The Post-Merger Performance Puzzle

While the bulk of the research on the financial performance of mergers and acquisitions has focused on stock returns around the merger announcement, a surprisingly large set of papers has also examined long-run stock returns following acquisitions. We review this literature, concluding that long-run performance is negative following mergers, though performance is non-negative (and perhaps even positive) following tender offers. However, the effects of both methodology (see Lyon, Barber and Tsai (1999)) and chance (see Fama (1998)) may modify this conclusion. Two explanations of under-performance (speed of price-adjustment and EPS myopia) are not supported by the data, while two other explanations (method of payment and performance extrapolation) receive greater support.