The EPS Myopia Hypothesis and Post-Merger Market Performance of Acquiring Firms

Abstract

This study examines the effect of EPS “myopia” on the abnormal returns of acquiring firms in mergers. Earnings per share myopia may be defined as a disproportionate emphasis or fixation on the immediate postmerger impact of a merger on earnings per share as opposed to a consideration of longer-term consequences. The near-term emphasis is on avoiding dilution at a minimum, and, more optimally, on creating earnings accretion. These outcomes are often accomplished through the use of P/E ratio differentials between the participating firms and the use of pooling of interests accounting. The results of this research indicate a statistically significant negative relationship between mergers that have a high immediate impact on EPS and the stock market performance of the acquiring firm 24 to 36 months after the merger.