Productivity, restructuring, and the gains from takeovers

This paper investigates how takeovers create value. Using plant-level data, I show that acquirers increase targetsʹ productivity through more efficient use of capital and labor. Acquirers reduce capital expenditures, wages, and employment in target plants, though output is unchanged. Acquirers improve targetsʹ investment efficiency through reallocating capital to industries with better investment opportunities. Moreover, changes in productivity help explain the merging firmsʹ announcement returns. The combined announcement returns are driven by improvements in targetʹs productivity. Targets with greater productivity improvements receive higher premiums. These results provide some first empirical evidence on the relation between productivity and stock returns in takeovers.