EPS-Sensitivity and Merger Deals
Finance
Speaker: | Jarrad Harford, University of Washington |
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Date: | Thursday 16 May 2019 |
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Time: | 13:45 - 15:15 |
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Location: | Xfi Henderson Lecture Theatre |
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Further details
Announcements of mergers where the target is offered stock very often discuss the impact of
the deal on the acquirer’s earnings per share (EPS), especially when the deal is EPS-accretive for the
acquirer. In this paper, we document that the acquirer’s EPS-sensitivity affects how deals are structured,
the premium that is paid, and the types of deals that are done. We provide evidence that EPS-sensitivity
of acquirers is another manifestation of short-termism, driven by institutional investor horizon as well as
components of managerial compensation contracts. Our results suggest that the relative popularity of
deals financed in cash since early 2000 could be a consequence of acquirers’ EPS-sensitivity and low
value-multiple acquirers pursuing high value-multiple targets. EPS-sensitivity is also consistent with the
overall pattern of “like-buys-like” that has been documented in the literature for stock deals.