Accounting Earnings and Takeover Likelihood

• In Event: Earnings, Analyst and Disclosures

Abstract

We examine the association between a firm’s accounting earnings and its takeover probability. Prior research argues that firms with poorer performance are more likely to be taken over because acquirers can unlock value by managing the firms more efficiently (Palepu 1986). We further argue that firms with high earnings can also be attractive takeover targets because of acquirers’ managerial opportunism. We show that takeover likelihood is negatively (positively) associated with negative (positive) industry adjusted ROA, consistent with the efficiency (managerial opportunism) explanation. We also show that the positive association is more pronounced when the acquirers’ management is likely to be more opportunistic. Moreover, acquirers’ stock price reaction to the announcement of acquisition is less favorable when targets’ earnings is above as against below industry average.

Authors

• Ashiq Ali, University of Texas-Dallas

• Todd Kravet, University of Connecticut

• Bin Li, University of Texas-Dallas