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Do Takeover Targets Underperform? Evidence from Operating and Stock Returns

Published online by Cambridge University Press:  06 April 2009

Anup Agrawal  and
Jeffrey F. Jaffe
Anup Agrawal
Affiliation:
aagrawal@cba.ua.edu, Culverhouse College of Business Administration, 4 North Stadium Drive, University of Alabama, Tuscaloosa, AL 35487;
Jeffrey F. Jaffe
Affiliation:
jaffe@wharton.upenn.edu, The Wharton School, 3620 Locust Walk, University of Pennsylvania, Philadelphia, PA 19104.
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Abstract

Financial economists seem to believe that takeovers are partly motivated by the desire to improve poorly performing firms. However, prior empirical evidence in support of this inefficient management hypothesis is rather weak. We provide a detailed re-examination of this hypothesis in a large scale empirical study. We find little evidence that target firms were performing poorly before acquisition, using either operating or stock returns. This result holds both for the sample as a whole and for subsamples of takeovers that are more likely to be disciplinary. We conclude that the conventional view that targets perform poorly is not supported by the data.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 38 , Issue 4 , December 2003 , pp. 721 - 746
Copyright
Copyright © School of Business Administration, University of Washington 2003

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