Skip to main content Accessibility help

Operating Performance and the Method of Payment in Takeovers

  • Randall Heron (a1) and Erik Lie (a2)


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.



Hide All
Asquith, P., and Mullins, D.. “Equity Issues and Offering Dilution.” Journal of Financial Economics, 15 (1986), 6189.
Ball, R., and Brown, P.. “An Empirical Evaluation of Accounting Income Numbers.” Journal of Accounting Research, 6 (1968), p 159178.
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), 359399.
Bhagat, S.; Shleifer, A.; and Vishny, R.. “Hostile Takeovers in the 1980s: The Return to Corporate Specialization.” Brookings Papers on Economic Activity, Microeconomics, (1990), 172.
Berger, P., and Ofek, E.. “Diversification's Effect on Firm Value.” Journal of Financial Economics, 37 (1995), 3965.
Berger, P., and Ofek, E.. “Bustup Takeovers of Value-Destroying Diversified Firms.” Journal of Finance, 51 (1996), 11751200.
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), 141168.
Comment, R., and Jarrell, G.. “Corporate Focus and Stock Returns.” Journal of Financial Economics, 37 (1995), 6787.
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), 169193.
Eckbo, E. B.; Masulis, R. W.; and Norli, O.. “Seasoned Public Offerings: Resolution of the 'New Issues Puzzle'.” Journal of Financial Economics, 56 (2000), 251291.
Erickson, M.The Effect of Taxes on the Structure of Corporate Acquisitions.” Journal of Accounting Research, 36 (1998), 279298.
Erickson, M., and Wang, S.. “Earnings Management by Acquiring Firms in Stock for Stock Mergers.” Journal of Accounting and Economics, 27 (1999), 149176.
Fama, E. F.Market Efficiency, Long-Term Returns, and Behavioral Finance.” Journal of Financial Economics, 49 (1998), 283306.
Guay, W.; Kothari, S.; and Watts, R.. “A Market-Based Evaluation of Discretionary Accrual Models.” Journal of Accounting Research (Supplement), 34 (1996), 83105.
Guenther, D. “Measuring Earnings Management in Response to Corporate Tax Rate Changes: Evidence from the 1986 Tax Reform Act.” Accounting Review, 69 (1994), 230243.
Hansen, R. G.A Theory for the Choice of Exchange Medium in Mergers and Acquisitions.” Journal of Business, 60 (1987), 7595.
Healy, P.; Palepu, K.; and Ruback, R.. “Does Corporate Performance Improve after Takeovers?” Journal of Financial Economics, 31 (1992), 135175.
Hertzel, M.; Lemmon, M.; Linck, J. S.; and Rees, L.. “Long-Run Performance following Private Placements of Equity.Working Paper, Arizona State Univ. (1999).
Hotchkiss, E. S., and Mooradian, R. M.. “Acquisitions as a Means of Restructuring Firms in Chapter 11.” Journal of Financial Intermediation, 7 (1998), 240262.
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), 329349.
John, K., and Ofek, E.. “Asset Sales and Increase in Focus.” Journal of Financial Economics, 37 (1995), 105126.
Jones, J.Earnings Management during Import Relief Investigation.” Journal of Accounting Research, 29 (1991), 193228.
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), 159185.
Kahle, K. M., and Walkling, R. A.. “The Impact of Industry Classifications on Financial Research.” Journal of Financial and Quantitative Analysis, 31 (1996), 309335.
Kaplan, S. “The Effects of Management Buyouts on Operating Performance and Value.” Journal of Financial Economics, 24 (1989), 217254.
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), 137154.
Lewellen, W. G.A Pure Financial Rationale for the Conglomerate Merger.” Journal of Finance, 26 (1971), 521545.
Loughran, T., and Ritter, J.. “The Operating Performance of Firms Conducting Seasoned Equity Offerings.” Journal of Finance, 52 (1997), 18231850.
Loughran, T., and Vijh, A.. “Do Long-Term Shareholders Benefit from Corporate Acquisitions?Journal of Finance, 52 (1997), 17651790.
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), 333.
Martin, K. J.The Method of Payment in Corporate Acquisitions, Investment Opportunities, and Management Ownership.” Journal of Finance, 51 (1996), 12271246.
Masulis, R. W., and Korwar, A. N.. “Seasoned Equity Offerings: An Empirical Investigation.” Journal of Financial Economics, 15 (1986), 91118.
Mikkelson, W., and Partch, M.. “Valuation Effects of Security Offerings and the Issuance Process.” Journal of Financial Economics, 15 (1986), 3160.
Myers, S. C.Determinants of Corporate Borrowing.” Journal of Financial Economics, 5 (1977), 147175.
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), 187221.
Opler, T.; Pinkowitz, L.; Stulz, R.; and Williamson, R.. “The Determinants and Implications of Corporate Cash Holdings.” Journal of Financial Economics, 52 (1999), 346.
Rajan, R.; Servaes, H.; and Zingales, L.. “The Cost of Diversity: The Diversification Discount and Inefficient Investment.” Journal of Finance, 55 (2000), 3580.
Rangan, S.Earnings Management and the Performance of Seasoned Equity Offerings.” Journal of Financial Economics, 50 (1998), 101122.
Rau, R., and Vermaelen, T.. “Glamour, Value and the Post-Acquisition Performance of Acquiring Firms.” Journal of Financial Economics, 49 (1998), 223253.
Servaes, H.Tobin's Q and the Gains from Takeovers.” Journal of Finance, 46 (1991), 409420.
Servaes, H.The Value of Diversification during the Conglomerate Merger Wave.” Journal of Finance, 51 (1996), 12011225.
Sloan, R.Do Stock Prices Fully Impound Information in Accruals about Future Earnings?Accounting Review, 71 (1996), 289315.
Smith, C. W.Investment Banking and the Capital Acquisition Process.” Journal of Financial Economics, 15 (1986), 329.
Teoh, S. H.; Welch, I.; and Wong, T. J.. “Earnings Management and the Underperformance of Seasoned Equity Offerings.” Journal of Financial Economics, 50 (1998), 6399.
Travlos, N. G.Corporate Takeover Bids, Methods of Payment, and Bidding Firms' Stock Returns.” Journal of Finance, 42 (1987), 943963.
Wansley, J.; Lane, W.; and Yang, H.. “Abnormal Returns to Acquired Firms by Type of Acquisition and Method of Payment.” Financial Management, 12 (1983), 1622.
Wansley, J.; Lane, W.; and Yang, H.. “Gains to Bidder Firms in Cash and Securities Transactions.” Financial Review, 22 (1987), 403414.


Full text views

Total number of HTML views: 0
Total number of PDF views: 0 *
Loading metrics...

Abstract views

Total abstract views: 0 *
Loading metrics...

* Views captured on Cambridge Core between <date>. This data will be updated every 24 hours.

Usage data cannot currently be displayed