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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.
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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

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