Skip to main content
SpringerLink
Log in

Financial characteristics of acquiring firms and their relation to the wealth effects of acquisition announcements

  • Published:
Journal of Economics and Finance Aims and scope Submit manuscript

Abstract

This paper examines the sources of value to acquiring firms to expand the understanding of mergers and acquisitions. The firmspecific rationale that motivate firms to acquire other firms are examined, along with how these rationale impact the shareholder wealth of acquiring firms when the acquisitions are announced. A logit regression model is utilized to compare financial characteristics of acquiring firms to those of non-acquiring firms. The relation of these characteristics to the shareholder wealth effects experienced by acquiring firms when they announce acquisitions is also examined. The results support hypotheses that firm size and cash-flow payout impact the decision to acquire. Capital structure, management performance, and cash-flow payout are related to the wealth effects of acquisition announcements. Better fitting models result when industry effects are controlled by measuring firm characteristics as relative deviations from industry values.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Similar content being viewed by others

References

  • Amemiya, Takeshi. “Qualitative Response Models: A Survey.”Journal of Economic Literature 19, no. 4 (December 1981): 1483–1536.

    Google Scholar 

  • Asquith, Paul, Robert F. Bruner, andDavid D. Mullins, Jr. “The Gains to Bidding Firms from Merger.”Journal of Financial Economics 11 (April 1983): 121–139.

    Article  Google Scholar 

  • Belkaoui, Ahmed. “Financial Ratios as Predictors of Canadian Takeovers.”Journal of Business, Finance, and Accounting 5 (Spring 1978): 93–107.

    Article  Google Scholar 

  • Bradley, Michael, Anand Desai, andE. Han Kim. “Synergistic Gains From Corporate Acquisitions and Their Division Between the Stockholders of Target and Acquiring Firms.”Journal of Financial Economics 21, no. 1 (May 1988): 3–40.

    Article  Google Scholar 

  • Brown, Stephen J., andJerold B. Warner. “Using Daily Stock Returns: The Case of Event Studies.”Journal of Financial Economics 14, no. 1 (March 1985): 3–32.

    Article  Google Scholar 

  • Castagna, A.D., and Z.P. Matolcsy. “Financial Ratios as Predictors of Company Acquisitions.”Journal of the Securities Institute of Australia (December 1976): 6–10.

  • Dietrich, J. Kimball, andEric Sorensen. “An Application of Logit Analysis to Prediction of Merger Targets.”Journal of Business Research 12, no. 3 (September 1984): 393–402.

    Article  Google Scholar 

  • Dodd, Peter, andJerold B. Warner. “On Corporate Governance: A Study of Proxy Contests.”Journal of Financial Economics 11 (April 1983): 401–438.

    Article  Google Scholar 

  • Gort, Michael. “An Economic Disturbance Theory of Mergers.”Quarterly Journal of Economics 83, no. 4 (November 1969): 624–642.

    Article  Google Scholar 

  • Grimm, W.T. Mergerstat Review. Chicago: W.T. Grimm and Co., 1985, 1986, 1987.

    Google Scholar 

  • Jarrell, Gregg A., James A. Brickley, andJeffry M. Netter. “The Market for Corporate Control: The Empirical Evidence Since 1980.”Journal of Economic Perspectives 2, no. 1 (Winter 1988): 49–68.

    Google Scholar 

  • Jarrell, Gregg A., andAnnette B. Poulsen. “The Returns to Acquiring Firms in Tender Offers: Evidence From Three Decades.”Financial Management 18, no. 3 (Autumn 1989): 12–19.

    Article  Google Scholar 

  • Jensen, Michael, C.. “Takeovers: Folklore and Science.”Harvard Business Review 62, no. 6 (November–December 1984): 109–121.

    Google Scholar 

  • —. “Agency Costs of Free Cash Flow, Corporate Finance and Takeovers.”American Economic Review 76, no. 2 (May 1986): 323–329.

    Google Scholar 

  • —. “The Takeover Controversy: Analysis and Evidence.” InKnights, Raiders, and Targets: The Impact of the Hostile Takeover, ed. J.C. Coffee, L. Lowenstein, and S. Rose-Ackerman, 314–354. New York: Oxford University Press, 1988.

    Google Scholar 

  • Jensen, Michael, C., andRichard S. Ruback. “The Market For Corporate Control: The Scientific Evidence.”Journal of Financial Economics 11 (April 1983): 5–50.

    Article  Google Scholar 

  • Jensen, Michael, C., andJerold B. Warner. “The Distribution of Power Among Corporate Managers, Shareholders, and Directors.”Journal of Financial Economics 20 (January/March 1988): 3–24.

    Article  Google Scholar 

  • Lang, Larry, H.P., Rene M. Stulz, andRalph A. Walkling. “Managerial Performance, Tobin’s Q, and the Gains From Successful Tender Offers.”Journal of Financial Economics 24, no. 1 (September 1989): 137–154.

    Article  Google Scholar 

  • Lang, Larry, H.P., Rene M. Stulz, andRalph A. Walkling. “A Test of the Free Cash Flow Hypothesis: The Case of Bidder Returns.”Journal of Financial Economics 29, no. 2 (October 1991): 315–335.

    Article  Google Scholar 

  • Lehn, Kenneth, andAnnette Poulsen. “Free Cash Flow and Stockholder Gains in Going Private Transactions.”Journal of Finance 44, no. 3 (July 1989): 771–787.

    Article  Google Scholar 

  • Lehn, Kenneth, Jeffry Netter, andAnnette Poulsen. “Consolidating Corporate Control: Dual-Class Recapitalizations Versus Leveraged Buyouts.”Journal of Financial Economics 27, no. 2 (October 1990): 557–580.

    Article  Google Scholar 

  • Maddala, G.S. Limited-Dependent and Qualitative Variables in Econometrics. London: Cambridge University Press, 1983.

    Google Scholar 

  • Manne, Henry G.. “Mergers and the Market for Corporate Control.”Journal of Political Economy 73 (April 1965): 110–120.

    Article  Google Scholar 

  • Morck, Randall, Andrei Shleifer, andRobert W. Vishny. “Do Managerial Objectives Drive Bad Acquisitions?.”Journal of Finance 45, no. 1 (March 1990): 31–48.

    Article  Google Scholar 

  • Myers, Stewart C., andNicholas S. Majluf. “Corporate Financing and Investment Decisions When Firms Have Information That Investors Do Not Have.”Journal of Financial Economics 13, no. 2 (June 1984): 187–221.

    Article  Google Scholar 

  • Palepu, Krishna G.. “Predicting Takeover Targets: A Methodological and Empirical Analysis.”Journal of Accounting and Economics 8, no. 1 (March 1986): 3–35.

    Article  Google Scholar 

  • Rock, Milton, L. Publisher,Mergers and Acquisitions, Philadelphia: MLR Publishing Co., various issues 1984-1987.

    Google Scholar 

  • Roll, Richard. “The Hubris Hypothesis of Corporate Takeovers.”Journal of Business 59, no. 2 (April 1986): 197–216.

    Article  Google Scholar 

  • —. “Empirical Evidence on Takeover Activity and Shareholder Wealth.” InKnights, Raiders, and Targets: The Impact of the Hostile Takeover, ed. John C. Coffee, Jr., Louis Lowenstein, and Susan Rose-Ackerman, 241–252. New York: Oxford University Press, 1988.

    Google Scholar 

  • Salter, Malcolm S., andWolf A. Weinhold. “Corporate Takeovers: Financial Boom or Organizational Bust?” InKnights, Raiders, and Targets: The Impact of the Hostile Takeover, ed. John C. Coffee, Jr., Louis Lowenstein, and Susan Rose-Ackerman, 135–149. New York: Oxford University Press, 1988.

    Google Scholar 

  • Schipper, Katherine, andRex Thompson. “Evidence On the Capitalized Value of Merger Activity for Acquiring Firms.”Journal of Financial Economics 11 (April 1983): 85–119.

    Article  Google Scholar 

  • Simkowitz, Michael A., andRobert J. Monroe. “A Discriminant Analysis Function for Conglomerate Targets.”Southern Journal of Business 6, no. 3 (November 1971): 1–16.

    Google Scholar 

  • Stevens, Donald L.. “Financial Characteristics of Merged Firms: A Multivariate Analysis.”Journal of Financial and Quantitative Analysis 8, no. 2 (March 1973): 149–158.

    Article  Google Scholar 

  • Travlos, Nickolaos G.. “Corporate Takeover Bids, Methods of Payment, and Bidding Firms’ Stock Returns.”Journal of Finance 42, no. 4 (September 1987): 943–963.

    Article  Google Scholar 

Download references

Author information

Authors and Affiliations

  1. Northeastern University, 02115, Boston, MA

    Emery A. Trahan

Authors
  1. Emery A. Trahan
    View author publications

    You can also search for this author in PubMed Google Scholar

Rights and permissions

Reprints and permissions

About this article

Cite this article

Trahan, E.A. Financial characteristics of acquiring firms and their relation to the wealth effects of acquisition announcements. J Econ Finan 17, 21–35 (1993). https://doi.org/10.1007/BF02920635

Download citation

  • Issue Date:

  • DOI: https://doi.org/10.1007/BF02920635

Keywords

Search

Navigation