Accounting Profitability and Takeover Likelihood

This study examines the association between accounting profitability and takeover likelihood of a firm. Takeover likelihood is negatively associated with negative industry-adjusted ROA, and is positively associated with positive industry-adjusted ROA. The negative association is consistent with Palepu’s (1986) argument that acquirers can unlock more value in firms with poorer performance through efficient management. The positive association among firms with above industry average profitability is consistent with the opportunistic behavior of acquirers’ management. The positive association is more (less) pronounced when the personal benefits (costs) of acquisition to acquirers’ management is greater.