The Federal Reserve Board eagle logo links to home page
Finance and Economics Discussion Series
Finance and Economics Discussion Series logo links to FEDS home page An Efficiency Perspective on the Gains from Mergers and Asset Purchases
Sugata Ray and Missaka Warusawitharana

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: Acquisitions, efficiency gains, event study

Full paper (212 KB PDF) | Full Paper (Screen Reader Version)

Home | FEDS | List of 2007 FEDS papers | Accessibility
To comment on this site, please fill out our feedback form.
Last update: August 23, 2007