Hostname: page-component-7b7567c8c-tnzcf Total loading time: 0 Render date: 2026-11-14T16:19:10.809Z Has data issue: false hasContentIssue false
  • English
  • Français

EPS Sensitivity and Mergers

Published online by Cambridge University Press:  14 February 2023

Sudipto DasguptaOpen the ORCID record for Sudipto Dasgupta[Opens in a new window],
Jarrad Harford and
Fangyuan MaOpen the ORCID record for Fangyuan Ma[Opens in a new window]
Sudipto Dasgupta
Affiliation:
Chinese University of Hong Kong Business School, CEPR, and ABFER s.dasgupta@cuhk.edu.hk
Jarrad Harford
Affiliation:
University of Washington Foster School of Business jarrad@uw.edu
Fangyuan Ma*
Affiliation:
Peking University HSBC Business School
*
fangyuanma@phbs.pku.edu.cn (corresponding author)
Rights & Permissions [Opens in a new window]

Abstract

Core share and HTML view are not available for this content. However, as you have access to this content, a full PDF is available via the 'Save PDF' action button.

Announcements of mergers very often discuss the immediate impact of the deal on the acquirer’s earnings per share (EPS). We argue that the focus on EPS reflects the difficulty of evaluating and communicating deal synergy in mergers and acquisitions (M&A) practice and provide supporting evidence. We show that the acquirer’s EPS focus affects how deals are structured, the premium that is paid, and the types of deals that are done. EPS-driven M&A decisions are also associated with costly distortions in the acquirer’s financial and investment policies.

Information

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 59 , Issue 2 , March 2024, pp. 521 - 556
Copyright
© The Author(s), 2023. Published by Cambridge University Press on behalf of the Michael G. Foster School of Business, University of Washington

Footnotes

We are grateful to Heitor Almeida, Nelson Camanho (discussant), Olivier Dessaint (discussant), Ming Dong (the referee), Mara Faccio (the editor), Massimo Massa, Rik Sen, Zhishu Yang (discussant), Marc Zenner (discussant), and Huizhong Zhang (discussant); seminar participants at the Chinese University of Hong Kong, Hong Kong University of Science and Technology, Hong Kong Baptist University, University of Sydney, Massey University, CUHK (Shenzhen), Southern University of Science and Technology, National University of Singapore, Singapore Management University, Iowa State University, University of Waterloo, University of Surrey, University of Exeter, University of Bristol, and Southern Methodist University; and conference participants at the SFS Cavalcade Asia-Pacific (2018), Tsinghua Finance Workshop (2019), CICF (2019), FMA Asia-Pacific (2019), EFA (2019), and MARC (2021) for helpful comments.

References

Aboody, D.; Kasznik, R.; and Williams, M.. “Purchase Versus Pooling in Stock-For-Stock Acquisitions: Why Do Firms Care?” Journal of Accounting and Economics, 29 (2000), 261–286.CrossRefGoogle Scholar
Almeida, H. “Is It Time to Get Rid of Earnings-Per-Share (EPS)?” Review of Corporate Finance Studies, 8 (2018), 174–206.CrossRefGoogle Scholar
Almeida, H.; Fos, V.; and Kronlund, M.. “The Real Effects of Share Repurchases.” Journal of Financial Economics, 119 (2016), 168–185.CrossRefGoogle Scholar
Andrade, G. “Do Appearances Matter? The Impact of EPS Accretion and Dilution on Stock Prices.” Working Paper, Harvard University (1999).CrossRefGoogle Scholar
Ang, J. S., and Cheng, Y.. “Direct Evidence on the Market‐Driven Acquisition Theory.” Journal of Financial Research, 29 (2006), 199–216.CrossRefGoogle Scholar
Bargeron, L. L.; Schlingemann, F. P.; Stulz, R. M.; and Zutter, C. J.. “Why Do Private Acquirers Pay So Little Compared to Public Acquirers?” Journal of Financial Economics, 89 (2008), 375–390.CrossRefGoogle Scholar
Bennett, B.; Bettis, J. C.; Gopalan, R.; and Milbourn, T.. “Compensation Goals and Firm Performance.” Journal of Financial Economics, 124 (2017), 307–330.CrossRefGoogle Scholar
Bernile, G., and Bauguess, S.. “Do Merger-Related Operating Synergies Exist?” Working Paper, available at https://ink.library.smu.edu.sg/lkcsb_research/5162 (2011).CrossRefGoogle Scholar
Bollen, N. P., and Pool, V. K.. “Do Hedge Fund Managers Misreport Returns? Evidence from the Pooled Distribution.” Journal of Finance, 64 (2009), 2257–2288.CrossRefGoogle Scholar
Cattaneo, M. D.; Jansson, M.; and Ma, X.. “Simple Local Polynomial Density Estimators.” Journal of the American Statistical Association, 115 (2019), 1449–1455.CrossRefGoogle Scholar
Cheng, Y.; Harford, J.; and Zhang, T. T.. “Bonus-Driven Repurchases.” Journal of Financial and Quantitative Analysis, 50 (2015), 447–475.CrossRefGoogle Scholar
de Bodt, E.; Cousin, J.; and Roll, R.. “Full-Stock-Payment Marginalization in Merger and Acquisition Transactions.” Management Science, 64 (2017), 760–783.CrossRefGoogle Scholar
Dong, M.; Hirshleifer, D.; Richardson, S.; and Teoh, S. H.. “Does Investor Misvaluation Drive the Takeover Market?” Journal of Finance, 61 (2006), 725–762.CrossRefGoogle Scholar
Dutordoir, M.; Roosenboom, P.; and Vasconcelos, M.. “Synergies Disclosure in Mergers and Acquisitions.” International Review of Financial Analysis, 31 (2014), 88–100.CrossRefGoogle Scholar
Eckbo, B. E.; Makaew, T.; and Thorburn, K. S.. “Are Stock-Financed Takeovers Opportunistic?” Journal of Financial Economics, 128 (2018), 443–465.CrossRefGoogle Scholar
Fu, F.; Lin, L.; and Officer, M. S.. “Acquisitions Driven by Stock Overvaluation: Are They Good Deals?” Journal of Financial Economics, 109 (2013), 24–39.CrossRefGoogle Scholar
Garvey, G.; Milbourn, T.; and Xie, K.. “What Will It Do for My EPS? An Unflattering but Powerful Motive for Mergers.” Working Paper, available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1620544 (2021).Google Scholar
Gaspar, J.; Massa, M.; and Matos, P.. “Shareholder Investment Horizons and the Market for Corporate Control.” Journal of Financial Economics, 76 (2005), 135–165.CrossRefGoogle Scholar
Hadlock, C. J., and Pierce, J. R.. “New Evidence on Measuring Financial Constraints: Moving Beyond the KZ index.” Review of Financial Studies, 23 (2010), 1909–1940.CrossRefGoogle Scholar
Harford, J.; Klasa, S.; and Walcott, N.. “Do Firms Have Leverage Targets? Evidence from Acquisitions.” Journal of Financial Economics, 93 (2009), 1–14.CrossRefGoogle Scholar
Hazelkorn, T.; Zenner, M.; and Shivdasani, A.. “Creating Value with Mergers and Acquisitions .” Journal of Applied Corporate Finance, 16 (2004), 81–90.CrossRefGoogle Scholar
He, J.; Liu, T.; Netter, J.; and Shu, T.. “Expectation Management in Mergers and Acquisitions.” Management Science, 66 (2020), 1205–1226.CrossRefGoogle Scholar
Hribar, P.; Jenkins, N. T.; and Johnson, W. B.. “Stock Repurchases as an Earnings Management Device.” Journal of Accounting and Economics, 41 (2006), 3–27.CrossRefGoogle Scholar
Li, K.; Liu, T.; and Wu, J.. “Vote Avoidance and Shareholder Voting in Mergers and Acquisitions.” Review of Financial Studies, 31 (2018), 3176–3211.CrossRefGoogle Scholar
Liu, J.; Nissim, D.; and Thomas, J.. “Equity Valuation Using Multiples.” Journal of Accounting Research, 40 (2002), 135–172.CrossRefGoogle Scholar
Lys, T., and Vincent, L.. “An Analysis of Value Destruction in AT&T’s Acquisition of NCR.” Journal of Financial Economics, 39 (1995), 353–378.CrossRefGoogle Scholar
Pinkowitz, L.; Stulz, R. M.; and Williamson, R.. “Do US Firms Hold More Cash than Foreign Firms Do?” Review of Financial Studies, 29 (2015), 309–348.CrossRefGoogle Scholar
Rau, P. R., and Vermaelen, T.. “Glamour, Value and the Post-Acquisition Performance of Acquiring Firms.” Journal of Financial Economics, 49 (1998), 223–253.Google Scholar
Rhodes‐Kropf, M., and Robinson, D. T.. “The Market for Mergers and the Boundaries of the Firm.” Journal of Finance, 63 (2008), 1169–1211.CrossRefGoogle Scholar
Rhodes-Kropf, M.; Robinson, D. T.; and Viswanathan, S.. “Valuation Waves and Merger Activity: The Empirical Evidence.” Journal of Financial Economics, 77 (2005), 561–603.CrossRefGoogle Scholar
Schwert, G. W. “Markup Pricing in Mergers and Acquisitions.” Journal of Financial Economics, 41 (1996), 153–192.CrossRefGoogle Scholar
Schwert, G. W. “Hostility in Takeovers: In the Eyes of the Beholder?” Journal of Finance, 55 (2000), 2599–2640.CrossRefGoogle Scholar
Shleifer, A., and Vishny, R. W.. “Stock Market Driven Acquisitions.” Journal of Financial Economics, 70 (2003), 295–311.CrossRefGoogle Scholar
Terry, S. J. “The Macro Impact of Short-Termism.” Working Paper, Stanford Inst. for Economic Policy Research (2017).Google Scholar
Whited, T. M., and Wu, G.. “Financial Constraints Risk.” Review of Financial Studies, 19 (2006), 531–559.CrossRefGoogle Scholar
Supplementary material: File

Dasgupta et al. supplementary material

Dasgupta et al. supplementary material
Download Dasgupta et al. supplementary material(File)
File 815.5 KB