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EPS Sensitivity and Mergers

Published online by Cambridge University Press:  14 February 2023

Sudipto Dasgupta Open the ORCID record for Sudipto Dasgupta [Opens in a new window] ,
Jarrad Harford  and
Fangyuan Ma Open the ORCID record for Fangyuan Ma [Opens in a new window]
Sudipto Dasgupta
Affiliation:
Chinese University of Hong Kong Business School, CEPR, and ABFER s.dasgupta@cuhk.edu.hk
Jarrad Harford
Affiliation:
University of Washington Foster School of Business jarrad@uw.edu
Fangyuan Ma*
Affiliation:
Peking University HSBC Business School
*
fangyuanma@phbs.pku.edu.cn (corresponding author)
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Abstract

Announcements of mergers very often discuss the immediate impact of the deal on the acquirer’s earnings per share (EPS). We argue that the focus on EPS reflects the difficulty of evaluating and communicating deal synergy in mergers and acquisitions (M&A) practice and provide supporting evidence. We show that the acquirer’s EPS focus affects how deals are structured, the premium that is paid, and the types of deals that are done. EPS-driven M&A decisions are also associated with costly distortions in the acquirer’s financial and investment policies.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 59 , Issue 2 , March 2024 , pp. 521 - 556
Copyright
© The Author(s), 2023. Published by Cambridge University Press on behalf of the Michael G. Foster School of Business, University of Washington

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Footnotes

We are grateful to Heitor Almeida, Nelson Camanho (discussant), Olivier Dessaint (discussant), Ming Dong (the referee), Mara Faccio (the editor), Massimo Massa, Rik Sen, Zhishu Yang (discussant), Marc Zenner (discussant), and Huizhong Zhang (discussant); seminar participants at the Chinese University of Hong Kong, Hong Kong University of Science and Technology, Hong Kong Baptist University, University of Sydney, Massey University, CUHK (Shenzhen), Southern University of Science and Technology, National University of Singapore, Singapore Management University, Iowa State University, University of Waterloo, University of Surrey, University of Exeter, University of Bristol, and Southern Methodist University; and conference participants at the SFS Cavalcade Asia-Pacific (2018), Tsinghua Finance Workshop (2019), CICF (2019), FMA Asia-Pacific (2019), EFA (2019), and MARC (2021) for helpful comments.

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