What Do Economic Value Added of Acquiring Firms Tell Us?

Using a cross-sectional logistic regression model and economic value added index, this paper explores the motive and value creation of mergers and acquisitions. The results indicate that an increase in market value and economic value added will increase a firm´s likelihood to engage in takeover transactions because of high level of managerial ability and low agency cost, while increasing in asset-liability ratio will decline the possibility of acquiring because of financial constraints and financial risk. The results also suggest that the firms which stock has been overvalued are more like to execute a mergers and acquisitions transaction. The stock reaction of mergers and acquisitions has positive impact in a short period of time, while the economic value added of acquirers drop sharply after mergers and acquisitions transactions.