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Management practices and M&A success

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Article number106355
<mark>Journal publication date</mark>31/01/2022
<mark>Journal</mark>Journal of Banking and Finance
Volume134
Number of pages17
Publication StatusPublished
Early online date8/11/21
<mark>Original language</mark>English

Abstract

We study whether management practices determine merger and acquisition (M&A) success. We model management as an unobserved (latent) variable in a standard microeconomic model of the firm and derive firm-year management estimates. We validate these estimates against benchmark survey data on management practices and by using Monte Carlo simulation. We show that our measure is among the most important determinants of value creation in M&A deals, substantially increasing the predictive power of models that explain cumulative abnormal returns. Thus, we offer a measure of management practices that identifies the best-performing M&As. Our results are robust to the inclusion of acquirer fixed effects and many control variables, and to several other sensitivity tests. We identify the Q-theory as the key mechanism driving our results.