ABSTRACT
This chapter reviews the measures used in the prior literature on the post-takeover operating performance of merging firms and analyses possible biases inherent in these measures. It finds that the operating cash flow measures preferred in the recent merger literature make various accounting adjustments that are predominantly responsible for the general findings of improvements in operating performance. The chapter then employs a comprehensive set of earnings and cash flow measures to assess the economic impact of a sample of large takeovers. Instead of improvements in performance after mergers the majority of the measures suggest significant declines in operating performance. By comparing the various performance metrics the study illustrates the magnitude of the accounting biases in various earnings and cash flow measures.
