ARTICLE | Journal of Financial and Quantitative Analysis | Vol. 59, 2024

Abstract

Announcements of mergers where the target is offered stock very often discuss the impact of the deal on the acquirer’s earnings per share (EPS), especially when the deal is EPS-accretive for the acquirer. In this paper, we document that the acquirer’s EPS-sensitivity affects how deals are structured, the premium that is paid, and the types of deals that are done. We provide evidence that acquirer managers prefer to do EPS-accretive deals when (a) shareholder approval is required for deals (b) institutional investor horizon is shorter, and (c) managers’ compensation is tied to EPS. Our results suggest that the relative popularity of deals financed in cash since early 2000 could be a consequence of acquirers’ EPS-sensitivity and low value-multiple acquirers pursuing high value-multiple targets.