Prediction Model of Post-merger Performance

Abstract

This study develops a comprehensive model describing the post-merger performance of a combined firm based on a fundamental ROE equation. The model suggests that post-merger performance is an exponential function composed of relative size, price to book ratio, synergy, cost of equity and book value change, rather than a simple linear combination of factors. In addition, the model addresses relative size effect, market valuation effect, premium, and merger wave, which are consistent with previous studies. Empirical tests are also provided to show the effectiveness of the model for measurement of the post-merger performance.