Operating performance following mergers and acquisitions

In this paper, I review the finance literature on the costs and benefits of mergers and acquisitions and present new empirical results. Since many of the common methods used to calculate long-run abnormal stock returns following an event are conceptually flawed and often lead to biased test statistics, I focus instead on operating performance over one- and three-year horizon following mergers and acquisitions. I find that there is no significant difference between operating performance of firms that had recent M&A activity and the operating performance of their matching firms, where the matching is done based on industry, market-to-book ratio, and the past operating performance. Overall, small firms tend to have significantly better operating performance following M&A activity than large firms, and firms that report “acquisition of assets” as a form of deal tend to have better operating performance than firms that report “mergers.” However, the differences in operating performance become insignificant once I account for endogeneity by comparing the operating performance of firms that undergone mergers and acquisitions with that of their matching firms. I conclude that mergers and acquisitions do not affect the operating performance of firms in a long-term