Measuring the Quality of Mergers and Acquisitions.

This article develops and empirically validates a novel measure of merger and acquisition (M&A) deal quality called implied return-on-equity improvement (IRI), grounded in accounting theory. IRI quantifies the minimum post-acquisition improvement in the target's return on equity (ROE) that the acquirer must achieve to break even on the acquisition price. Using a large U.S. sample from 1980 to 2018, the study finds that high IRI values are generally unattainable ex post and predict significantly worse acquirer financial performance, including lower ROE growth, higher operating costs, tighter financial constraints, reduced investments, and more frequent goodwill impairments. The research links high IRI to managerial overconfidence, incentive misalignment, and difficulty in estimating synergies, suggesting that overpayment and overestimation of synergies drive poor post-M&A outcomes. The measure's theoretical foundation, ease of computation, and incremental predictive power over existing deal characteristics make IRI a useful ex ante tool for managers and investors assessing M&A quality.