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Are Good Performers Bad Acquirers?


  • The authors thank Bill Christie (Editor) and an anonymous referee for helpful comments and suggestions. We also thank Vijay Jog, Shantaram Hegde, Alfred Davis, Frederick Davis, John Doukas, Gulnur Muradoglu, Lamia Chourou, Tatyana Sokolyk, and session participants at the annual meetings of the 2010 Eastern Finance Association and the 2010 European Financial Management Association for helpful discussion and comments. We are grateful to Michael Whitehead and Salvatore Selvaggio for their research assistance. The authors appreciate the editorial assistance provided by Linda A. Baker, Meghan Nesmith, and Wendy S. Jennings. H. Kent Baker acknowledges financial support from the Kogod School of Business at American University. Shantanu Dutta appreciates generous financial support from the University of Ontario Institute of Technology and Canada's Social Sciences and Humanities Research Council (SSHRC). Part of this research was conducted while Samir Saadi was visiting Stern School of Business, New York University. We are responsible for any errors.

H. Kent Baker is a Professor of Finance and Kogod Research Professor in the Department of Finance and Real Estate at the Kogod School of Business at American University in Washington, DC. Shantanu Dutta is an Assistant Professor of Finance at the University of Ontario Institute of Technology in Oshawa, Ontario, Canada. Samir Saadi is a Doctoral Student at the Queen's School of Business at Queen's University, Kingston in Ontario, Canada. PengCheng Zhu is an Assistant Professor of Finance at the Eberhardt School of Business at the University of the Pacific in Stockton, CA.


We examine how the market reacts to announcements of mergers and acquisitions (M&As) by well-performing acquirers and evaluate the results in light of three hypotheses: 1) managerial ability, 2) empire building, and 3) chief executive officer (CEO) overconfidence. Our results indicate that an empire-building motive drives the relationship between past superior operating performance and M&A announcements. Long-term operating performance drops significantly for acquiring firms with past superior operating performance. Our evidence also indicates that the presence of insider directors helps to alleviate the negative perception of acquisitions made by firms with better operating performance or empire-building CEOs.