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Abnormal Returns and Expected Managerial Performance of Target Firms

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  • Aloke Ghosh
  • Chi-Wen Jevons Lee

Abstract

We argue that the association between abnormal returns and expected managerial performance of target firms reveals alternative motives behind acquisitions. We test for the disciplinary motive by regressing abnormal returns against the earnings forecast revisions of target firms. A negative slope coefficient is consistent with disciplinary acquisitions because gains from disciplinary actions are likely to be high when target firms’ managerial performance is expected to decline in the future as stand-alone firms. A positive coefficient is consistent with non-disciplinary acquisitions because unexpected increases in targets’ performance as stand-alone firms imply higher expected gains associated with better investment decisions. Our results indicating higher abnormal returns for targets with negative earnings forecast revisions suggest that investors are more optimistic about disciplinary rather than non-disciplinary acquisitions.

Suggested Citation

  • Aloke Ghosh & Chi-Wen Jevons Lee, 2000. "Abnormal Returns and Expected Managerial Performance of Target Firms," Financial Management, Financial Management Association, vol. 29(1), Spring.
    • Handle: RePEc:fma:fmanag:ghosh00
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    Cited by:

    1. Jo-Hui Chen & Chih-Sean Chen, 2011. "The effects of international off-site surveillance on bank rating changes," Quality & Quantity: International Journal of Methodology, Springer, vol. 45(6), pages 1313-1329, October.
    2. Nico Rottke & Dirk Schiereck & Stephan Pauser, 2011. "M&A in the Construction Industry -Wealth Effects of Diversification into Real Estate Life Cycle Related Services," International Real Estate Review, Global Social Science Institute, vol. 14(3), pages 283-310.
    3. Ghosh, Aloke & Jain, Prem C., 2000. "Financial leverage changes associated with corporate mergers," Journal of Corporate Finance, Elsevier, vol. 6(4), pages 377-402, December.
    4. Huh, Kwang-Sook, 2015. "The performances of acquired firms in the steel industry: Do financial institutions cause bubbles?," The Quarterly Review of Economics and Finance, Elsevier, vol. 58(C), pages 143-153.

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