An empirical study of the relationship between managerial ability and the success of strategic acquisitions

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An empirical study of the relationship between managerial ability and the success of strategic acquisitions

 

Author: Po, Chun Wong Danny
Title: An empirical study of the relationship between managerial ability and the success of strategic acquisitions
Degree: D.B.A.
Year: 2014
Subject: Consolidation and merger of corporations
Leadership
Executive ability
Hong Kong Polytechnic University -- Dissertations
Department: Faculty of Business
Pages: vi, 108 leaves ; 30 cm
Language: English
InnoPac Record: http://library.polyu.edu.hk/record=b2825665
URI: http://theses.lib.polyu.edu.hk/handle/200/7987
Abstract: This thesis examines managerial ability as a determinant of the success or failure of strategic mergers and acquisitions. I employ the managerial ability score developed by Demerjian, P., Lev, B. and McVay, S. (2012) as a proxy for managerial ability. The success or failure of acquirers is measured by (a) the change in the industry-adjusted returns on assets (ROA) in the post-merger period relative to the pre-merger period, and (b) the short- and long-run abnormal stock returns following the transaction.Based on a sample of 1,957 transactions between the years of 1992 and 2011 obtained by merging the Thomas ONE Banker database and the managerial ability score data available from Demerjian et al. (2012), I document statistically significant and economically meaningful positive correlations between the pre-merger managerial ability of acquirers and the combined improvement of firms in their post-merger operating performance. On the other hand, there is no evidence that the three-day stock price reaction to the merger announcement varies systematically with the managerial ability. However, there is a statistically significant and economically meaningful positive correlation between the pre-merger managerial ability of acquirers and the combined firms{174} long-run abnormal stock returns. The empirical results show that improvement in post-merger operating performance translate into stock gains in the long run, which can be predicted by the higher managerial ability of the acquiring firms, but it is not recognised by the stock market immediately upon announcement.This empirical study is the first of its kind to show that managerial ability is a potential determinant of strategic merger and acquisition performance. Furthermore, I demonstrate that the Managerial Ability Score developed by Demerjian et al. (2012) is an efficient and robust proxy for managerial ability in empirical studies on merger and acquisition performance. Managerial ability helps the governing boards of acquiring firms determine the readiness of their management to attempt strategic acquisitions. It also enables the managers of acquiring firms to select acquisition targets and articulate appropriate integration strategies with reference to the relative managerial ability of the two firms. Similarly, the empirical results provided useful information for stock market investors anticipating long-run abnormal stock returns of merger and acquisition transactions.

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