This thesis examines if there is an association between EPS accretion and announcement returns to acquiring firms. The motivating factors are perception among managers about the importance of EPS accretion and the inconclusive evidence in the literature. This study is the first empirical assessment of the market reaction to EPS accretion which separates the total EPS accretion into accretion due to synergies (synergy accretion) and accretion due to deal structuring (accounting accretion).
Using event study methodology, this thesis finds results consistent with the hypothesis that EPS accretion signals how 'good' a deal is. In addition, the multiple regression model explains the announcement returns to acquiring firms better when the total EPS accretion is segregated into synergy and accounting accretion. When synergy and accounting accretion are both incorporated into the model, the association between accounting accretion and announcement returns to acquiring firm becomes more economically significant than previously thought. This indicates that prior studies may have suffered an omitted variable problem. Interestingly, the price reaction to synergy and accounting accretion vary across different financing structures. Although there is a positive association between synergy accretion and announcement returns to acquiring firms in both cash and stock deals, the association between accounting accretion and announcement returns to acquiring firms IS more important in stock deals than in cash deals.
The practical implication is that managers of acquiring firms, acting in the best interests of the shareholders, should bear in mind EPS accretion when considering M&A opportunities.