Working Paper

An efficiency perspective on the gains from mergers and asset purchases

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.

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

Bibliographic Information

Provider: Board of Governors of the Federal Reserve System (U.S.)

Part of Series: Finance and Economics Discussion Series

Publication Date: 2007

Number: 2007-39