The Reputational Consequences of M&As

Abstract

In this study we theorise and test the mechanism through which mergers and acquisitions (M&As) affect the corporate reputation of acquiring firms. We theorise two channels – the outcome- and the intention-based channel. Further we argue that the announcement returns of M&As provide stakeholders with the outcome cues to make reputation judgements, and that M&As’ deal characteristics signal the acquirers’ intentions. Hence, the corporate reputation of acquiring firms will be enhanced if the acquisition outcomes or signalled intentions coincide with the stakeholders’ interests. By conducting a content analysis on news articles, we produce firm-level reputation indexes based on the tone of news related specifically to the analyst comments. The empirical results largely support the hypotheses. We find that announcement returns are positively related to the corporate reputation of acquiring firms following the acquisition announcements. We also find that diversifying deals and acquisitions with a relatively larger size are likely to generate reputation gains for acquirers. As such, this study develops the reputation antecedent research, moreover, provides a more balanced assessment for M&A success by investigating the “soft” (i.e. reputational) consequences of M&As.