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An efficiency perspective on the gains from mergers and asset purchases

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Author Info
Sugata Ray
Missaka Warusawitharana

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Abstract

A simple efficiency-based view states that acquisitions shift assets to more productive owners. This implies that expected returns from acquisitions increase with transaction value. We propose using the sensitivity of abnormal returns to scaled transaction value as a measure of efficiency gains. Using this method, we find that the average acquirer obtains an increase of 3% - 5% in the value of the acquired assets. However, efficiency gains vary sharply across acquirer and deal characteristics. We find statistical significance for interactions of relative value and variables known to affect acquirer normal returns. The inclusion of the interaction term sometimes drives away the significance of the variable of interest. These results suggest that improving productivity via capital reallocation plays an important role in understanding acquirer returns from acquisitions.

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Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series Finance and Economics Discussion Series with number 2007-39.

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Date of creation: 2007
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Handle: RePEc:fip:fedgfe:2007-39

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Keywords: Consolidation and merger of corporations ; Rate of return;

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