Operating Performance Improvements after Corporate Takeovers : Fact or Fallacy?

The paper investigates the post-takeover operating performance of a sample of the 50 largest mergers announced on the New York Stock Exchange in the years 1998-2001. It is argued that the commonly used operating cash flow measures in the recent merger literature suffer from various accounting biases which are predominantly responsible for the general findings of improvements in operating performance. The paper reviews the previous literature and critically analyses possible biases in former research. It employs a comprehensive set of earnings and cash flow measures to assess the economic impact of large takeovers. Instead of improvements in performance after mergers the majority of the measures suggest significant declines in operating performance. By comparing the various measures the study provides evidence of the magnitude of the accounting biases in various earnings measures. The paper further investigates the determinants of the deterioration in post-merger performance. The study provides one explanation for the long existing puzzle in the literature documenting short-term shareholder gains around merger announcements, which are not vindicated subsequently in the long-run