Merger and Acquisition

Journal of Management http://jom.sagepub.
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Taking Stock of What We Know About Mergers and Acquisitions: A Review and
Research Agenda
Jerayr Haleblian, Cynthia E. Devers, Gerry McNamara, Mason A. Carpenter and Robert B.
Davison
Journal of Management 2009 35: 469 originally published online 23 February 2009
DOI: 10.1177/0149206308330554
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What is This?
Taking Stock of What We Know
About Mergers and Acquisitions:
A Review and Research Agenda†
Jerayr Haleblian*
Anderson Graduate School of Management, University of California, Riverside
Cynthia E. Devers
Wisconsin School of Business, University of Wisconsin–Madison
Gerry McNamara
Broad Graduate School of Management, Michigan State University, East Lansing
Mason A. Carpenter
Wisconsin School of Business, University of Wisconsin–Madison
Robert B. Davison
Broad Graduate School of Management, Michigan State University, East Lansing
Scholars from multiple fields have shown increasing interest in the causes and consequences of
mergers and acquisitions (M&A). Although this proliferation of research has the potential to
significantly improve our understanding of M&A activity, absent is the necessary step of con-
solidating and integrating extant knowledge. Accordingly, this article develops a framework to
organize and review recent empirical findings, principally from management, economics, and
finance in which interest in acquisition behavior is high but also from other areas that have tan-
gentially explored acquisition activity such as accounting and sociology. This article identifies
patterns and theoretical gaps and provides recommendations for future research aimed at devel-
oping a more integrated M&A research agenda for management scientists.
Keywords: acquisitions; mergers; mergers and acquisitions
†We would like to thank Manuel Becerra for his insightful comments, which significantly improved our manuscript.
This article was accepted under the editorship of Russell Cropanzano.
*Corresponding author: Tel.: 951-827-3608.
E-mail address: john.haleblian@ucr.edu

Journal of Management, Vol. 35 No. 3, June 2009 469-502
DOI: 10.1177/0149206308330554
© 2009 Southern Management Association. All rights reserved.
469

470 Journal of Management / June 2009
Global investment in mergers and acquisitions (hereafter referred to simply as acquisitions)

has reached unprecedented levels in recent years (Barkema & Schijven, 2008a). Paralleling this
practical importance, in both monetary and strategic terms, acquisition activity has increasingly
become a focus of study in several academic fields. Although this interest has generated con-
siderable acquisition-related knowledge, the range of findings from these diverse areas lacks
theoretical integration, which constrains scholars’ abilities to synthesize notable contributions
from each discipline. For instance, initial research, concentrated mostly in the finance literature,
paved the way for scholarly work in the acquisition literature. These scholars looked with great
interest at whether acquisitions added value to the firm, by focusing largely on assessing the
relationship between acquisition activity and firm performance through changes in shareholder
value (Carper, 1990). This period also witnessed the advent of event study methodology (Brown
& Warner, 1980, 1985), designed to aid researchers in assessing market expectations of future
cash flows related to discrete events, such as acquisition announcements.
Typical findings from these early studies suggested that acquisitions did not enhance
acquiring firm value, as measured by either short-term (Asquith, 1983; Dodd, 1980; Jarrell
& Poulsen, 1989; Malatesta, 1983) or long-term performance measures (Agrawal, Jaffe, &
Mandelker, 1992; Asquith, 1983; Loderer & Martin, 1992). More specifically, acquisitions
were often found to erode acquiring firm value (Chatterjee, 1992; D. K. Datta, Pinches, &
Narayanan, 1992; King, Dalton, Daily, & Covin, 2004; Moeller, Schlingemann, & Stulz,
2003; Seth, Song, & Pettit, 2002) and produce highly volatile market returns (Langetieg,
Haugen, & Wichern, 1980; Pablo, Sitkin, & Jemison, 1996).
Although much of the early empirical attention centered on the performance of bidding
firms, some finance researchers also assessed the returns accrued by target firms. Perhaps
not surprising, given that acquirers generally pay premiums to acquire targets, results
showed that target shareholders generally fared well, often experiencing significant positive
returns (Asquith & Kim, 1982; D. K. Datta et al., 1992; Hansen & Lott, 1996; Malatesta,
1983). In addition to target performance, scholars also examined the effects of acquisitions
on combined bidder and target returns (Bradley, Desai, & Kim, 1988; Bruner, 1988; Carow,
Heron, & Saxton, 2004; Healy, Palepu, & Ruback, 1992; Wright, Kroll, Lado, & van Ness,
2002). Whereas these studies generally showed that acquisitions produce positive combined
returns, importantly, decomposition of these joint outcomes revealed that targets accounted
for the majority of those gains, with acquiring firms contributing neutral or negative returns
(i.e., Bradley et al., 1988; Houston, James, & Ryngaert, 2001; Leeth & Borg, 2000).
In light of these performance consequences for acquirers, more recent finance and strategic
management work focused on antecedents of acquisitions, as scholars sought to uncover why
firms acquired. Perhaps encouraged by the increasing popularity of acquisitions, this research
gained traction in recent decades. Although scholars have uncovered a number of antecedents
that appear to trigger acquisition activity, much of this research has occurred in isolated pock-
ets, leaving a unified theoretical view of why firms acquire markedly absent from this litera-
ture. Further research has focused on identifying both potential moderators of acquisition
performance and other acquisition-related outcomes. Although this work confirms that, on
average, acquiring firms do not benefit from acquisitions, it importantly reveals conditions and
situations under which acquisitions do benefit acquirers. Nevertheless, like the work cited ear-
lier, these rich insights have yet to be effectively integrated into the vast acquisition literature.

Haleblian et al. / Mergers and Acquisitions 471
Given the practical and theoretical importance of acquisitions, it is surprising that no

comprehensive reviews of acquisition research have been published in the past decade.1 As
a result, few unifying theoretical threads capable of knitting together the unique, discipli-
nary-based perspectives on acquisitions have emerged, leaving an understanding of the
acquisition process punctuated by critical gaps. In this review, we begin to address these
gaps by developing a comprehensive theoretical framework that organizes the acquisition lit-
erature. In turn, we use our framework to review extant research within and across multiple
disciplines. Building on this review, we then highlight the theoretical and empirical gaps that
continue to plague the acquisition literature and outline several future research suggestions
for advancing the state of acquisition research.
We followed five steps to manage the scope of our review and ensure consistent coverage
of relevant studies in our sample. First, we focused on quantitative acquisition research in
the accounting, economics, finance, management, and sociology literatures from 1992 to
present. Second, given the considerable size of the acquisition literature and space limita-
tions, we restricted our sample to articles published in leading journals in each of these
areas.2 Within the constraints of the first two sampling steps, our third step consisted of a
search of titles and abstracts of the target journals on the keywords merger, merge, acquisi-
tion, acquire, and mergers and acquisitions (M&A). We made the decision to focus our
search on a limited range of keywords directly related to the topic of the review, as expand-
ing outside of this list to include related words, such as diversification, yielded an over-
whelming number of articles, almost all of which were not relevant to the topic of the review.
Even with the narrow focus of our keyword search, our initial search identified 864 articles.
Fourth, we independently reviewed subsets of these articles for relevance and fit, reading the
text and verifying their empirical nature. Many articles were eliminated as being clearly off
topic (e.g., “information acquisition,” “knowledge acquisition”); discrepancies in opinions
about inclusion or exclusion were resolved through discussion. This fourth step reduced the
set to 310 articles. In the fifth and final step, we further reviewed each study to confirm rel-
evance and eliminated studies in which acquisitions were not the central focus. This resulted
in a sample of 167 empirical articles.
To get a sense of how interest in the topic of acquisitions has evolved, we plotted the
number of studies published in the period examined by academic discipline.3 (See Figure 1.)
This plot shows, not surprisingly, that the management and finance fields have generated the
bulk of published acquisition research since 1992. It also shows that although research inter-
est in acquisitions in the management field remained fairly constant throughout the period
examined, interest in acquisitions increased in finance in recent years. This reinforces our
belief that a multidisciplinary review of the field is beneficial because it fosters cross-disci-
plinary learning, allowing the management field to incorporate knowledge from recent
finance work on acquisitions into our own research.
We then moved from the search for articles to the coding and categorizing of the articles. In
this step, we coded the primary variables and key findings. Drawing from this coding, we
developed a model in which to frame and interpret the research on acquisitions and to ease the
presentation of the body of work on this topic. This comprehensive theoretical framework cat-
egorizes recent acquisition research into three broad areas: (a) antecedents, the factors that lead
firms to undertake acquisitions; (b) moderators, internal and external factors that moderate
acquisition performance; and (c) other acquisition outcomes (summarized in Figure 2). Next,

Figure 1
The Trends in Research on Mergers and Acquisitions
Number of Articles by Discipline
30
25
20
15
10
92-93 94-95 96-97 98-99 00-01 02-03 04-05 06-07
Management Finance Accounting

Economics Sociology
we present our full review of this literature, using this framework to discuss the current state
of knowledge regarding acquisitions.
Antecedents: Why Do firms Acquire?

A primary line of research across many of the sampled articles centers on why firms
acquire. Although scholars have proposed a number of acquisition antecedents, they fall
broadly into four categories: value creation, managerial self-interest (value destruction),
environmental factors, and firm characteristics.
Value Creation
Market power. Market power may be considered an attempt to appropriate more
value from customers. The finance literature was first to explore the market power
hypothesis—the idea that having fewer firms in an industry increases firm-level pricing
power—by examining rival firms’ stock price reactions to horizontal mergers. Although
this early research found no support for market power as an acquisition antecedent
(Eckbo, 1983; Stillman, 1983), some economists criticized this work by arguing that the

Figure 2
Mergers and Acquisitions Literature Overview
MODERATORS
Deal Characteristics
• Payment type
• Deal type
Managerial Effects
• Ownership
• Compensation
• Managerial
experience
• Cognition/
Personality
Firm Characteristics
ANTECEDENTS • Performance
• Size
Value Creation
• Acquirer
• Market power experience
• Efficiency
• Resource Environmental Factors
redeployment • Waves
• Market discipline • Regulations
Managerial Self-Interest
(Value Destruction)
• Compensation OUTCOMES
• Hubris
Performance Outcomes
• Target defense
Other Outcomes
tactics ACQUISITION
BEHAVIOR • Premiums
Environmental Factors
• Turnover
• Environmental • Customers/
uncertainty Bondholders
• Regulation
• Imitation
• Resource
dependence
• Networks ties
• Acquisition
experience
• Firm strategy
and position
rivals studied were large, multiproduct firms that derived only a small fraction of their
revenues from the affected market and that the sample periods examined were subsequent
to highly restrictive antitrust legislation. Using the same methodological approach, on a
period preceding both those antitrust laws and the rise of highly diversified firms (early
1900s), Prager (1992) found that railroad industry rivals’ stock prices increased the week
acquisitions were announced, suggesting support for the market power hypothesis.
Similarly, an analysis of 1980s airline mergers showed that prices on routes serviced by
merging firms increased relative to those of a matched sample unaffected by the merger (Kim
& Singal, 1993). Thus, some limited evidence supports market power as an acquisition motive.

Efficiency. To reduce the cost side of value creation, economists have also assessed
whether acquisitions are motivated by the desire to increase efficiency. Suggestive of
efficiency motives, Banerjee and Eckard (1998) found that the market bid up horizontal merg-
ers during the first great merger wave (early 1900s). Additional support came from more
recent samples documenting improvements in long-term plant productivity (McGuckin &
Nguyen, 1995) and public accounting service delivery (Banker, Chang, & Cunningham,
2003). Nevertheless, all evidence is not so straightforward. For example, in a multiperiod
study, Klein (2001) found a diversification “discount” for late period (1970 to 1974) con-
glomerates; however, contrary to prior work implying inefficiency in 1960s conglomeration
(e.g., P. Berger & Ofek, 1995; Jensen & Ruback, 1983; Kaplan & Weisbach, 1992), Klein
reported a premium for late-1960s acquisitions, supporting the efficiency motive for unrelated
acquisitions during early yet not later periods.
Resource redeployment. Scholars have argued that managers view horizontal acquisitions
as a means of facilitating redeployment of assets and competency transfers to generate
economies of scope. Consistent with this argument, Capron, Dussauge, and Mitchell
(1998) found that horizontal acquisitions often led to significant resource realignment
between acquirers and targets. In addition, King, Slotegraaf, and Kesner (2008) showed
that acquirer abnormal returns were associated with the degree of acquirer and target firm
resource complementarity. In a similar vein, Karim and Mitchell (2000) reported that
acquirers exhibited greater changes in their resource sets than nonacquirers. Specifically,
acquirers deepened resource sets by both adding to existing areas of strength and extend-
ing resources into new areas. Notably, acquirers extended their resources to include recent
entries to the industry, suggesting that managers may use acquisitions as a means of inno-
vation. Extending this work, Uhlenbruck, Hitt, and Semadeni (2006) drew on resource-
based and organizational learning perspectives to demonstrate that offline firms used
acquisitions to acquire scarce resources held by Internet firms, which in turn led to posi-
tive acquirer returns. More recently, Puranam and Srikanth (2007) demonstrated that
acquiring firms leveraged the innovation-oriented resources of target firms either by inte-
grating those resources into the acquiring firm or by leveraging the innovative capabilities
of the firm as an independent unit. The results above are consistent with research demon-
strating that the market position and resources of firms involved in acquisitions influence
future product market performance (Lubatkin, Schulze, Mainkar, & Cotterill, 2001).
Market discipline. Additional research from finance suggests that acquisitions may be
value enhancing when they are used to discipline ineffective managers. Agency theorists, in
particular, contend that acquisitions can help protect shareholders from poor management
(Jensen, 1986; Jensen & Ruback, 1983). Consistent with this notion, research has found that
CEOs of acquired firms are often dismissed after an acquisition has been completed
(Agrawal & Walkling, 1994; Martin & McConnell, 1991). Moreover, studies have shown
that relative to other managers, target firm managers who were overcompensated prior to
takeovers received reduced compensation after acquisition completion (Agrawal &
Walkling, 1994). Agrawal and Walkling (1994) argued that this reflected the full playing out
of the market for corporate control, with firms managed by ineffective and overcompensated
top managers being the target of takeovers made with the intention of corporate turnaround.

An implied assumption within the market discipline hypothesis is that firms with poor
corporate governance have low market values and are taken over by higher valued bidders
(i.e., high buys low). However, Rhodes-Kropf and Robinson (2008) showed that rather than
high-asset-value firms buying low-asset-value firms, firms with similar asset valuation tend
to purchase one another (i.e., like buys like). Hence, although a firm may want to merge with
a stronger firm, in such a case, they would likely have reduced bargaining power. Thus, evi-
dence has accrued for complementarity asset quality as a driver of acquisition activity in
which firms with similar quality seek each other out as high market-to-book acquirers will
acquire high market-to-book targets and weaker acquirers will buy weaker targets.
Consistent with this logic, Wang and Zajac (2007) found that resource similarity between
firms increases the likelihood of an acquisition over an alliance.
Managerial Self-Interest (Value Destruction)
It is interesting that although much work assumes that acquisitions are made to maxi-
mize shareholder value (e.g., market power, efficiency, asset redeployment, market disci-
pline), a substantial amount of studies make the opposing assumption—that acquisitions
destroy shareholder value as managers attempt to maximize their own self-interest.
Compensation. A number of finance and management scholars have demonstrated important

links between upper echelon compensation and ownership and acquisitive behavior. For
example, research has shown that industries with higher CEO compensation generally exhibit
greater acquisition activity (Agrawal & Walkling, 1994) and, further, that acquiring CEO
(Sanders, 2001) and director (Deutsch, Keil, & Laamanen, 2007) stock option grants are posi-
tively associated with such activity. Agency theory holds that compensation contracts should be
designed to reduce managerial opportunism and align managers’ and shareholders’ interests.
However, a growing body of recent evidence suggests that managers’ desire for increased com-
pensation elicits strong, self-interested motivations to acquire. This is consistent with evidence
demonstrating that acquiring CEOs’ postacquisition compensation generally increases, irre-
spective of acquisition performance through liberal postacquisition equity-based pay grants
(Harford & Li, 2007), bonuses (Grinstein & Hribar, 2004), and other compensation (Bliss &
Rosen, 2001) that offset potential decreases of acquiring CEOs’ wealth. Additionally, managing
larger firms generally also increases CEO discretion and power, which can further entrench
managers and reduce their employment risk (e.g., Gomez-Mejia & Wiseman, 1997; Haleblian
& Finkelstein, 1993; Hambrick & Finkelstein, 1987). This research suggests that, in general,
acquisitions may appear overly attractive for CEOs. However, vigilant governance may attenu-
ate this effect, as Kroll, Wright, Toombs, and Leavell (1997) found that acquisitions led to higher
size-based CEO compensation in manager-controlled firms, yet in owner-controlled firms,
acquiring CEOs’ compensation was more closely tied to shareholder returns.
Managerial hubris. In addition to compensation, other work has shown that manager-
ial confidence and ego gratification may also increase acquisition behavior. Finance

scholars were the first to propose CEO hubris—exaggerated self-confidence—as an

acquisition motive (Roll, 1986). In line with this argument, management research has
empirically demonstrated that CEO hubris increased acquisition premiums, which in turn
decreased acquisition performance (Hayward & Hambrick, 1997). In a closely related
article, Malmendier and Tate (2008) found that overconfident CEOs overestimate their
ability to generate returns and as a result overpay for target companies and undertake
value-destroying mergers. Moreover, this effect was found to be particularly pronounced
for firms that have access to internal financing.
Target defense tactics. Arguably, target defense tactics are created to enhance managerial
self-interest at the expense of shareholder wealth. Hence, finance scholars have shown inter-
est in the implications of defense tactics on acquisition likelihood. For example, Ambrose
and Megginson (1992) found that blank check preferred stock authorizations tended to
decrease target acquisition likelihood. Similar findings in initial public offering (IPO)
research revealed that when IPO managers deployed defenses, such defenses were negatively
related to subsequent acquisition likelihood (Field & Karpoff, 2002). However, in contrast,
Bates and Lemmon (2003) found that rather than serving to deter bidding, target payable
fees (termination fee provisions in which the target has agreed to pay a fee to the acquirer in
the event the merger agreement is terminated) led to higher deal completion rates and greater
takeover premiums, suggesting that defense tactics do not have homogeneous effects.
Additional work is consistent with the notion of managerial self-interest from the perspec-
tive of targets. Cai and Vijh (2007) showed that target CEOs with greater levels of illiquid
(not yet vested) stock were more likely to become acquired. More specifically, the restricted
stock of target CEOs becomes vested after an exchange of control, allowing them to sell their
stock, which increases the value of their holdings, and incents them to sell the firm.
Overall, it is interesting to note that although self-interested behavior sometimes leads to
acquisition activity, ineffective governance that may follow self-interested activity may lead
to market discipline-based acquisition activity. Perhaps this is one reason we see so much
acquisition activity—acquisitions are made for multiple reasons: value-enhancing and value-
destroying ones.
Environmental uncertainty and regulation. Strategic management scholars have
focused attention on whether the fit between environment and firm strategy motivates
acquisition behavior. Some of this work has shown that environmental uncertainty affects
whether firms select to acquire or opt for other cooperative means. This research has shown
that although environmental uncertainty increased the likelihood of collaboration over acqui-
sition (Folta, 1998), it also increased the likelihood of acquisition over licensing agreement
(Schilling & Steensma, 2002). Additional work has investigated how environmental factors
influence corporate portfolio restructuring generally and acquisition likelihood specifically.
Bergh and Lawless (1998) showed that highly diversified firms were more likely to pursue
acquisitions in decreasing environmental uncertainty, whereas the opposite occurred in less

diversified firms; Thornton (2001), however, demonstrated that the failure to shift firm strat-
egy with environmental changes increased acquisition likelihood.
Examining environmental factors from a different perspective, finance scholars have
demonstrated that external governance structures also influence acquisition likelihood. More
specifically, this work examined the influence of regulatory actions on acquisition behavior.
Results of this work found that antitrust laws did not appear to impede acquisition activity
(Matsusaka, 1996) and, furthermore, that countries with higher accounting standards and
stronger shareholder protection had a greater amount of acquisition activity than their counter-
parts (Rossi & Volpin, 2004). More recent work suggests that impending regulation of sin
industries (e.g., tobacco, alcohol, gaming) may have motivated firms to engage in domestic
expansion through diversifying acquisitions as a means of garnering the political clout to influ-
ence policies aimed at mitigating the costs of such regulation (Beneish, Jansen, Lewis, &
Stuart, 2008).
Imitation and resource dependence. Sociologists have also shown interest in why firms
acquire. Extending interorganizational imitation theory to explore interindustry mergers,
Stearns and Allan (1996) found that fringe actors initiated innovations that enabled them to
execute mergers and, as these actors became increasingly successful, others, in turn, imitated
their innovations. Drawing on resource dependence theory, to assess the likelihood of
becoming a target, Palmer, Zhou, Barber, and Soysal (1995) showed that although the capac-
ity to constrain firms in other industries gave corporations in the 1960s conglomerate wave
little incentive to seek friendly acquisition partners, it also made them targets of predators
from other nonlinked industries.
Pioneering resource dependency work in the management literature, Pfeffer (1972) showed
that firms managed resource dependencies by absorbing needed resources through mergers.
This basic finding was subsequently replicated, although the use of more powerful analytical
methods generated results that suggested the strength of this relationship was weaker than orig-
inally found (Finkelstein, 1997). Additional research conducted by Casciaro and Piskorski
(2005) extended Pfeffer’s contributions by showing that although mutual dependence between
two firms was a key driver of acquisition behavior in interindustry acquisitions, power imbal-
ances between these same two firms acted as an obstacle to their combination.
Network ties. Building on network ties research, originally developed by Granovetter

(1973) and other sociologists, management scholars have shown the importance of net-
work ties as a driver of acquisition behavior. For example, Haunschild (1993) found that
managers imitated the acquisition activities of firms to which they were tied through
interlocking directorships. Subsequent work demonstrated that the number of current
acquisitions made by firms was positively related to the number of acquisitions com-
pleted by interlock partners (Haunschild & Beckman, 1998). Similarly, Westphal, Seidel,
and Stewart (2001) found that changes in the acquisition activity of “tied-to” firms had
significant positive effects on changes in focal firm acquisition activity. This research
identifies managers’ desires to achieve peer isomorphism as an important antecedent of
acquisitions.

Acquisition experience. The management literature has been interested in the influ-
ence of experience as an acquisition motivator. Acquisitions are an excellent context to
study organization learning, in that acquisitions are strategically significant, discrete
events. Furthermore, because they often occur multiple times in a firm’s history, scholars
have the opportunity to assess whether performance improvements occurred across
acquisition events. An excellent comprehensive review of the influence of experience in
the context of acquisitions has recently been published in Journal of Management
(Barkema & Schijven, 2008a). Thus, we limit our scope in this section to provide a cursory
overview.
In general, research on acquisition experience has shown recent experience to be pos-
itively related to subsequent acquisition likelihood (Haleblian, Kim, & Rajagopalan,
2006), particularly when this experience is rewarded (i.e., strong acquisition perfor-
mance). However, other work has shown that acquisition experience of a particular type
(e.g., horizontal, vertical, product extension) can increase the likelihood of subsequent
acquisitions of the same type (Amburgey & Miner, 1992) and, correspondingly, decrease
the likelihood of acquisition of any different types (Yang & Hyland, 2006). Related work
suggests that experiential processes encourage repetitive behavior. Specifically, Baum,
Li, and Usher (2000) found that firms acquired other firms that were geographically and
organizationally similar to their own most recent prior acquisitions. Moreover, they fur-
ther proposed that in addition to firms’ own experience, vicarious learning also appeared
to influence acquisition behavior, as they found that firms imitated the location choices
of other visible and comparable firms’ recent acquisitions (Baum et al., 2000). It is inter-
esting that the experience effect appears to generalize beyond acquisitions, as
Vanhaverbeke, Duysters, and Noorderhaven (2002) found that prior alliance experience
increased the likelihood of one partner acquiring the other, highlighting the influence of
experience, in general, on acquisition behavior.
Firm strategy and position. Although work in this area is recent and limited, it suggests
that firms’ strategic positions and intentions may have strong influences on acquisition
behavior. In the context of international strategy, evidence has shown that companies fol-
lowing a global strategy have higher proportions of greenfield subsidiaries than multido-
mestics, whereas companies following a multidomestic strategy exhibit higher proportions
of acquisitions (Harzing, 2002). Furthermore, in an entrepreneurial firm context, Graebner
and Eisenhardt (2004) found that targets facing “difficult strategic hurdles” such as a chief
executive search or an impending funding round were more likely to be acquired than those
that were not facing such hurdles.
Overall, then, a multitude of factors from different disciplines have been offered as to
why firms acquire. However, a nagging basic question within this area still remains:
Which of these antecedents has the most influence on acquisition behavior and under what
conditions?

Moderators of the Acquisition–Performance Relationship
Given that acquiring firms generally do not benefit from making acquisitions, scholars
have increasingly concerned themselves with developing a better understanding of the spe-
cific situations that allow the minority of acquirers to create value. Results of this work have
uncovered multiple conditions that moderate the acquisition–performance relationship,
which we organize based on four levels of analysis: deal characteristics, managerial effects,
firm characteristics, and environmental factors.
Deal Characteristics
Payment type. Beginning with the deal itself, a common argument asserts that managers
finance acquisitions with cash when they perceive their firms are undervalued and with stock
when they perceive their firms are overvalued (King et al., 2004), suggesting that the market
should perceive stock-financed deals as a signal of bidder overvaluation (Loughran & Vijh,
1997). Taking a somewhat different view, Hayward (2003) argued that powerful banks with
specialized expertise are quick to use this expertise and, thus, direct clients to complex solu-
tions, such as stock-financed deals. In support, he reported that using investment banks to
advise stock-financed acquisitions harmed acquirer performance.
Regardless of the motivations behind financing choice, several studies have shown that
cash-financed deals are more beneficial, or at least less detrimental, to bidding firms’ share-
holders (e.g., Carow et al., 2004; Huang & Walkling, 1987; Loughran & Vijh, 1997; Travlos,
1987). However, this evidence is not as straightforward as some might suggest. For example,
although Healy et al. (1992) reported no effect of payment method on bidder accounting per-
formance, other studies found mixed results. Specifically, Heron and Lie (2002) found no
material differences in operating performance between cash and stock deals, yet they reported
lower announcement and postacquisition market returns for stock acquisitions than for cash
acquisitions. Furthermore, in a sample of serial acquirers, Fuller, Netter, and Stegemoller
(2002) found that regardless of payment method, public acquisitions resulted in insignificant
bidder returns for cash or combination deals and significantly negative returns for stock deals.
However, it is interesting that private and subsidiary acquisitions increased bidder perfor-
mance, regardless of method of payment, but those returns were greater when stock financ-
ing was used. Similarly, in a comparison of acquisitions of Canadian firms by domestic and
foreign bidders, contrary to many studies of U.S. acquisitions, Eckbo and Thorburn (2000)
found that returns were highest for domestic bidders who financed acquisitions with stock.
Examining payment method from a different perspective, Bharadwaj and Shivdasani (2003)
found that acquisitions entirely financed by banks resulted in high positive announcement
returns, suggesting that bank debt served as a signal of certification and monitoring for bidding
firms. Louis (2005) also found an effect for monitoring by demonstrating that bidders audited
by non–Big 4 accounting firms experienced higher abnormal announcement returns that those
audited by Big 4 firms. This effect was greater for private firms and when auditors appeared to
have served in an advisory capacity. Faccio, McConnell, and Stolin (2006) added additional

support for the private firm effect by reporting higher acquirer abnormal announcement returns
for private versus public targets that held over time and across Western European countries.
Explaining the private firm effect, Hansen and Lott (1996), citing a similar argument made by
Easterbrook and Fischel (1982), proposed that when bidding firm shareholders also hold tar-
get shares, they are indifferent to how acquisition gains arise (from the bidder or the target).
Therefore, bidding firm returns should be higher when acquiring private firms, where cross-
ownership (bidder and target ownership) is expected to be low or nonexistent. Bae, Kang, and
Kim (2002) offered support for the cross-ownership effect by demonstrating that although bid-
ding Korean chaebol firms’ minority shareholders suffered acquisition announcement losses,
controlling shareholders gained from such announcements through increases in the values of
other member firms (a tunneling effect).
Deal type. In general, research on deal types has suggested that tender offers outperform
mergers (e.g., Agrawal et al., 1992), particularly in cash-financed deals (Loughran & Vijh,
1997). However, in a more in-depth examination of the tender offer/merger distinction, Rau
and Vermaelen (1998) reported that the negative performance of mergers owed primarily to
low book-to-market “glamour” bidders whose postacquisition performance was significantly
lower than that of other glamour bidders and value bidders. They concluded that the man-
agers of low book-to-market firms might make poorer acquisition decisions than managers
of other firms, suggesting the importance of prior performance on acquisition returns.
Managerial Effects
Ownership and compensation. Following the agency-theoretic perspective that executive
equity and compensation influence interest alignment, finance and management scholars
have examined the influence of various ownership and compensation schemes on the
acquisition–performance relationship. For example, Hubbard and Palia (1995) found a
curvilinear relationship between managerial ownership and acquirer announcement returns.
Specifically, returns were highest at moderate levels of ownership. The authors argued that
under moderate levels of ownership, managers’ interests were more aligned with those of
shareholders, which resulted in lower bid premiums. However, they suggested that at low and
high levels of ownership, managers’ interests were misaligned with shareholders’, and thus,
they overpaid for acquisitions, which negatively affected announcement returns. Similarly,
Wright et al. (2002) found a nonlinear relationship between ownership and acquisition
announcement returns, such that under moderate levels of CEO ownership, combined bidder
and target announcement returns were positive; however, CEO stock options exhibited a
positive, linear influence on these returns. S. Datta, Iskandar-Datta, and Raman (2001)
reported a positive relationship between the Black-Scholes values of previous-year stock
option grants on subsequent-year bidder announcement returns. In addition, high levels of
previous-year options grants led to lower acquisition premiums and to the propensity to
acquire higher growth targets that increased firm risk.
Nevertheless, the results of other studies challenged these results. For example, Loderer
and Martin (1997) used a simultaneous equations framework to examine whether managers’

stock ownership led to acquisition performance or acquisition performance led to increased

ownership. Results showed that acquisition announcement returns were positively associated
with higher stock holdings; however, stock ownership was not related to acquisition perfor-
mance, suggesting that performance begets ownership rather than vice versa. Consistent with
our earlier discussion in which acquisitions allow bidding firms’ managers to gain at the
expense of shareholders, Grinstein and Hribar (2004) found that CEOs with higher power
over their boards received larger acquisition bonuses; however, such bonuses did not trans-
late into increased stock returns. They also revealed that although more powerful CEOs
made larger acquisitions than lower power peers, the market responded more negatively to
these acquisition announcements.
In general, research examining the effects of equity holdings and incentive pay on acqui-
sition behavior and performance has returned mixed results. However, recent management
and finance research has suggested a troubling view of the role of equity-based rewards in
managerial decision making, as findings suggest that managers may engage in opportunistic
behaviors to achieve personal gain (Devers, Cannella, Reilly, & Yoder, 2007).
Managerial experience and cognition/personality. The characteristics of managers have also

been shown to exhibit important influences on acquisition decisions and acquisition perfor-
mance. For example, the market appears to value the expertise and knowledge held by key tar-
get executives, as their postacquisition departures have been shown to negatively affect both
acquisition performance (Cannella & Hambrick, 1993; Krishnan, Miller, & Judge, 1997) and
bidding firms’ satisfaction with acquisition decisions (Saxton & Dollinger, 2004). Furthermore,
research suggests that cognitive influences figure importantly into acquisition performance.
Specifically, perceptions of task, cultural, and political characteristics (Pablo, 1994), and CEOs’
perceptions of invulnerability (hubris; Hayward & Hambrick, 1997) affect managers’ acquisi-
tion judgments and acquisition performance. Other research has shown that top managers’ per-
ceptions of cultural differences between bidders and targets have negatively affected both bidder
announcement returns (Chatterjee, Lubatkin, Schweiger, & Weber, 1992) and managers’ per-
ceptions of postmerger performance (Very, Lubatkin, Calori, & Veiga, 1997). This desire for fit
is consistent with research showing that strategic similarity (Ramaswamy, 1997) and alliance
experience between bidders and targets (Porrini, 2004) enhanced synergy realization during
integration and, in turn, positively influenced long-term postacquisition accounting returns.
Historical performance. Scholars have paid particular attention to the role of historical
operating performance in acquisition events. For example, Heron and Lie (2002) showed that
acquirers experienced strong operating performance both before and after acquisitions and,
furthermore, that postacquisition performance increased when bidders with higher market-
to-book ratios acquired targets with low market-to-book ratios. Using another performance
measure, Lang, Stulz, and Walkling (1989) reported that high Tobin’s Q bidders gained more
than low Tobin’s Q bidders and, additionally, low Tobin’s Q targets benefited more from
takeovers than high Tobin’s Q targets. Similarly, Servaes (1991) found that bidders’ abnormal

returns were also higher when their Tobin’s Q ratios were higher and increased further with
decreases in targets’ Tobin’s Q ratios. In a test of Jensen’s (1986) free cash flow hypothesis
(managers endowed with free cash flow will invest it in negative net present value projects
rather than pay it out to shareholders), Lang, Stulz, and Walkling (1991) found that bidder
announcement returns were negatively related to cash flow for low Tobin’s Q bidders but not
related to cash flow for high Tobin’s Q bidders. Similar to Rau and Vermaelen (1998), the
authors concluded that firms with agency problems (low Tobin’s Q ratios) appeared to invest
in negative net present value projects, including acquisitions. In a somewhat related vein,
Bruner (1988) found that the combination of slack-rich (cash and unused debt capacity) bid-
ders and slack-poor targets created positive combined bidder-target announcement returns,
again implying the importance of prior performance for acquisition returns.
Not surprisingly, taken together, this evidence suggests that acquisition performance
increases when high-performing firms pair with low-performing targets. This perhaps results
because low-performing targets offer upside restructuring value, which has been shown to
offer the greatest opportunity for value creation in takeovers (Chatterjee, 1992) and bank
mergers (Houston et al., 2001). Although this suggests some benefit in picking the low-
hanging fruit, Agrawal and Jaffe (2003) found little evidence to support the common con-
tention that all takeover targets’ preacquisition operating and stock returns were poor. Thus,
although the takeover market is often viewed as a disciplinary mechanism, acquisitions are
undertaken for a variety of reasons. Furthermore, although acquiring low-performing firms
may offer value, research by Clark and Ofek (1994) suggests this relationship may have
boundary conditions, as they found that bidders were generally unable to successfully
restructure severely distressed firms and, as a result, acquiring deeply troubled targets
decreased acquirers’ long-term accounting and market returns. Thus, there appear to be
diminishing returns for poor target performance; hence, picking the lowest hanging fruit
may not be the wisest path to wealth creation.
Firm size. Scholars have also argued that firm size affects the performance of acquisitions.
In support, some studies have found that large mergers produced positive postacquisition
accounting performance, which the authors attributed to increased asset productivity (Healy
et al., 1992) and enhanced customer attraction, employee productivity, and asset growth
(Cornett & Tehranian, 1992). Conversely, however, S. B. Moeller, Schlingemann, and Stulz
(2004) found that small acquisitions by small acquirers resulted in positive announcement
gains, whereas large acquisitions by large acquirers resulted in significant announcement
losses. Findings indicated that large firms not only offered larger acquisition premiums than
smaller firms, but they were also more likely to complete an offer, suggesting that manager-
ial hubris played more of a role in the acquisition decisions of large firms than of small firms.
In a related vein, Fuller et al. (2002) partitioned the returns to acquirers on the relative size of
the target as compared to the bidder and found that for public targets, as the relative size of
the target increased, returns became more positive for cash offers, more negative for stock
offers, and changed little for combination offers. They also found, however, that for private
acquisitions, as the relative size of the target increased, returns accrued by stock-financing
bidders were greater than those accrued by cash-financing bidders. Whereas firm size appears

to influence acquisition returns in important ways, the mixed results inherent in this work
illustrate that an understanding of how this effect manifests is underdeveloped. Thus, the role
of firm size in acquisition performance remains a fertile area for acquisition research.
Acquirer experience. Acquisition scholars have also examined the role of acquirers’ expe-
rience on acquisition performance. Although it seems intuitive that acquisition experience
should positively affect the performance of subsequent acquisitions, the results of these stud-
ies are mixed, suggesting moderating influences. Haleblian and Finkelstein (1999) found
that the relationship between acquisition experience and acquisition performance was U-
shaped, not positively linear. The authors concluded that these results are owed to the notion
that inexperienced acquirers inappropriately applied experience garnered from first acquisi-
tions to following dissimilar acquisitions, whereas highly experienced acquirers were able to
avoid these missteps. Discussing the moderating influence of task heterogeneity on organi-
zational learning, Zollo and Winter (2002) offer support for this conclusion, arguing that
high heterogeneity in organizational tasks such as acquisition decisions increases the likeli-
hood of erroneous generalizations because of an overreliance on tacit knowledge accumula-
tion. They hypothesized that when the heterogeneity of task experiences is high, as is often
the situation facing infrequent and inexperienced acquirers, firms employing explicit knowl-
edge articulation and codification mechanisms, as opposed to those relying on tacit knowl-
edge accumulation, will reap additional learning benefits resulting in more effective decision
making. In support of this hypothesis, Zollo and Singh (2004) found that prior acquisition
experience alone did not positively influence acquisition performance, whereas knowledge
codification of experience did. More recently, in a study of the most active U.S. acquirers in
the 1990s, Laamanen and Keil (2008) found that although both high rate of acquisitions and
high variability of the rate were negatively related to performance, the relationship was
weakened through the moderating effects of an acquirer’s size, the scope of its acquisition
program, and acquisition experience.
Examining the role that transfer effects played in multiple acquisitions, Finkelstein and
Haleblian (2002) found that (a) bidder-to-target similarity increased announcement returns, a
finding indicative of a positive transfer effect, and (b) firms’ first acquisitions outperformed
their second acquisitions, particularly when those acquisitions were made in dissimilar indus-
tries, a finding indicative of a negative transfer effect. These results suggest that although rou-
tines and practices transfer from prior to new situations, positive transfer is dependent on
similarity. Hayward (2002) found that acquisition experience increased acquisition perfor-
mance when targets were not markedly similar to or dissimilar from previous acquisitions.
Collectively, this evidence suggests that although similarity is important, at higher levels, it
may exhibit diminishing returns for learning. Finally, although much of the experience and
learning literature focuses on learning by doing, Delong and Deyoung (2007) showed large
commercial banks learned not by engaging directly in repeated acquisitions, but indirectly by
observing other banks’ acquisition-related successes and failures. Therefore, in addition to
experiential learning and codification of knowledge, vicarious learning may be beneficial to
managers’ acquisition decisions.

Waves. Several scholars have proposed that temporal and episodic effects influence market
responses to acquisitions. Following this logic, some scholars have examined the performance
consequences of acquirers across different acquisition waves. For example, Banerjee and
Eckard (1998) found that acquisitions in the first great merger wave period resulted in signifi-
cant value creation for bidders and targets, as firms pursued greater efficiency. Analyzing a
later wave (1920s), however, Leeth and Borg (2000) reported that although targets gained from
being acquired, bidding firms neither gained nor lost. Conversely, Matsusaka (1993) found
that during the 1960s merger wave, acquiring firms accrued negative returns from related
acquisitions but received positive returns from diversifying acquisitions, particularly if target
managers were retained. Reexamining this wave, Hubbard and Palia (1999) found that the
greatest returns for diversifying acquisitions resulted when financially unconstrained bidders
acquired financially constrained targets, suggesting that investors viewed internal capital mar-
kets as more efficient than external capital markets. Although these results are fairly mixed,
they suggest that the strategic focus of acquisitions influences acquiring firm returns.
Although the work cited above focused on single waves, some researchers have examined
the consequences of moving between or within wave periods. For example, examining mul-
tiple waves, Matsusaka (1993) uncovered interesting changes in investor sentiment toward
diversification over time. Specifically, he noted that diversifying acquisitions resulted in pos-
itive bidder returns from 1968 to1974, neutral returns from 1975 to 1979, and negative
returns from 1980 to 1987. Although the reasons behind this sentiment shift are unclear, he
suggested that it may owe to first-mover effects, regulation such as the Williams Act of 1968
(Malatesta & Thompson, 1993), and exogenous shocks or changes in fads and fashions
regarding acquisitions. In a more recent study, S. B. Moeller et al. (2004) demonstrated that
although, in aggregate, acquiring firms’ shareholders experienced greater losses during the
1998-2001 wave than during the 1980s wave, more recent losses resulted from a few
extremely large loss deals, suggesting the importance of controlling for outliers.
Still other scholars have examined the effects of acquiring at different stages within acquisi-
tion waves. For example, Carow et al. (2004) found moving early in acquisition waves resulted
in higher combined target-bidder abnormal returns. However, they further reported that early
moving bidders accrued positive returns only when they possessed superior information, paid
with cash, and expanded in related industries during widespread expansion periods. In a more
fine-grained analysis of the performance consequences of acquiring at different wave stages,
McNamara, Haleblian, and Dykes (2008) revealed that, on average, firms that acquired early
within an industry acquisition wave achieved positive returns, whereas the market punished
later acquirers. Although these results underscored the importance of ordering, interestingly,
their data also revealed that although returns werse positive for early acquirers and negative for
later acquires, returns began to improve for firms acquiring at the farthest point of the wave.
They concluded that the worst returns might have resulted from acquirers’ falling prey to band-
wagon imitation, whereas acquirers at the far end of waves may have benefited from learning
by observing and reduced bandwagon pressures. Finally, acquiring during low-equity market
cycles has been shown to generate higher announcement returns than during high-equity

market cycles, suggesting that managers are less likely to overpay for acquisitions when equity
market cycles are low (Pangarkar & Lie, 2004).
Regulations. Scholars have also shown that regulatory events can influence the attrac-
tiveness of acquiring (e.g., Tax Reform Act of 1986) and shift the bidder–target power rela-
tionship (e.g., Williams Act of 1968). Specifically, evidence has suggested that regulatory
reforms have been detrimental to bidder returns (Asquith, Bruner, & Mullins, 1983;
Malatesta & Thompson, 1993; Schipper & Thompson, 1983) yet beneficial to target returns
(Bradley et al., 1988). Similarly, recent strategic risk-taking research has found that regula-
tory changes resulting from the implementation of the Sarbanes-Oxley Act (SOX) have
influenced CEOs’ strategic decisions (Devers, McNamara, Wiseman, & Arrfelt, 2008).
Although we found no studies directly examining how recent regulatory changes influenced
acquisition performance, the work cited above suggests that future research considers SOX
and other forthcoming regulatory changes.
As with work on antecedents, although many moderating variables have been offered that
improve acquisition performance, it is currently unclear which of these moderators have the
greatest impact on improving shareholder value. Moreover, given that scholars have been able
to isolate some conditions in which acquirers generate value, it remains puzzling as to why
acquisitions on average still perform poorly. It may be that scholarly insights are not transfer-
ring to practitioners, they are impractical or unfeasible to execute, or although they produce
“statistical significance” that justifies publication in academic journals, they do not generate
sufficient increased shareholder value to justify implementation. Regardless of the reason, it is
clear that developing a deeper understanding of these moderating influences is necessary.
Other Acquisition Outcomes
In addition to acquisition performance, a smaller number of studies have examined other

consequences associated with acquisitions. There is an implicit assumption, as well as some
empirical evidence, that lower acquisition premiums lead to better acquisition performance
(Hayward & Hambrick, 1997). Although a likely mediating variable, acquisition premiums
have also been studied without mention of their relationship to other measures of perfor-
mance and thus are often considered a relevant dependent variable on their own. Aside from
premiums, the most commonly examined nonperformance outcomes are turnover and cus-
tomer and bondholder consequences.
Acquisition premium. In general, an acquisition premium is measured by the difference

between the purchase price of the target firm’s stock, paid by the acquiring firm, and the
target’s pre-acquisition stock price, divided by the target’s pre-acquisition stock price.
Whereas finance studies have focused on target influences on premium price, management
studies have concentrated more on the acquirers and their motivations to acquire. The
finance literature has examined target tactics aimed at influencing acquisition premiums
and/or the likelihood of being acquired. The 1980s saw an increase in corporate anti-
takeover methods, as many firms adopted shareholder rights plans (poison pills). Evidence
showed in the broad market that although poison pills were associated with higher

takeover premiums, they did not decrease acquisition activity (Comment & Schwert,
1995). However, in the specific context of IPO firms, although the presence of takeover
defenses had no effect on takeover premiums, they were negatively related to subsequent
acquisition likelihood (Field & Karpoff, 2002), which is consistent with the idea that man-
agers take steps at the time of the IPO to ensure the continuation of their personal benefits
of control, as takeover defenses help firms remain independent after IPO. Another tactic
targets have used to their advantage is a termination fee. Research has shown that such
clauses result in both higher success rates and higher premiums, suggesting that target
managers use such fees to encourage bidder participation by ensuring that the bidder is
compensated for the revelation of valuable private information released during merger
negotiations (Officer, 2003).
Other finance scholars have proposed that target managers with high levels of ownership
will resist takeovers unless they feel fully compensated for their loss of control. Following
this logic, acquisition premiums should be increasing with managerial ownership levels as
entrenched managers negotiate more vigorously (Song & Walkling, 1993). Supporting the
resistance argument, Song and Walkling (1993) found that eventual targets exhibited lower
levels of managerial ownership than industry peers and random nontargets. Furthermore,
returns to target firm shareholders increased with managerial ownership in contested but suc-
cessful acquisitions, indicating that managerial ownership can be beneficial to target share-
holders when it encourages bid resistance that leads to deal negotiation but not when such
resistance leads to deal termination. More recent research on bid negotiation has supported
the resistance argument (see Bruner, 1999; Burch, 2001; Holl & Kyriazis, 1997).
The finance literature has also focused on the influence of target shareholder control on pre-
miums. Findings have shown that targets highly controlled by shareholders also achieve higher
premiums. This result suggests that when target shareholders are weak and a target CEO is
strong, one way to entice target CEOs’ approval at a reduced price is for bidders to offer the
CEO a position in the merged firm. However, strong target shareholders appear to intervene in
such transactions and raise premiums (T. Moeller, 2005). Relatedly, the results of additional
studies have shown that targets with short-term institutional shareholders are more likely to
receive an acquisition bid and receive lower premiums. This finding suggests that firms held
by short-term investors hold weaker bargaining positions in acquisitions, which allows man-
agers to proceed with value-reducing acquisitions (Gaspar, Massa, & Matos, 2005).
In contrast to the majority of work in finance focusing on targets, one lone study examined
the influence of national investor protection on premiums. Consistent with the notion that
investor protection can create more active markets for acquisitions, findings showed that
investor protection (quality accounting standards, quality law enforcement, and shareholder
rights) resulted in higher premiums (Rossi & Volpin, 2004). Although this works suggests that
macrolevel factors including national culture may exhibit important influences on premiums,
and perhaps other aspects of acquisitions more generally (Stahl & Voigt, 2008), the area is
underdeveloped and thus presents a fruitful opportunity for future research.
It is interesting that management scholars have focused more on bidders than targets,
specifically their motivations to acquire. Consistent with this notion, indicators of CEO
hubris were highly associated with the size of premiums paid (Hayward & Hambrick, 1997).
As discussed earlier, network ties have been shown to influence premiums such that the

premiums paid by acquirers were related to premiums previously paid by board interlock
partners (Haunschild, 1994). Furthermore, firms tied to other firms with heterogeneous prior
premium experience tended to pay less for acquisitions than those tied to partners with more
homogeneous experience (Beckman & Haunschild, 2002). More recently, Laamanen (2007)
showed that premiums might be higher when target firms’ resources were intangible and that
such intangibles-related premiums did not cause negative abnormal returns. Using acquisi-
tions as a context to study such resource diffusion and learning processes, all three of these
studies suggest the importance of interorganizational knowledge transfer for acquisition pre-
miums, thus pointing to acquisitions as a fertile area for the study of organizational learning.
Turnover. The finance field has drawn primarily on agency theory views to understand the
relationship between acquisitions and governance, and although some management scholars
have likewise employed this perspective, others have studied the governance and leadership
consequences of acquisitions through much more of a resource-based lens. Focusing more on
firm-level, strategic consequences, the management literature has not regarded acquisition-
driven top management turnover as a logical and productive consequence. Instead, building
on Cannella and Hambrick’s (1993) argument that top management team turnover reflects a
loss of firm and industry knowledge, the management literature has viewed top management
turnover as an unintended loss of human resources valuable to the firm. Haveman (1995)
found acquisitions in the financial services industry resulted in increased exit by top managers
in the acquiring firm, especially more senior executives, resulting in a top management team
with reduced average tenure. A number of management studies have found that target firms
experience a higher than normal turnover of top managers (Krug & Hegarty, 1997; Walsh,
1988, 1989). Additional research has indicated that top management turnover in target firms
is moderated by key aspects of acquisitions. Specifically, target firm turnover is higher when
the acquiring firm is foreign (Krug & Hegarty, 1997), when managers perceive significant cul-
tural differences between the acquiring and the target firm (Lubatkin, Schweiger, & Weber,
1999), and when managers view the merger announcement negatively or expect the merger to
have negative long-term professional consequences (Krug & Hegarty, 2001).
There is some evidence as well from the finance literature regarding the consequences of
acquisitions for board members; for instance, Harford (2003) showed that board members of
target firms typically lose their board positions and are often unable to replace them by mov-
ing to other boards. This suggests that there are tangible and reputational costs for board
members of target firms, highlighting a potential misalignment of interests between target
firm shareholders and their representatives, the board of directors.
In addition to executive turnover, scholars have also examined acquisition-related
employee turnover. For example, Fried, Tiegs, Naughton, and Ashforth (1996) found that sur-
viving middle managers’ perceptions of change in job control and postacquisition employee
termination fairness had important implications for subsequent commitment to work and
intentions to leave. Consistent with synergy and market for corporate control arguments,
O’Shaughnessy and Flanagan (1998) found that layoffs were more likely when acquisitions
combined related firms and when target firms were less efficient relative to industry peers. In
a more fine-grained analysis, Iverson and Pullman (2000) distinguished between the drivers
of voluntary versus involuntary turnover after acquisitions. Using a hospital industry sample,

they found that younger and white-collar workers were more likely to voluntarily leave after
an acquisition, whereas employees who were older, were blue-collar, and felt they received
less support from their coworkers were more likely to be laid off after an acquisition.
Combined, this work indicates that acquisitions often have negative implications for employees
but that certain classes of employees disproportionately perceive these consequences.
Customer and bondholder outcomes. The finance literature has also focused on the effect
of acquisitions on customers and bondholders. For example, A. N. Berger, Saunders, Scalise,
and Udell (1998) examined changes in lending to small business customers after bank acqui-
sitions. They found evidence that acquisitions led to reduced lending by acquiring banks but
that this reduction in lending was filled by increased lending by competing banks. They con-
cluded that acquisitions did not appear to have negative effects on this category of customers.
Looking more directly at acquisition effects on particular borrowers, Karceski, Ongena, and
Smith (2005) found that, in reaction to bank acquisition announcements, borrowers of target
banks experienced negative stock returns whereas borrowers of the acquiring bank experi-
enced positive stock returns. They concluded that the market reaction is negative for target
bank borrowers, as these borrowers often switch banks after acquisitions and often incur sig-
nificant switching costs when doing so. Thus, the research suggests that acquisitions, at least
in the banking market, have limited, if any, negative consequences for customers in an aggre-
gate sense, but particular customers of target firms often suffer economic harm.
Finance scholars have also examined the effect of acquisitions on the bondholders of
acquiring and target firms, finding somewhat inconsistent results. In a general sample
of acquisitions, Billet, King, and Mauer (2004) found that the returns to bondholders of
acquiring firms were negative in response to acquisition announcements but that the returns
for target firm bondholders were positive—particularly when target firms’ bonds were
below investment grade. In a more focused sample of acquisitions in the banking industry,
Penas and Unal (2004) found positive returns to both acquiring and target firm bondhold-
ers. Although these findings provide some support that acquisitions reduce risk to bond-
holders, primary beneficiaries appear to be target bondholders.
After our review of the research of nonfinancial performance outcomes, we come to two
conclusions. First, acquisition premiums are underused in acquisitions research. More specifi-
cally, under the assumptions that acquiring firms attempt to pay the lowest premium possible
while concurrently deterring competing offers (Asquith, 1983; Bradley et al., 1988; Malatesta
& Thompson, 1993) and that the majority of the value of a target is reflected in its stock price
(Haunschild, 1994), we argue that acquisition premiums offer an effective proxy for managers’
strategic intentions, in that high premiums indicate both managers’ motivations to acquire and
their confidence in their abilities to extract value from the acquisition. Second, we surmise that
the effect of acquisitions on stakeholders other than shareholders (i.e., employees, customers,
rivals) has not been sufficiently examined, and thus, this area is ripe for future work.
Future Research Directions
Collectively, the management, finance, economics, sociology, and accounting literatures

have employed a rich and diverse set of methodologies to examine acquisition phenomena.

Although this work has uncovered numerous notable findings, few attempts to synthesize
these insights across fields have emerged. Therefore, we turn attention to several opportuni-
ties for scholars to advance the understanding of acquisitions. Our suggestions for future
research are not intended to be exhaustive, but rather, they represent our perceptions of the
most impactful directions management scholars can pursue.
Antecedents
Although scholars have identified many acquisition antecedents, it remains unclear which
antecedents are primary, secondary, or tertiary triggers or how these factors may jointly oper-
ate on acquisition behavior. It is interesting that even the most basic questions remain unan-
swered: For example, are acquisitions driven more by a genuine profit motive (market power,
efficiency, asset redeployment, market discipline) or by managerial self-interest (hubris,
empire building to justify increased compensation)? We realize that empirical research is
reductionist by design, so we are not surprised that many individual factors that drive acqui-
sition behavior have been isolated. However, because multiple drivers have already been
determined, we suggest that, at this stage, the field might benefit from developing a deeper
understanding of the relative importance of, and contingency conditions associated with,
those established drivers.
We also see value in more fully examining the influence of governance mechanisms on
acquisition behavior. As noted earlier, executive compensation is but one facet of corporate
governance. A simplifying assumption underlying the agency theory perspective is that
shareholders hold homogenous profit maximization interests. Also assumed is that large
shareholders fulfill external monitoring roles and, furthermore may initiate takeovers or
other activist measures, to discipline ineffective management (Shleifer & Vishny, 1997).
Nevertheless, evidence shows that large shareholders often seek opportunistic interests and
can have heterogeneous interests and objectives, which may or may not align with the goals
of other shareholders (Claessens, Djankov, Fan, & Lang, 2002; La Porta, Lopez-De-Silanes,
Shleifer, & Vishny, 2000; Shleifer & Vishny, 1997). Furthermore, in the United States, recent
years have witnessed the emergence of powerful and active minority shareholders, such as
rapidly growing hedge funds or activist investors, who often seek to pressure managers into
transactions (e.g., acquisitions or divestitures) that hold benefit for them yet, arguably, are
not always in the best interests of the broader shareholder base (Anabtawi, 2006).
Paralleling these issues are those related to choices between the antecedents of IPOs and
acquisitions as value creation vehicles. We have noted the burgeoning literature on acquisitions,
and there is similar growth in attention to the antecedents of IPOs. And although executives and
other stakeholders like investment firms increasingly make tradeoffs between taking a business
public and finding a strategic buyer and sometimes “tee up” a future acquisition by taking a firm
or business unit public, rarely do we see these topics linked in academic studies (Reuer & Shen,
2003). As noted earlier in our review, recent work (Field & Karpoff, 2002) suggests that there
is a relationship between what IPO managers do following an offering and subsequent acquisi-
tion, but beyond this very general understanding, we know little about how tradeoffs between
IPO and acquisition as value creation vehicles are managed or staged.

Collectively, these factors give rise to this question: How are changing trends in corporate gov-
ernance regulation, shareholder demographics, and shareholder activism—labeled the move
toward “shareholder democracy” (Anabtawi & Stout, 2008)—affecting decisions around when
and if to acquire? Scholars have only begun to examine how the governance structures of
acquiring firms influence whether managers enrich shareholders or themselves by growing the
firm through acquisitions (Kroll et al., 1997). For instance, Kroll, Walters, and Wright (2008)
found that vigilant boards rich in relevant experience were associated with superior acquisition
outcomes. Thus, we encourage research that more fully examines the role of ownership and
board structure in acquisition behavior and performance, as well as in moderating the rela-
tionship between incentives and acquisition decisions and the costs of such remedies.
Consequences of Acquisitions
Barkema and Schijven (2008b) argued that although acquisitions are often treated as
independent events, most are actually a component of a broader acquisition strategy, and
such broad acquisition strategies are more likely to require significant sequential organiza-
tional restructuring to more fully realize benefits from multiple acquisitions. Following this
argument, they demonstrated that the performance implications of a single acquisition are
dependent on that acquisition’s position within the acquirers’ acquisition sequence. Thus,
accounting for postacquisition integration as a long-term process rather than a “one-shot
game” can reveal acquirer gains that are often overlooked when examining single acquisi-
tion events (Barkema & Schijven, 2008b: 715). Accordingly, to develop a deeper under-
standing of the consequences of acquisitions, we urge greater attention to the processes that
acquirers use to seize value from acquisitions. Specifically, we encourage future research
that explores the processes that foster effective integration and how the dynamics among
acquiring firms’ top managers and between the acquiring and target top management teams
influence acquisition implementation success. For example, we suggest that resource-based
and organizational learning perspectives might inform our understanding of the specific
internal capabilities, cultures, and decision processes that allow acquirers to realize value
from acquisitions and how this process may vary as a function of intended strategy (e.g.,
King et al., 2008; Uhlenbruck et al., 2006). In short, there is much to learn about the imple-
mentation of acquisitions, especially about how firms integrate, transfer, and manage the
resources of the combined firm, which underscores the need for greater focus on acquisi-
tion implementation in general.
We also recommend that researchers focus on deepening our knowledge of several outcomes
of interest. For example, little is known about how acquisitions affect rival firms in the market.
Some evidence indicates that the market bids up the value of other firms in the industry
in response to acquisition announcements (Song & Walkling, 2000), but we know little of the
long-term consequences for these firms. For example, horizontal acquisitions may lead to indus-
try consolidation and reduced commitment to and from existing customers of target firms
(A. N. Berger et al., 1998), which in turn may create growth opportunities for survivors.
Therefore, the field could benefit by research that uncovers when and how acquisitions create
market opportunities for, and alter the capabilities of, remaining firms.

In addition, the market, and thereby the acquisition literature, often views an acquisition
and subsequent divestiture as a failure of management to reap value from the transaction
(cf., Capron, Mitchell, & Swaminathan, 2001). This perspective ignores the existence of
information asymmetries between managers and the market and gives little consideration to
any intervening restructuring. Thus, there is potential value in examining whether, how, and
under what conditions firms can extract valuable resources from acquisitions, even if target
assets are subsequently divested. Relatedly, restructuring also often leads to the divestiture
of capital assets, product lines, and businesses that are considered to be strategic misfits, and
thus, restructuring creates acquisition opportunities for rivals. Therefore, in addition to even-
tual consequences of acquiring, we suggest that scholars give greater attention to divestitures
as antecedents to acquisitions.
As our review showed, some research has shed light on employment and human capital con-
sequences of acquisitions for target managers and employees, yet we suggest there is still much
to learn. For example, acquisitions often initiate turnover of target firm managers and the loss of
other human capital from the newly combined entity. It is interesting that although finance
scholars have often viewed executive turnover as a natural and beneficial consequence of the
market for corporate control (Agrawal & Walkling, 1994), management scholars have suggested
such turnover results in losses of important knowledge resources (Cannella & Hambrick, 1993).
Specifically, such losses can present industry rivals with opportunities to acquire experienced
resources and, perhaps more important, tacit knowledge that holds the potential to enhance
firms’ capabilities and competitive positions (Cannella & Hambrick, 1993). We see a clear
opportunity to reconcile these competing views by examining the consequences of managerial
turnover on market growth, innovation, and firm performance, as well as opportunities to build
contingent arguments on when such turnover is beneficial and when it is detrimental.
We also suggest there is value in developing greater knowledge regarding how acquisi-
tions affect various stakeholder groups and competitors. First, the evidence to date offers
somewhat inconsistent consequences for the bondholders of both the target and the acquir-
ing firm (Billet et al., 2004; Penas & Unal, 2004). Thus, opportunities exist for additional
studies examining how acquisitions influence firms’ creditors—for example, when bond-
holders benefit and when they lose. Also, the consequences of acquisitions for the customers
of the acquiring and target firms remain somewhat unclear, particularly outside of the bank-
ing industry (A. N. Berger et al., 1998; Karceski et al., 2005). We believe the consequences
to customers and other stakeholders are likely to be influenced by the type of acquisition, the
level of industry concentration before and after the acquisition, the level of differentiation in
product or service offerings in the industry, and the barriers to entry to the market. Therefore,
the effects of acquisitions on a broad range of stakeholders are another important dimension
of acquisition research in need of further study.
Finally, our review shows that an understanding of how acquisitions affect the membership,
compensation, and behavior of the board of directors is underdeveloped. Several possible
questions arise in this area: Do acquisitions allow firms to attract different, and possibly more
prestigious or capable, board members? How do acquisitions that result in combined boards
influence the communication patterns, interpersonal dynamics, and information content shared
within boards? Do board members receive higher and, possibly, less performance-sensitive
compensation packages after acquisitions, as top managers of the firm have experienced? In

short, we see important unanswered questions regarding how acquisitions influence the func-
tioning of boards as well as the effectiveness of these boards in representing shareholders.
In sum, although there are many influences on acquisition decisions and outcomes, we
still have yet to clearly determine the relative importance of each of these factors. Moreover,
there is much to learn regarding under what conditions particular factors have greater effects
than others. Although there is merit in continuing to search for factors that drive acquisition
activity, or lead to superior performance, we argue that it is also important to more deeply
assess the relative merits of established factors and to more clearly understand their relative
effects on acquisition decisions and outcomes.
Measurement Issues
Our review of the acquisition literature also identified a number of measurement issues.
First, research suggests the role of time exhibits important influences on study results. In par-
ticular, as noted earlier, research on merger waves shows that investor sentiment toward
diversification has changed significantly over time (e.g., Matsusaka, 1993). In a related vein,
whereas many studies reviewed examined abnormal returns over short (2- to 4-day) windows
around announcement, others examined long-term abnormal returns or accounting measures
that stretched from 36 to 60 months. Therefore, time might potentially exhibit a contributing
influence on research findings, which results in the equivocal nature of many of the areas we
reviewed. As a result, we encourage research that develops a better understanding of the
influence of time on the acquisition process.
Second, the vast majority of acquisition research has focused on larger, publicly traded U.S.
corporate entities, using mainly quantitative archival data. To a large degree, archival-based
methodologies are a consequence of data availability; however, although such methods have
provided scholars with valuable insights into the antecedents and consequences of acquisitions,
they limit scholars’ abilities to get “inside” the phenomenon. Furthermore, such data can render
findings prone to local biases and interpretation, which stands out in stark contrast to the reality
of globalizing markets. To overcome these limitations, we did find some studies that focused in
great depth on one particular event (e.g., Bruner, 1999; Chakravarty & McConnell, 1999;
Kaplan, 1994; Lys & Vincent, 1995) or a small set of acquisitions (Larsson & Finkelstein, 1999).
We suggest that where appropriate (i.e., integration and process-related studies), management
scholars consider these and other alternative approaches, including in-depth interviews, case
study techniques (Graebner & Eisenhardt, 2004; Yin, 1984), grounded theory development
(Strauss & Corbin, 1990), and surveys and laboratory studies (e.g., Pablo, 1994; Westphal, 1999;
Westphal & Zajac, 1995; Zajac & Westphal, 1996) to develop a deeper understanding of the cog-
nitive and behavioral decision-making processes that form the basis for acquisition behavior
and, ultimately, affect acquisition outcomes. We also encourage a broadening of scope to incor-
porate the richness of knowledge available in other regions of the world.
Third, a majority of acquisition research operates explicitly or implicitly through an
agency theory lens (cf., Jensen & Meckling, 1976). Given agency theory’s focus on share-
holder wealth creation, it is not surprising that short-term abnormal market return around
acquisition announcement remains the most commonly used performance metric in both

finance and strategic management. We note that cumulative abnormal returns (CARs) around
acquisition announcement dates reflect investors’ responses to the announcement of an
acquisition, based on present expectations about the future cash flows of a combined firm
(i.e., bidder + target). Under the assumption of an efficient market, many scholars consider
abnormal returns as the most effective technique to measure acquisition performance, par-
ticularly as the results of some studies have led scholars to propose that the market has some
ability to predict postacquisition performance (Asquith, 1983; Cornett & Tehranian, 1992;
Healy et al., 1992; Kaplan & Weisbach, 1992). A primary advantage of event studies using
short-window CARs is that changes in stock price can be attributed to the acquisition
announcement with relative confidence by minimizing “noise” from other potentially con-
founding variables. Nevertheless, the emergence of abnormal returns as the seemingly
“default” measure of acquisition performance notwithstanding, it is not a perfect measure.
Specifically, although markets predict future cash flows of combined firms, markets are not
omniscient. Thus, event study methodology primarily assesses the potential value seen in the
decision to acquire (i.e., strategy formulation) but is less likely to incorporate the value cre-
ated or destroyed during the implementation of the acquisition (i.e., strategy implementation).
Given this concern, some scholars have argued for longer term performance metrics, such
as annual buy and hold returns (Loughran & Vijh, 1997) or accounting measures (e.g.,
Agrawal & Jaffe, 2003; Agrawal et al., 1992; Cornett & Tehranian, 1992; Healy et al., 1992;
Krishnan et al., 1997; Porrini, 2004; Ramaswamy, 1997; Rau & Vermaelen, 1998; Zollo &
Singh, 2004). However, given their distal natures, longer term measures also present chal-
lenges, as changes in product mix, investment decisions, and other actions can exhibit poten-
tial confounding effects on firm performance. In principle, longer term measures, such as
longer window abnormal returns and accounting-based methods, can allow for the assessment
of actual implementation. However, in practice, because confounding events outside of the
acquisition may produce significant “noise,” acquisitions can be a relatively “weak signal” on
longer term accounting-based and market-based measures. That is, whereas accounting-based
measures allow for a general assessment of firm performance, they are not always capable of
providing a specific assessment of a particular acquisition’s effect on firm performance.
To more effectively measure acquisition performance during and after implementation
efforts, a better alignment in the matching of acquisition performance measures with the
subjects of analyses and the questions of interest seems warranted. To advance this process,
we encourage future research that develops a more comprehensive and complete theoretical
and empirical framework to guide researchers’ choice of appropriate performance measures.
In a similar vein, we note that the general label acquisition performance is not specific
enough to convey the dimension of performance being studied. We encourage scholars to be
more precise in describing what construct is actually being measured and used to eventually
test a theory, rather than labeling it generically as acquisition performance. Such precision
will help to integrate the results of work across fields such as finance, where CAR is the
dominant measure of performance, and management, where a range of stock market,
accounting, and other performance outcomes are employed. The performance construct
measured by announcement CARs, for instance, would be labeled something akin to short-
term market response to acquisition announcements, as it gauges a stock’s upward or down-
ward movement over a short time frame. Similarly, survey data representing managers’

perceptions of acquisition processes or outcomes might be labeled managers’ retrospective

assessment of acquisition performance.
Importantly, we also encourage the use of a broader set of acquisition performance mea-
sures beyond CARs and accounting-based returns. For example, acquisition premiums
appear to be an appropriate measure of managerial motivation and, hence, may be used to
assess managerial intentions associated with acquisitions. Divestitures also appear to hold
potential as a measure of long-term performance based on the assumption that when a firm
divests an acquisition within a short window after the acquisition (e.g., 3 to 5 years), this
implies poor acquisition performance. Although divestiture assessment may also have flaws
(e.g., firms may divest for a profit, divestitures are difficult to track), this may be an
approach to effectively assess long-term acquisition performance. Finally, and perhaps
most important, because there is no perfect measure of acquisition performance, we coun-
sel tolerance. Specifically, we encourage reviewers not to react negatively and dogmatically
to any one measure of acquisition performance but instead to allow scholars assessing
acquisitions to use various methods if they are well justified. The use of a broad set of meth-
ods and measures will add to a fuller understanding of acquisition behavior across studies.
Fourth, some research reviewed also showed that sample composition (e.g., targets vs.
bidders, large vs. small firms, public vs. private firms) affects the results of acquisition stud-
ies. However, we found considerable differences in the subjects of studies and the criteria
used to select other important study parameters. Given that sampling differences have been
argued to contribute to the mixed findings inherent in acquisition performance research (see
Franks, Harris, & Titman, 1991), a more complete understanding of the role of such factors
in acquisition research appears prudent. At the very least, sampling differences create
research opportunities regarding the generalizability of results from one setting to another.
One such example was provided recently by Anand, Capron, and Mitchell (2005), who
showed that cross-border acquisition is more likely to create value than within-country
acquisition, suggesting an important value creation contingency to be explored in future
acquisition research. Similarly, Capron and Shen (2007) found that returns to acquiring firms
varied as a function of both target choice (public vs. private) and other acquisition–target
search-related factors.
Finally, our review shows that the management and finance areas account for the major-
ity of acquisition-related research. However, these two disciplines often approach this
research with divergent perspectives and objectives (Lane, Cannella, & Lubatkin, 1999).
Whereas management scholars focus chiefly on theoretical extension and development,
typically using acquisitions as a research context, finance researchers emphasize empirical
rigor and descriptive statistics, as method sections exhibit significant attention to sensitiv-
ity analyses. Ultimately, these two groups are placing respective page-length emphasis on
two sides of the same coin—theoretical context and empirical context—and the resulting
common ground does not seem much in evidence, in terms of cross-citations. We believe
that the individual fields, and the field of management in general, can benefit from a greater
focus on cross-disciplinary integration that synthesizes multidisciplinary contributions and
methodologies into future research.

Notes
1. Although acquisition behavior has been discussed in other literature reviews, it has typically been consid-
ered as a secondary facet of some larger subject. Acquisitions have been included as part of reviews of other con-
structs, such as turnarounds and organizational change (Armenakis & Bedeian, 1999; Brauer, 2006; Johnson,
Daily, & Ellstrand, 1996; Pearce & Robbins, 1993), diversification (Hitt, Tihanyi, Miller, & Connelly, 2006;
Hoskisson & Hitt, 1990; Ramanujam & Varadarajan, 1989), executive compensation (Devers et al., 2007; Gomez-
Mejia & Wiseman, 1997), and human resource practices (Danna & Griffin, 1999; Fisher, 1989; Wright & Boswell,
2002). In contrast, we focus directly on acquisitions.
2. Selected journals are as follows: management: Academy of Management Journal, Administrative Science
Quarterly, Journal of Management, Organization Science, and Strategic Management Journal; finance: Journal of
Finance, Journal of Financial Economics, and Journal of Financial and Quantitative Analysis; accounting: Accounting
Review, Journal of Accounting & Economics, and Journal of Accounting Research; economics: American Economic
Review, Journal of Economic Perspectives, and Rand Journal of Economics; and sociology: American Journal of
Sociology and American Sociological Review.
3. We use our larger sample of 310 articles to get as broad a perspective as possible on the evolution of acquisition
interest.
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Keywords: acquisitions; mergers; mergers and acquisitions

*Corresponding author: Tel.: 951-827-3608.

E-mail address: john.haleblian@ucr.edu

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Global investment in mergers and acquisitions (hereafter referred to simply as acquisitions)

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Given the practical and theoretical importance of acquisitions, it is surprising that no

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92-93 94-95 96-97 98-99 00-01 02-03 04-05 06-07

Management Finance Accounting

Antecedents: Why Do firms Acquire?

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Managerial Self-Interest (Value Destruction)

Compensation. A number of finance and management scholars have demonstrated important

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scholars were the first to propose CEO hubris—exaggerated self-confidence—as an

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Network ties. Building on network ties research, originally developed by Granovetter

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Moderators of the Acquisition–Performance Relationship

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stock ownership led to acquisition performance or acquisition performance led to increased

Managerial experience and cognition/personality. The characteristics of managers have also

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Other Acquisition Outcomes

In addition to acquisition performance, a smaller number of studies have examined other

Acquisition premium. In general, an acquisition premium is measured by the difference

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Future Research Directions

Collectively, the management, finance, economics, sociology, and accounting literatures

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perceptions of acquisition processes or outcomes might be labeled managers’ retrospective

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