Do Takeover Targets Under-Perform? Evidence from Operating and Stock Returns

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 reexamination 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 sub-samples 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.

Keywords: Takeovers, Disciplinary takeovers, Takeover targets, Firm performance, Operating performance, Long-run performance

JEL Classification: G34