Skip to main content Accessibility help

Organization Capital and Mergers and Acquisitions

Published online by Cambridge University Press:  11 May 2018


Using a sample of completed U.S. acquisition deals over the period 1984–2014, we find that acquirer organization capital as measured by capitalized selling, general, and administrative (SG&A) expenses is associated with superior deal performance. We show that high organization-capital acquirers achieve significantly higher abnormal announcement period returns, and better post-merger operating and stock performance, than low organization-capital acquirers. Additional tests suggest a causal relation between acquirer organization capital and deal performance. We further show that post-merger, high organization-capital acquirers cut more on the cost of goods sold, invest more in SG&A expenses, and achieve greater asset turnover and innovative efficiency.

Research Article
Copyright © Michael G. Foster School of Business, University of Washington 2018 

Access options

Get access to the full version of this content by using one of the access options below.



We thank Kenneth Ahern, Bruce Carlin (the referee), Ming Dong, Marion Dupire-Declerck, Espen Eckbo, Andrea Eisfeldt, Wayne Ferson, Xian Gu, Jarrad Harford, Jerry Hoberg, Martin Jacob, Andrew Karolyi, Simi Kedia, Jin-Mo Kim, Bart Lambrecht, Paul Malatesta (the editor), Alberto Manconi, Harold Mulherin, Jeff Netter, Georgios Papanastasopoulos, Graham Partington, Neil Pearson, Gordon Phillips, Elena Pikulina, Luc Renneboog, Terry Walter, Jin Wang, Fangming Xu, Ting Xu, Pradeep Yadav, Hongjun Yan, Feng Zhang, and seminar participants at the Cheung Kong Graduate School of Business, Chinese University of Hong Kong, Erasmus University Rotterdam, Hong Kong University of Science and Technology, Nanyang Technological University, Rutgers University, Shanghai University of Finance and Economics, Singapore Management University, University of Amsterdam, University of Bristol, University of Georgia, University of Groningen, University of Illinois at Urbana–Champaign, University of Southern California, University of Sydney, PBC School of Finance, Peking University, Tilburg University, Tsinghua University, VU University Amsterdam, WHU – Otto Beisheim School of Management, and York University, and conference participants at the 2014 Center for the Economic Analysis of Risk (CEAR) Conference on Corporate Control Mechanisms and Risk, the 2014 Belgium Financial Research Forum, the 2014 European Accounting Association Annual Meetings, the 2016 Edinburgh Corporate Finance Conference, and the 2016 Financial Management Association Asia Pacific Conference for helpful comments. We also thank our research assistants Alice Guo, Julie Shin, Ting Xu, Tan Ren Xuan, and Nicholas Yoong. Li acknowledges financial support from the Social Sciences and Humanities Research Council of Canada, the Undergraduate International Student Research Assistant Program at the University of British Columbia, and the Sauder School of Business Bureau of Asset Management. All errors are our own.


Anand, B.; Collis, D.; and Hood, S.. “Danaher Corporation.” Harvard Business School Case 708-445 (2011).Google Scholar
Andrade, G.; Mitchell, M.; and Stafford, E.. “New Evidence and Perspectives on Mergers.” Journal of Economic Perspectives, 15 (2001), 103120.CrossRefGoogle Scholar
Arrow, K.The Economic Implications of Learning by Doing.” Review of Economic Studies, 29 (1962), 155173.CrossRefGoogle Scholar
Atkeson, A., and Kehoe, P.. “Modeling and Measuring Organization Capital.” Journal of Political Economy, 113 (2005), 10261053.CrossRefGoogle Scholar
Banker, R. D.; Huang, R.; and Natarajan, R.. “Equity Incentives and Long-Term Value Created by SG&A Expenditure.” Contemporary Accounting Research, 28 (2011), 794830.CrossRefGoogle Scholar
Becker, G. Human Capital: A Theoretical and Empirical Analysis, with Special Reference to Education, 3rd ed. Chicago, IL: University of Chicago Press (1993).CrossRefGoogle Scholar
Bena, J., and Li, K.. “Corporate Innovations and Mergers and Acquisitions.” Journal of Finance, 69 (2014), 19231960.CrossRefGoogle Scholar
Berk, J.; Stanton, R.; and Zechner, J.. “Human Capital, Bankruptcy, and Capital Structure.” Journal of Finance, 65 (2010), 891926.CrossRefGoogle Scholar
Bessembinder, H., and Zhang, F.. “Firm Characteristics and Long-Run Stock Returns after Corporate Events.” Journal of Financial Economics, 109 (2013), 83102.CrossRefGoogle Scholar
Betton, S.; Eckbo, B. E.; and Thorburn, K.. “Corporate Takeovers.” In Handbook of Corporate Finance: Empirical Corporate Finance, Vol. II, Eckbo, B. E., ed. Amsterdam, The Netherlands: Elsevier/North-Holland (2008), 291429.CrossRefGoogle Scholar
Black, S. E., and Lynch, L. M.. “Measuring Organization Capital in the New Economy.” In Measuring Capital in the New Economy, Corrado, C., Haltiwanger, J., and Sichel, D., eds. Chicago, IL: University of Chicago Press (2005), 205236.CrossRefGoogle Scholar
Bloom, N.; Sadun, R.; and Van Reenen, J.. “Americans Do IT Better: US Multinationals and the Productivity Miracle.” American Economic Review, 102 (2012), 167201.CrossRefGoogle Scholar
Bloom, N., and Van Reenen, J.. “Measuring and Explaining Management Practices across Firms and Countries.” Quarterly Journal of Economics, 122 (2007), 13511408.CrossRefGoogle Scholar
Brav, A.; Geczy, C.; and Gompers, P.. “Is the Abnormal Return Following Equity Issuances Anomalous?Journal of Financial Economics, 56 (2000), 209249.CrossRefGoogle Scholar
Brown, E., and Kaufold, H.. “Human Capital Accumulation and the Optimal Level of Unemployment Insurance Provision.” Journal of Labor Economics, 6 (1988), 493514.CrossRefGoogle Scholar
Capron, L., and Pistre, N.. “When Do Acquirers Earn Abnormal Returns?Strategic Management Journal, 23 (2002), 781794.CrossRefGoogle Scholar
Carlin, B.; Chowdhry, B.; and Garmaise, M.. “Investment in Organization Capital.” Working Paper, UCLA (2011).Google Scholar
Carlin, B.; Chowdhry, B.; and Garmaise, M.. “Investment in Organization Capital.” Journal of Financial Intermediation, 21 (2012), 268286.CrossRefGoogle Scholar
Carlin, B., and Gervais, S.. “Work Ethic, Employment Contracts, and Firm Value.” Journal of Finance, 64 (2009), 785821.CrossRefGoogle Scholar
Chan, L. K. C.; Lakonishok, J.; and Sougiannis, T.. “The Stock Market Valuation of Research and Development Expenditures.” Journal of Finance, 56 (2001), 24312456.CrossRefGoogle Scholar
Chen, D.; Gao, H.; and Ma, Y.. “Human Capital Driven Acquisition: Evidence from the Inevitable Disclosure Doctrine.” Working Paper, University of International Business and Economics (2017).Google Scholar
Chen, X.; Harford, J.; and Li, K.. “Monitoring: Which Institutions Matter?Journal of Financial Economics, 86 (2007), 279305.CrossRefGoogle Scholar
Cooney, J. W.; Moeller, T.; and Stegemoller, M.. “The Underpricing of Private Targets.” Journal of Financial Economics, 93 (2009), 5166.CrossRefGoogle Scholar
Cragg, J. G., and Donald, S. G.. “Testing Identifiability and Specification in Instrumental Variable Models.” Econometric Theory, 9 (1993), 222240.CrossRefGoogle Scholar
Demerjian, P.; Lev, B.; and McVay, S.. “Quantifying Managerial Ability: A New Measure and Validity Tests.” Management Science, 58 (2012), 12291248.CrossRefGoogle Scholar
Eckbo, B. E.; Masulis, R.; and Norli, O.. “Security Offerings.” In Handbook of Corporate Finance: Empirical Corporate Finance, Vol. I, Eckbo, B. E., ed. Amsterdam, The Netherlands: Elsevier/North-Holland (2007), 233373.CrossRefGoogle Scholar
Edmans, A.Does the Stock Market Fully Value Intangibles? Employee Satisfaction and Equity Prices.” Journal of Financial Economics, 101 (2011), 621640.CrossRefGoogle Scholar
Eisfeldt, A., and Papanikolaou, D.. “Organization Capital and the Cross-Section of Expected Returns.” Journal of Finance, 68 (2013), 13651406.CrossRefGoogle Scholar
Ericson, R., and Pakes, A.. “Markov-Perfect Industry Dynamics: A Framework for Empirical Work.” Review of Economic Studies, 61 (1995), 5382.CrossRefGoogle Scholar
Evenson, R., and Westphal, L.. “Technological Change and Technological Strategy.” In Handbook of Development Economics, Behrman, J. and Srinivasan, T. N., eds. Amsterdam, The Netherlands: Elsevier (1995), 22092299.Google Scholar
Falato, A.; Kadyrzhanova, D.; and Sim, J. W.. “Rising Intangible Capital, Shrinking Debt Capacity, and the US Corporate Savings Glut.” Working Paper, Federal Reserve Board (2013).Google Scholar
Fama, E. F.Market Efficiency, Long-Term Returns, and Behavioral Finance.” Journal of Financial Economics, 49 (1998), 283306.CrossRefGoogle Scholar
Fama, E. F., and French, K. R.. “Forecasting Profitability and Earnings.” Journal of Business, 73 (2000), 161175.CrossRefGoogle Scholar
Fuller, K.; Netter, J.; and Stegemoller, M.. “What Do Returns to Acquiring Firms Tell Us? Evidence from Firms That Make Many Acquisitions.” Journal of Finance, 57 (2002), 17631793.CrossRefGoogle Scholar
Gao, H.; Harford, J.; and Li, K.. “Determinants of Corporate Cash Policy: Insights from Private Firms.” Journal of Financial Economics, 109 (2013), 623639.CrossRefGoogle Scholar
Gao, H.; Harford, J.; and Li, K.. “CEO Turnover-Performance Sensitivities in Private Firms.” Journal of Financial and Quantitative Analysis, 52 (2017), 583611.CrossRefGoogle Scholar
Hall, R.“E-Capital: The Link between the Stock Market and the Labor Market in the 1990s.” Brookings Papers on Economic Activity (2000), 73–102.Google Scholar
Hamler, N.Impending Merger of the Inevitable Disclosure Doctrine and Negative Trade Secrets: Is Trade Secrets Law Headed in the Right Direction?Journal of Corporate Law, 25 (2000), 383405.Google Scholar
Hansen, L. P.Large Sample Properties of Generalized Method of Moments Estimators.” Econometrica, 50 (1982), 10291054.CrossRefGoogle Scholar
Harford, J.Corporate Cash Reserves and Acquisitions.” Journal of Finance, 54 (1999), 19691997.CrossRefGoogle Scholar
Hassler, J.; Rodriguez Mora, J. V.; Storesletten, K.; and Zilibotti, F.. “A Positive Theory of Geographic Mobility and Social Insurance.” International Economic Review, 46 (2005), 263303.CrossRefGoogle Scholar
Hilary, G., and Hui, K. W.. “Does Religion Matter in Corporate Decision Making in America?Journal of Financial Economics, 93 (2009), 455473.CrossRefGoogle Scholar
Hirshleifer, D.; Hsu, P. H.; and Li, D.. “Innovative Efficiency and Stock Returns.” Journal of Financial Economics, 107 (2013), 632652.CrossRefGoogle Scholar
Jaffe, J.; Jindra, J.; Pedersen, D.; and Voetmann, T.. “Returns to Acquirers of Public and Subsidiary Targets.” Journal of Corporate Finance, 31 (2015), 246270.CrossRefGoogle Scholar
Jovanovic, B.Job Matching and the Theory of Turnover.” Journal of Political Economy, 87 (1979), 972990.CrossRefGoogle Scholar
Jovanovic, B., and Rousseau, P. L.. “Vintage Organization Capital.” NBER Working Paper No. 8166 (2001).Google Scholar
Klasa, S.; Ortiz-Molina, H.; Serfling, M. A.; and Srinivasan, S.. “Protection of Trade Secrets and Capital Structure Decisions.” Journal of Financial Economics, forthcoming (2018).Google Scholar
Lev, B., and Radhakrishnan, S.. “The Valuation of Organization Capital.” In Measuring Capital in the New Economy, Corrado, C., Haltiwanger, J., and Sichel, D., eds. Chicago, IL: University of Chicago Press (2005), 73110.CrossRefGoogle Scholar
Lev, B.; Radhakrishnan, S.; and Evans, P. C.. “Organizational Capital: A CEO’s Guide to Measuring and Managing Enterprise Intangibles.” Working Paper, The Center for Global Enterprise (2016).Google Scholar
Lev, B.; Radhakrishnan, S.; and Zhang, W.. “Organizational Capital.” Abacus, 45 (2009), 275298.CrossRefGoogle Scholar
Lev, B., and Sougiannis, T.. “The Capitalization, Amortization, and Value-Relevance of R&D.” Journal of Accounting and Economics, 21 (1996), 107138.CrossRefGoogle Scholar
Levhari, D., and Weiss, Y.. “The Effect of Risk on the Investment in Human Capital.” American Economic Review, 64 (1974), 950963.Google Scholar
Li, K., and Prabhala, N. R.. “Self-Selection Models in Corporate Finance.” In Handbook of Corporate Finance: Empirical Corporate Finance, Vol. I, Eckbo, B. E., ed. Amsterdam, The Netherlands: Elsevier/North-Holland (2007), 3786.Google Scholar
Light, A., and Omori, Y.. “Unemployment Insurance and Job Quits.” Journal of Labor Economics, 22 (2004), 159188.CrossRefGoogle Scholar
Loughran, T., and Vijh, A. M.. “Do Long-Term Shareholders Benefit from Corporate Acquisitions?Journal of Finance, 52 (1997), 17651790.CrossRefGoogle Scholar
Lustig, H.; Syverson, C.; and Van Nieuwerburgh, S.. “Technological Change and the Growing Inequality in Managerial Compensation.” Journal of Financial Economics, 99 (2011), 601627.CrossRefGoogle Scholar
Lyon, J. D.; Barber, B. M.; and Tsai, C.. “Improved Methods for Tests of Long-Run Abnormal Stock Returns.” Journal of Finance, 54 (1999), 165201.CrossRefGoogle Scholar
Maksimovic, V., and Phillips, G.. “The Market for Corporate Assets: Who Engages in Mergers and Asset Sales and Are There Gains?Journal of Finance, 56 (2001), 20192065.CrossRefGoogle Scholar
Marshall, A. Principles of Economics: An Introductory Volume, 8th ed. London, UK: Macmillan (1930).Google Scholar
Masulis, R.; Wang, C.; and Xie, F.. “Corporate Governance and Acquirer Returns.” Journal of Finance, 62 (2007), 18511889.CrossRefGoogle Scholar
McGrattan, E. R., and Prescott, E. C.. “Unmeasured Investment and the Puzzling US Boom in the 1990s.” American Economic Journal: Macroeconomics, 2 (2010), 88123.Google Scholar
Moeller, S.; Schlingemann, F.; and Stulz, R.. “Firm Size and the Gains from Acquisitions.” Journal of Financial Economics, 73 (2004), 201228.CrossRefGoogle Scholar
Netter, J.; Stegemoller, M.; and Wintoki, M. B.. “Implications of Data Screens on Merger and Acquisition Analysis: A Large Sample Study of Mergers and Acquisitions from 1992 to 2009.” Review of Financial Studies, 24 (2011), 23162357.CrossRefGoogle Scholar
Officer, M. S.The Price of Corporate Liquidity: Acquisition Discounts for Unlisted Targets.” Journal of Financial Economics, 83 (2007), 571598.CrossRefGoogle Scholar
Officer, M. S.; Poulsen, A. B.; and Stegemoller, M.. “Target-Firm Information Asymmetry and Acquirer Returns.” Review of Finance, 13 (2009), 467493.CrossRefGoogle Scholar
Phillips, G., and Zhdanov, A.. “R&D and the Incentives from Merger and Acquisition Activity.” Review of Financial Studies, 26 (2013), 3478.CrossRefGoogle Scholar
Pirinsky, C., and Wang, Q.. “Does Corporate Headquarters Location Matter for Stock Returns?Journal of Finance, 61 (2006), 19912015.CrossRefGoogle Scholar
Prescott, E., and Visscher, M.. “Organization Capital.” Journal of Political Economy, 88 (1980), 446461.CrossRefGoogle Scholar
Rau, P. R., and Vermaelen, T.. “Glamour, Value and the Post-Acquisition Performance of Acquiring Firms.” Journal of Financial Economics, 49 (1998), 223253.Google Scholar
Roberts, M. R., and Whited, T. M.. “Endogeneity in Empirical Corporate Finance.” In Handbook of the Economics of Finance, Vol. 2, Part A, Constantinides, G., Stulz, R., and Harris, M., eds. Amsterdam, The Netherlands: Elsevier/North-Holland (2013), 493572.CrossRefGoogle Scholar
Roberts, P. W., and Dowling, G. R.. “Corporate Reputation and Sustained Superior Financial Performance.” Strategic Management Journal, 23 (2002), 10771093.CrossRefGoogle Scholar
Rosen, S.Learning by Experience as Joint Production.” Quarterly Journal of Economics, 86 (1972), 366382.CrossRefGoogle Scholar
Sargan, J. D.The Estimation of Economic Relationships Using Instrumental Variables.” Econometrica, 26 (1958), 393415.CrossRefGoogle Scholar
Smith, A. An Inquiry into the Nature and Causes of the Wealth of Nations (1776).CrossRefGoogle Scholar
Stock, J. H., and Yogo, M.. “Testing for Weak Instruments in Linear IV Regression.” In Identification and Inference for Econometric Models: Essays in Honor of Thomas J. Rothenberg, Stock, J. H. and Andrews, D. W. K., eds. Cambridge, UK: Cambridge University Press (2005), 80108.CrossRefGoogle Scholar
Tomer, J. Organizational Capital: The Path to Higher Productivity and Wellbeing. New York, NY: Praeger (1987).Google Scholar
Wooldridge, J. Introductory Econometrics: A Modern Approach, 3rd ed. Cincinnati, OH: South-Western (2006).Google Scholar

Li et al. supplementary material

Li et al. supplementary material 1

[Opens in a new window]
File 117 KB

Full text views

Full text views reflects PDF downloads, PDFs sent to Google Drive, Dropbox and Kindle and HTML full text views.

Total number of HTML views: 0
Total number of PDF views: 1408 *
View data table for this chart

* Views captured on Cambridge Core between 11th May 2018 - 2nd December 2020. This data will be updated every 24 hours.

Hostname: page-component-79f79cbf67-jgbff Total loading time: 9.979 Render date: 2020-12-02T11:18:49.453Z Query parameters: { "hasAccess": "0", "openAccess": "0", "isLogged": "0", "lang": "en" } Feature Flags last update: Wed Dec 02 2020 11:05:33 GMT+0000 (Coordinated Universal Time) Feature Flags: { "metrics": true, "metricsAbstractViews": false, "peerReview": true, "crossMark": true, "comments": true, "relatedCommentaries": true, "subject": true, "clr": false, "languageSwitch": true }

Send article to Kindle

To send this article to your Kindle, first ensure is added to your Approved Personal Document E-mail List under your Personal Document Settings on the Manage Your Content and Devices page of your Amazon account. Then enter the ‘name’ part of your Kindle email address below. Find out more about sending to your Kindle. Find out more about sending to your Kindle.

Note you can select to send to either the or variations. ‘’ emails are free but can only be sent to your device when it is connected to wi-fi. ‘’ emails can be delivered even when you are not connected to wi-fi, but note that service fees apply.

Find out more about the Kindle Personal Document Service.

Organization Capital and Mergers and Acquisitions
Available formats

Send article to Dropbox

To send this article to your Dropbox account, please select one or more formats and confirm that you agree to abide by our usage policies. If this is the first time you use this feature, you will be asked to authorise Cambridge Core to connect with your <service> account. Find out more about sending content to Dropbox.

Organization Capital and Mergers and Acquisitions
Available formats

Send article to Google Drive

To send this article to your Google Drive account, please select one or more formats and confirm that you agree to abide by our usage policies. If this is the first time you use this feature, you will be asked to authorise Cambridge Core to connect with your <service> account. Find out more about sending content to Google Drive.

Organization Capital and Mergers and Acquisitions
Available formats

Reply to: Submit a response

Your details

Conflicting interests

Do you have any conflicting interests? *