Journal of Financial and Quantitative Analysis, 36 (2001), 169–193.CrossRefGoogle Scholar
Eckbo, E. B.; Masulis, R. W.; and Norli, O.. “Seasoned Public Offerings: Resolution of the 'New Issues Puzzle'.” Journal of Financial Economics, 56 (2000), 251–291.CrossRefGoogle Scholar
Erickson, M. “The Effect of Taxes on the Structure of Corporate Acquisitions.” Journal of Accounting Research, 36 (1998), 279–298.CrossRefGoogle Scholar
Erickson, M., and Wang, S.. “Earnings Management by Acquiring Firms in Stock for Stock Mergers.” Journal of Accounting and Economics, 27 (1999), 149–176.CrossRefGoogle Scholar
Fama, E. F. “Market Efficiency, Long-Term Returns, and Behavioral Finance.” Journal of Financial Economics, 49 (1998), 283–306.CrossRefGoogle Scholar
Guay, W.; Kothari, S.; and Watts, R.. “A Market-Based Evaluation of Discretionary Accrual Models.” Journal of Accounting Research (Supplement), 34 (1996), 83–105.CrossRefGoogle Scholar
Guenther, D. “Measuring Earnings Management in Response to Corporate Tax Rate Changes: Evidence from the 1986 Tax Reform Act.” Accounting Review, 69 (1994), 230–243.Google Scholar
Hansen, R. G. “A Theory for the Choice of Exchange Medium in Mergers and Acquisitions.” Journal of Business, 60 (1987), 75–95.CrossRefGoogle Scholar
Healy, P.; Palepu, K.; and Ruback, R.. “Does Corporate Performance Improve after Takeovers?” Journal of Financial Economics, 31 (1992), 135–175.CrossRefGoogle Scholar
Hertzel, M.; Lemmon, M.; Linck, J. S.; and Rees, L.. “Long-Run Performance following Private Placements of Equity.Working Paper, Arizona State Univ. (1999).CrossRefGoogle Scholar
Hotchkiss, E. S., and Mooradian, R. M.. “Acquisitions as a Means of Restructuring Firms in Chapter 11.” Journal of Financial Intermediation, 7 (1998), 240–262.CrossRefGoogle Scholar
Huang, Y. S., and Walkling, R. A.. “Target Abnormal Returns Associated with Acquisition Announcements: Payment, Acquisition Form, and Managerial Resistance.” Journal of Financial Economics, 19 (1987), 329–349.CrossRefGoogle Scholar
John, K., and Ofek, E.. “Asset Sales and Increase in Focus.” Journal of Financial Economics, 37 (1995), 105–126.CrossRefGoogle Scholar
Jones, J. “Earnings Management during Import Relief Investigation.” Journal of Accounting Research, 29 (1991), 193–228.CrossRefGoogle Scholar
Jung, K.; Kim, Y. C.; and Stulz, R. M.. “Timing, Investment Opportunities, Managerial Discretion, and the Security Issue Decision.” Journal of Financial Economics, 42 (1996), 159–185.CrossRefGoogle Scholar
Kahle, K. M., and Walkling, R. A.. “The Impact of Industry Classifications on Financial Research.” Journal of Financial and Quantitative Analysis, 31 (1996), 309–335.CrossRefGoogle Scholar
Kaplan, S. “The Effects of Management Buyouts on Operating Performance and Value.” Journal of Financial Economics, 24 (1989), 217–254.CrossRefGoogle Scholar
Lang, L. H. P.; Stulz, R.; and Walkling, R.. “Managerial Performance, Tobin's Q, and the Gains from Successful Tender Offers.” Journal of Financial Economics, 24 (1989), 137–154.CrossRefGoogle Scholar
Lewellen, W. G. “A Pure Financial Rationale for the Conglomerate Merger.” Journal of Finance, 26 (1971), 521–545.CrossRefGoogle Scholar
Loughran, T., and Ritter, J.. “The Operating Performance of Firms Conducting Seasoned Equity Offerings.” Journal of Finance, 52 (1997), 1823–1850.CrossRefGoogle Scholar
Loughran, T., and Vijh, A.. “Do Long-Term Shareholders Benefit from Corporate Acquisitions?” Journal of Finance, 52 (1997), 1765–1790.Google Scholar
Maquieira, C. P.; Megginson, W. L.; and Nail, L.. “Wealth Creation versus Wealth Redistributions in Pure Stock-for-Stock Mergers.” Journal of Financial Economics, 48 (1998), 3–33.CrossRefGoogle Scholar
Martin, K. J. “The Method of Payment in Corporate Acquisitions, Investment Opportunities, and Management Ownership.” Journal of Finance, 51 (1996), 1227–1246.CrossRefGoogle Scholar
Masulis, R. W., and Korwar, A. N.. “Seasoned Equity Offerings: An Empirical Investigation.” Journal of Financial Economics, 15 (1986), 91–118.CrossRefGoogle Scholar
Mikkelson, W., and Partch, M.. “Valuation Effects of Security Offerings and the Issuance Process.” Journal of Financial Economics, 15 (1986), 31–60.CrossRefGoogle Scholar
Myers, S. C. “Determinants of Corporate Borrowing.” Journal of Financial Economics, 5 (1977), 147–175.CrossRefGoogle Scholar
Myers, S. C., and Majluf, N.. “Corporate Financing and Investment Decisions when Firms Have Information That Investors Do Not Have.” Journal of Financial Economics, 13 (1984), 187–221.CrossRefGoogle Scholar
Opler, T.; Pinkowitz, L.; Stulz, R.; and Williamson, R.. “The Determinants and Implications of Corporate Cash Holdings.” Journal of Financial Economics, 52 (1999), 3–46.CrossRefGoogle Scholar
Rajan, R.; Servaes, H.; and Zingales, L.. “The Cost of Diversity: The Diversification Discount and Inefficient Investment.” Journal of Finance, 55 (2000), 35–80.CrossRefGoogle Scholar
Rangan, S. “Earnings Management and the Performance of Seasoned Equity Offerings.” Journal of Financial Economics, 50 (1998), 101–122.CrossRefGoogle Scholar
Rau, R., and Vermaelen, T.. “Glamour, Value and the Post-Acquisition Performance of Acquiring Firms.” Journal of Financial Economics, 49 (1998), 223–253.Google Scholar
Servaes, H. “Tobin's Q and the Gains from Takeovers.” Journal of Finance, 46 (1991), 409–420.CrossRefGoogle Scholar
Servaes, H. “The Value of Diversification during the Conglomerate Merger Wave.” Journal of Finance, 51 (1996), 1201–1225.CrossRefGoogle Scholar
Sloan, R. “Do Stock Prices Fully Impound Information in Accruals about Future Earnings?” Accounting Review, 71 (1996), 289–315.Google Scholar
Smith, C. W. “Investment Banking and the Capital Acquisition Process.” Journal of Financial Economics, 15 (1986), 3–29.CrossRefGoogle Scholar
Teoh, S. H.; Welch, I.; and Wong, T. J.. “Earnings Management and the Underperformance of Seasoned Equity Offerings.” Journal of Financial Economics, 50 (1998), 63–99.CrossRefGoogle Scholar
Travlos, N. G. “Corporate Takeover Bids, Methods of Payment, and Bidding Firms' Stock Returns.” Journal of Finance, 42 (1987), 943–963.CrossRefGoogle Scholar
Wansley, J.; Lane, W.; and Yang, H.. “Abnormal Returns to Acquired Firms by Type of Acquisition and Method of Payment.” Financial Management, 12 (1983), 16–22.CrossRefGoogle Scholar
Wansley, J.; Lane, W.; and Yang, H.. “Gains to Bidder Firms in Cash and Securities Transactions.” Financial Review, 22 (1987), 403–414.CrossRefGoogle Scholar