The impact of accounting-based operating inefficiency on the aftermarket acquisition of an IPO firms

What is it about?

Based on the survival analysis, this study finds strong empirical evidence that the probability of acquisition is increased significantly when the IPO is inefficiently managed, measured by lower ratios of cash flow from continuing operations. When we compare the cash flow measures to conventional accrual assessments of operating inefficiency, we find that the accrual measures are not significant, while the cash flow measures maintain their significance. Moreover, our findings support the “inefficient management rationale” for acquisition.

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Why is it important?

This study reveals that the likelihood of an acquisition increases when IPO firms as target firms are inefficiently managed.