EPS-Sensitivity and Merger Deals
Date: 2018-11-05

Abstract: 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.

Bio: Fangyuan Ma is a postdoctoral fellow at Department of Finance, Chinese University of Hong Kong (CUHK). She received her Ph.D. in Finance from Hong Kong University of Science and Technology (HKUST) and joined CUHK in 2018. Fangyuan’s research interests include corporate finance, merger and acquisition, corporate governance, and applied contract theory. Her papers have been presented in several conferences and universities, including CUHK, HKUST, and Hong Kong Baptist University.