Profitability of Corporate Acquisitions and the Acquisition Premium Open Access
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This study examines whether corporate acquisitions create synergistic gains in the form of post-acquisition abnormal operating performance and whether the acquisition premium is associated with post-acquisition operating performance. By disentangling the purchase accounting effect, I propose an unbiased cash flow performance measure to be used consistently over the pre- and post-acquisition periods. Using the unbiased performance measure and difference-in-difference approach, I reconcile the conflicting results from prior studies (Healy, Palepu, and Ruback, 1992; Ghosh, 2001) and document evidence that the merged firms show an increase in post-acquisition operating cash flow performance in comparison with the control firms matched by pre-acquisition performance. I also find that the size of goodwill varies directly with post-acquisition operating performance, suggesting that acquiring firms which pay higher acquisition premium experience a higher cash flow return following the corporate acquisition.