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Do Takeover Targets Underperform? Evidence from Operating and Stock Returns

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  • Agrawal, Anup
  • Jaffe, Jeffrey F.

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 re-examination 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 subsamples 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.

Suggested Citation

  • Agrawal, Anup & Jaffe, Jeffrey F., 2003. "Do Takeover Targets Underperform? Evidence from Operating and Stock Returns," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 38(04), pages 721-746, December.
  • Handle: RePEc:cup:jfinqa:v:38:y:2003:i:04:p:721-746_00
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    Cited by:

    1. Correia, Manuela Faia & Cunha, Rita Campos e & Scholten, Marc, 2013. "Impact of M&As on organizational performance: The moderating role of HRM centrality," European Management Journal, Elsevier, vol. 31(4), pages 323-332.
    2. Anup Agrawal & Mark A. Chen, 2008. "Do Analyst Conflicts Matter? Evidence from Stock Recommendations," Journal of Law and Economics, University of Chicago Press, vol. 51(3), pages 503-537, August.
    3. Martynova, Marina & Renneboog, Luc, 2008. "A century of corporate takeovers: What have we learned and where do we stand?," Journal of Banking & Finance, Elsevier, vol. 32(10), pages 2148-2177, October.
    4. David Ling & Milena Petrova, 2011. "Why Do REITs Go Private? Differences in Target Characteristics, Acquirer Motivations, and Wealth Effects in Public and Private Acquisitions," The Journal of Real Estate Finance and Economics, Springer, vol. 43(1), pages 99-129, July.
    5. , 2009. "The Impact of Director Reputation and Performance on the Turnover and Board Seats of Target Firm Directors," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 36(1-2), pages 185-209.
    6. repec:dau:papers:123456789/6359 is not listed on IDEAS
    7. Yuping Zeng & Thomas J. Douglas & Changqi Wu, 2013. "The Seller's Perspective on Determinants of Acquisition Likelihood: Insights from China's Beer Industry," Journal of Management Studies, Wiley Blackwell, vol. 50(4), pages 673-698, June.
    8. Wang, Jiwei, 2010. "A comparison of shareholder identity and governance mechanisms in the monitoring of CEOs of listed companies in China," China Economic Review, Elsevier, vol. 21(1), pages 24-37, March.
    9. Martynova, M. & Renneboog, L.D.R., 2005. "Takeover Waves : Triggers, Performance and Motives," Discussion Paper 2005-029, Tilburg University, Tilburg Law and Economic Center.
    10. Humphery-Jenner, M., 2011. "High Frequency Trading, Information, and Takeovers," Discussion Paper 2011-047, Tilburg University, Center for Economic Research.
    11. Humphery-Jenner, M., 2011. "Internal and External Discipline Following Securities Class Actions," Discussion Paper 2011-044, Tilburg University, Center for Economic Research.
    12. Dr. Bhagaban Das & Alok Kumar Pramanik, 2006. "The History and Mystery of Worldwide Merger Waves (The stature in Context to Liberalisation)," Journal of Commerce and Trade, Society for Advanced Management Studies, vol. 1(2), pages 7-12, October.
    13. Zha Giedt, Jenny, 2017. "Why Do Firms Sell Out? Separating Targets’ Motives from Bidders’ Selection of Targets in M&A," MPRA Paper 81014, University Library of Munich, Germany, revised 23 Aug 2017.
    14. Chemla, Gilles, 2004. "Takeovers and the dynamics of information flows," International Journal of Industrial Organization, Elsevier, vol. 22(4), pages 575-590, April.
    15. Humphery-Jenner, Mark L., 2012. "Internal and external discipline following securities class actions," Journal of Financial Intermediation, Elsevier, vol. 21(1), pages 151-179.
    16. Kiplan Womack, 2012. "Real Estate Mergers: Corporate Control & Shareholder Wealth," The Journal of Real Estate Finance and Economics, Springer, vol. 44(4), pages 446-471, May.
    17. Harford, Jarrad, 2005. "What drives merger waves?," Journal of Financial Economics, Elsevier, vol. 77(3), pages 529-560, September.

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