Financial Ratio and Multiple Regression Analysis of Corporate Mergers

The general concern of this paper is the utility of financial ratios in the assessment of corporate mergers. Recent literature has been highly critical of traditional ratio analysis as an analytical technique in assessing the performance of the business enterprise. Does this mean financial ratios are of such limited utility that they have virtually no place in the decision making process? The answer rests on whether or not financial ratios can be successfully transformed and subjected to the more rigorous statistical techniques such as multiple regression. The usual types of transformations are trends, in the case of time-series analysis, and financial ratios, in the case of cross-sectional analysis. The specific concern of this paper is financial ratios, for the utility of financial accounting in general, and decision making in particular, rests on the usefulness of these ratios. Thus, the question here is: Can financial ratios be used to predict the success or failure of a corporate merger? The utility of ratios can only be measured with regard to some particular purpose. Past studies have found ratios to be useful in predicting a business failure and corporate bond ratings. If ratios have been useful in these unrelated areas, it would be reasonable to assume they may have some use in assessing the outcome of a merger