Academic journal article Academy of Accounting and Financial Studies Journal

Methodologies Used to Determine Mergers and Acquisitions' Performance

Academic journal article Academy of Accounting and Financial Studies Journal

Methodologies Used to Determine Mergers and Acquisitions' Performance

Article excerpt


"There is a need for additional theory development and changes to M&A research methods, most post-acquisition performance research has only employed stock market event studies, thus ignoring M&A effects on other potentially relevant dimensions of firm performance" (King, Daily and Covin. 2004).

Over the years, several studies have been done by researchers and practitioners to understand the significance of adopting M&A strategy for organizations. The motivation has been to understand whether the perceived benefits from this strategy have accrued or not. They have studied whether these acquisitions are value enhancing or destructive strategies for the acquiring organization. The methods used to measure this parameter have been varied. We have reviewed the literature to identify the methodologies used to measure post acquisition performance and the benefits and limitations of these methodologies. The objective of doing this review is to analyze the methodologies and identify the research gaps for further research in the area.

Our contribution is to bring together the various methods of measuring acquisition performance over the last three decades, including an analysis of recent studies during the 2005 to 2010 time frame. We describe the benefits and shortcomings of different methods, which would be useful to researchers in understanding how their conclusions on performance may be impacted by the method selected for measurement. We also research whether methods used in emerging markets such as India are the same as those typically used in the developed markets.

As M&A literature is inter-disciplinary in nature, we have selected research papers from several domains of management though emphasizing more on finance and strategy. Search terms used were 'Mergers' and 'Acquisition' and 'Performance', with the primary focus on journals such as Strategic management Journal, Journal of Finance, Journal of Financial Economics, Journal of Financial and Quantitative Analysis, Journal of Management, Academy of Management. In case of Indian studies, peer reviewed research papers with the additional search term of 'India' were selected for review.

The paper is structured as follows: Section I on performance studies provides a description of the various methods such as Event Study, Accounting Returns, Questionnaire, and some more recent approaches such as the Data Envelopment Analysis, Residual Income Approach, Innovative Performance approach. Section II includes a review of the most recent papers on acquisition research during the 2005 to 2010 time frame, with the intention of covering new developments in this field. We find that internationally Event studies are used pre dominantly, however a few researchers have ventured into the use of Data Envelopment Analysis and a balanced score card approach. Section III focuses on Indian studies and covers a review of literature on acquisition by Indian companies. Most studies on Indian acquisitions have used the accounting returns approach. Section IV includes a critical analysis of methods including details about the reasons for adopting some of the more popular approaches such as Accounting Returns, Event Study and Questionnaire methods and the limitations of these approaches. Section V includes a conclusion along with scope for future research.


Event Studies

Event Study is the most popular methodology adopted by researchers. Zollo, and Degenhard, (2007) reviewed 87 research papers on acquisition performance from top Management and Finance Journals between 1970 and 2006, and found that 41% used the short-term event study method, while 16% used the long term event study method.

This methodology has its origin in the 1930's. A detailed description of the methodology which is the basis of most of the recent event studies has been provided by MacKinlay (1997). First the normal returns for the selected firm in relation to the market are estimated using a regression equation. …

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