THE IMPACT OF MANAGERIAL ABILITY OF ACQUIRING FIRMS ON LONG-RUN OUTCOMES OF MERGERS AND ACQUISITIONS

Abstract

This study investigates the impact of managerial ability of acquiring firms, quantified by a new measure developed by Demerjian et al. (2012), on the long-run outcomes of mergers and acquisitions (M&As). I examine two long-run outcomes of M&As: 1) divestiture due to performance-related reasons; and 2) change in operating cash flow margins relative to sales. Using a sample of 451 acquisitions in the U.S. between 1980 and 2005 which I divide into quintiles, I find that the frequency of divestitures due to unsuccessful acquisitions is significantly reduced for firms with above-average acquirer managerial ability. Similarly, only these firms demonstrate significant acquisition-related improvements in their relative cash flow margins post-M&A. Overall, this indicates that higher managerial ability of acquirers is associated with an improvement of long-run M&A outcomes across the quintiles. However, this relation is only significant when acquirer managerial ability is above average.