Working Paper: NBER ID: w3348
Authors: Paul M. Healy; Krishna C. Palepu; Richard S. Ruback
Abstract: We examine the post-acquisition operating performance of merged firms using a sample of the 50 largest mergers between U.S. public industrial firms completed in the period 1979 to 1983. The results indicate that merged firms have significant improvement in asset productivity relative to their industries after the merger, leading to higher post-merger operating cash flow returns. Sample firms maintain their capital expenditure and R&D rates relative to their industries after the merger, indicating that merged firms do not reduce their long-term investments. There is a strong positive relation between postmerger increases in operating cash flows and abnormal stock returns at merger announcements, indicating that expectations of economic improvements underlie the equity revaluations of the merging firms.
Keywords: mergers; corporate performance; cash flow; stock returns
JEL Codes: G34; M41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| merger (G34) | improvements in asset productivity (G31) |
| post-merger increases in operating cash flows (G34) | abnormal stock returns (G17) |
| merger (G34) | increases in operating cash flows (D25) |
| increases in operating cash flows (D25) | maintenance of capital expenditure and R&D rates (G31) |