Best Practices in Corporate Governance: What Two Decades of Research Reveals


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    We thank Doina Rares, Andrew Farris, Dean Pimenta, and Shakira Sanchez for assistance in compiling the research described in this study, Celia Gong for her assistance with the publication process, Todd Perry from Arizona State University for his helpful comments and suggestions, and David Head, Robert Hoglund, Eric Lindenberg, Hans Morris, and Dan Pakenham for their support and insightful comments. A substantially similar version of this article was originally published by Salomon Smith Barney Inc., a member of Citigroup (Shivdasani and Zenner, 2002).


This report addresses two key questions for today's top executives: Do acquisitions create value for acquirers? And under what circumstances have acquisitions created the most value for acquiring shareholders?

The authors' analysis of over 1,500 completed deals by non-financial companies in the United States over the past 12 years shows that, at announcement, acquirers' shareholders suffer small losses, on average, in the short term around the initial deal announcement. Over longer intervals, such as one or two years following the announcement of the transaction, acquirers tend to slightly outperform industry peers.

The average or median market response hides tremendous variability in how the market has reacted to individual deals, however. This article provides evidence that the “right” M&A transaction can create substantial value for acquirers. One-quarter of the transactions lead to market-adjusted gains in excess of 5% for the acquirer and oneeighth of the transactions lead to gains in excess of 10% in the short term. However, some deals have also destroyed substantial shareholder value.

Financing structure is a key driver of the stock market reaction. Stock-financed transactions, on average, have a negative stock market reaction, while cash-financed transactions have benefited acquirers in both the short term as well as the long term.

Acquisitions of private companies or assets and units of public companies have consistently generated higher returns for acquirers than purchases of public companies.

Moreover, EPS dilution is not a major driver of how the stock market reacts to a deal. Although “accretive” deals perform slightly better than “dilutive” ones in the short and long run, the difference is small and not statistically significant. Over the long run, acquiring shareholders have benefited the most from deals within the same industry and that avoid targets with relatively optimistic earnings growth projections.