Skip to main content

Organization Capital and Mergers and Acquisitions

  • Kai Li, Buhui Qiu and Rui Shen

Using a sample of completed U.S. acquisition deals over the period 1984–2014, we find that acquirer organization capital as measured by capitalized selling, general, and administrative (SG&A) expenses is associated with superior deal performance. We show that high organization-capital acquirers achieve significantly higher abnormal announcement period returns, and better post-merger operating and stock performance, than low organization-capital acquirers. Additional tests suggest a causal relation between acquirer organization capital and deal performance. We further show that post-merger, high organization-capital acquirers cut more on the cost of goods sold, invest more in SG&A expenses, and achieve greater asset turnover and innovative efficiency.

Corresponding author
* Li (corresponding author),, University of British Columbia Sauder School of Business; Qiu,, University of Sydney Business School; and Shen,, Nanyang Technological University Nanyang Business School.
Hide All

We thank Kenneth Ahern, Bruce Carlin (the referee), Ming Dong, Marion Dupire-Declerck, Espen Eckbo, Andrea Eisfeldt, Wayne Ferson, Xian Gu, Jarrad Harford, Jerry Hoberg, Martin Jacob, Andrew Karolyi, Simi Kedia, Jin-Mo Kim, Bart Lambrecht, Paul Malatesta (the editor), Alberto Manconi, Harold Mulherin, Jeff Netter, Georgios Papanastasopoulos, Graham Partington, Neil Pearson, Gordon Phillips, Elena Pikulina, Luc Renneboog, Terry Walter, Jin Wang, Fangming Xu, Ting Xu, Pradeep Yadav, Hongjun Yan, Feng Zhang, and seminar participants at the Cheung Kong Graduate School of Business, Chinese University of Hong Kong, Erasmus University Rotterdam, Hong Kong University of Science and Technology, Nanyang Technological University, Rutgers University, Shanghai University of Finance and Economics, Singapore Management University, University of Amsterdam, University of Bristol, University of Georgia, University of Groningen, University of Illinois at Urbana–Champaign, University of Southern California, University of Sydney, PBC School of Finance, Peking University, Tilburg University, Tsinghua University, VU University Amsterdam, WHU – Otto Beisheim School of Management, and York University, and conference participants at the 2014 Center for the Economic Analysis of Risk (CEAR) Conference on Corporate Control Mechanisms and Risk, the 2014 Belgium Financial Research Forum, the 2014 European Accounting Association Annual Meetings, the 2016 Edinburgh Corporate Finance Conference, and the 2016 Financial Management Association Asia Pacific Conference for helpful comments. We also thank our research assistants Alice Guo, Julie Shin, Ting Xu, Tan Ren Xuan, and Nicholas Yoong. Li acknowledges financial support from the Social Sciences and Humanities Research Council of Canada, the Undergraduate International Student Research Assistant Program at the University of British Columbia, and the Sauder School of Business Bureau of Asset Management. All errors are our own.

Hide All
Anand, B.; Collis, D.; and Hood, S.. “Danaher Corporation.” Harvard Business School Case 708-445 (2011).
Andrade, G.; Mitchell, M.; and Stafford, E.. “New Evidence and Perspectives on Mergers.” Journal of Economic Perspectives, 15 (2001), 103120.
Arrow, K.The Economic Implications of Learning by Doing.” Review of Economic Studies, 29 (1962), 155173.
Atkeson, A., and Kehoe, P.. “Modeling and Measuring Organization Capital.” Journal of Political Economy, 113 (2005), 10261053.
Banker, R. D.; Huang, R.; and Natarajan, R.. “Equity Incentives and Long-Term Value Created by SG&A Expenditure.” Contemporary Accounting Research, 28 (2011), 794830.
Becker, G. Human Capital: A Theoretical and Empirical Analysis, with Special Reference to Education, 3rd ed. Chicago, IL: University of Chicago Press (1993).
Bena, J., and Li, K.. “Corporate Innovations and Mergers and Acquisitions.” Journal of Finance, 69 (2014), 19231960.
Berk, J.; Stanton, R.; and Zechner, J.. “Human Capital, Bankruptcy, and Capital Structure.” Journal of Finance, 65 (2010), 891926.
Bessembinder, H., and Zhang, F.. “Firm Characteristics and Long-Run Stock Returns after Corporate Events.” Journal of Financial Economics, 109 (2013), 83102.
Betton, S.; Eckbo, B. E.; and Thorburn, K.. “Corporate Takeovers.” In Handbook of Corporate Finance: Empirical Corporate Finance, Vol. II, Eckbo, B. E., ed. Amsterdam, The Netherlands: Elsevier/North-Holland (2008), 291429.
Black, S. E., and Lynch, L. M.. “Measuring Organization Capital in the New Economy.” In Measuring Capital in the New Economy, Corrado, C., Haltiwanger, J., and Sichel, D., eds. Chicago, IL: University of Chicago Press (2005), 205236.
Bloom, N.; Sadun, R.; and Van Reenen, J.. “Americans Do IT Better: US Multinationals and the Productivity Miracle.” American Economic Review, 102 (2012), 167201.
Bloom, N., and Van Reenen, J.. “Measuring and Explaining Management Practices across Firms and Countries.” Quarterly Journal of Economics, 122 (2007), 13511408.
Brav, A.; Geczy, C.; and Gompers, P.. “Is the Abnormal Return Following Equity Issuances Anomalous?Journal of Financial Economics, 56 (2000), 209249.
Brown, E., and Kaufold, H.. “Human Capital Accumulation and the Optimal Level of Unemployment Insurance Provision.” Journal of Labor Economics, 6 (1988), 493514.
Capron, L., and Pistre, N.. “When Do Acquirers Earn Abnormal Returns?Strategic Management Journal, 23 (2002), 781794.
Carlin, B.; Chowdhry, B.; and Garmaise, M.. “Investment in Organization Capital.” Working Paper, UCLA (2011).
Carlin, B.; Chowdhry, B.; and Garmaise, M.. “Investment in Organization Capital.” Journal of Financial Intermediation, 21 (2012), 268286.
Carlin, B., and Gervais, S.. “Work Ethic, Employment Contracts, and Firm Value.” Journal of Finance, 64 (2009), 785821.
Chan, L. K. C.; Lakonishok, J.; and Sougiannis, T.. “The Stock Market Valuation of Research and Development Expenditures.” Journal of Finance, 56 (2001), 24312456.
Chen, D.; Gao, H.; and Ma, Y.. “Human Capital Driven Acquisition: Evidence from the Inevitable Disclosure Doctrine.” Working Paper, University of International Business and Economics (2017).
Chen, X.; Harford, J.; and Li, K.. “Monitoring: Which Institutions Matter?Journal of Financial Economics, 86 (2007), 279305.
Cooney, J. W.; Moeller, T.; and Stegemoller, M.. “The Underpricing of Private Targets.” Journal of Financial Economics, 93 (2009), 5166.
Cragg, J. G., and Donald, S. G.. “Testing Identifiability and Specification in Instrumental Variable Models.” Econometric Theory, 9 (1993), 222240.
Demerjian, P.; Lev, B.; and McVay, S.. “Quantifying Managerial Ability: A New Measure and Validity Tests.” Management Science, 58 (2012), 12291248.
Eckbo, B. E.; Masulis, R.; and Norli, O.. “Security Offerings.” In Handbook of Corporate Finance: Empirical Corporate Finance, Vol. I, Eckbo, B. E., ed. Amsterdam, The Netherlands: Elsevier/North-Holland (2007), 233373.
Edmans, A.Does the Stock Market Fully Value Intangibles? Employee Satisfaction and Equity Prices.” Journal of Financial Economics, 101 (2011), 621640.
Eisfeldt, A., and Papanikolaou, D.. “Organization Capital and the Cross-Section of Expected Returns.” Journal of Finance, 68 (2013), 13651406.
Ericson, R., and Pakes, A.. “Markov-Perfect Industry Dynamics: A Framework for Empirical Work.” Review of Economic Studies, 61 (1995), 5382.
Evenson, R., and Westphal, L.. “Technological Change and Technological Strategy.” In Handbook of Development Economics, Behrman, J. and Srinivasan, T. N., eds. Amsterdam, The Netherlands: Elsevier (1995), 22092299.
Falato, A.; Kadyrzhanova, D.; and Sim, J. W.. “Rising Intangible Capital, Shrinking Debt Capacity, and the US Corporate Savings Glut.” Working Paper, Federal Reserve Board (2013).
Fama, E. F.Market Efficiency, Long-Term Returns, and Behavioral Finance.” Journal of Financial Economics, 49 (1998), 283306.
Fama, E. F., and French, K. R.. “Forecasting Profitability and Earnings.” Journal of Business, 73 (2000), 161175.
Fuller, K.; Netter, J.; and Stegemoller, M.. “What Do Returns to Acquiring Firms Tell Us? Evidence from Firms That Make Many Acquisitions.” Journal of Finance, 57 (2002), 17631793.
Gao, H.; Harford, J.; and Li, K.. “Determinants of Corporate Cash Policy: Insights from Private Firms.” Journal of Financial Economics, 109 (2013), 623639.
Gao, H.; Harford, J.; and Li, K.. “CEO Turnover-Performance Sensitivities in Private Firms.” Journal of Financial and Quantitative Analysis, 52 (2017), 583611.
Hall, R.“E-Capital: The Link between the Stock Market and the Labor Market in the 1990s.” Brookings Papers on Economic Activity (2000), 73–102.
Hamler, N.Impending Merger of the Inevitable Disclosure Doctrine and Negative Trade Secrets: Is Trade Secrets Law Headed in the Right Direction?Journal of Corporate Law, 25 (2000), 383405.
Hansen, L. P.Large Sample Properties of Generalized Method of Moments Estimators.” Econometrica, 50 (1982), 10291054.
Harford, J.Corporate Cash Reserves and Acquisitions.” Journal of Finance, 54 (1999), 19691997.
Hassler, J.; Rodriguez Mora, J. V.; Storesletten, K.; and Zilibotti, F.. “A Positive Theory of Geographic Mobility and Social Insurance.” International Economic Review, 46 (2005), 263303.
Hilary, G., and Hui, K. W.. “Does Religion Matter in Corporate Decision Making in America?Journal of Financial Economics, 93 (2009), 455473.
Hirshleifer, D.; Hsu, P. H.; and Li, D.. “Innovative Efficiency and Stock Returns.” Journal of Financial Economics, 107 (2013), 632652.
Jaffe, J.; Jindra, J.; Pedersen, D.; and Voetmann, T.. “Returns to Acquirers of Public and Subsidiary Targets.” Journal of Corporate Finance, 31 (2015), 246270.
Jovanovic, B.Job Matching and the Theory of Turnover.” Journal of Political Economy, 87 (1979), 972990.
Jovanovic, B., and Rousseau, P. L.. “Vintage Organization Capital.” NBER Working Paper No. 8166 (2001).
Klasa, S.; Ortiz-Molina, H.; Serfling, M. A.; and Srinivasan, S.. “Protection of Trade Secrets and Capital Structure Decisions.” Journal of Financial Economics, forthcoming (2018).
Lev, B., and Radhakrishnan, S.. “The Valuation of Organization Capital.” In Measuring Capital in the New Economy, Corrado, C., Haltiwanger, J., and Sichel, D., eds. Chicago, IL: University of Chicago Press (2005), 73110.
Lev, B.; Radhakrishnan, S.; and Evans, P. C.. “Organizational Capital: A CEO’s Guide to Measuring and Managing Enterprise Intangibles.” Working Paper, The Center for Global Enterprise (2016).
Lev, B.; Radhakrishnan, S.; and Zhang, W.. “Organizational Capital.” Abacus, 45 (2009), 275298.
Lev, B., and Sougiannis, T.. “The Capitalization, Amortization, and Value-Relevance of R&D.” Journal of Accounting and Economics, 21 (1996), 107138.
Levhari, D., and Weiss, Y.. “The Effect of Risk on the Investment in Human Capital.” American Economic Review, 64 (1974), 950963.
Li, K., and Prabhala, N. R.. “Self-Selection Models in Corporate Finance.” In Handbook of Corporate Finance: Empirical Corporate Finance, Vol. I, Eckbo, B. E., ed. Amsterdam, The Netherlands: Elsevier/North-Holland (2007), 3786.
Light, A., and Omori, Y.. “Unemployment Insurance and Job Quits.” Journal of Labor Economics, 22 (2004), 159188.
Loughran, T., and Vijh, A. M.. “Do Long-Term Shareholders Benefit from Corporate Acquisitions?Journal of Finance, 52 (1997), 17651790.
Lustig, H.; Syverson, C.; and Van Nieuwerburgh, S.. “Technological Change and the Growing Inequality in Managerial Compensation.” Journal of Financial Economics, 99 (2011), 601627.
Lyon, J. D.; Barber, B. M.; and Tsai, C.. “Improved Methods for Tests of Long-Run Abnormal Stock Returns.” Journal of Finance, 54 (1999), 165201.
Maksimovic, V., and Phillips, G.. “The Market for Corporate Assets: Who Engages in Mergers and Asset Sales and Are There Gains?Journal of Finance, 56 (2001), 20192065.
Marshall, A. Principles of Economics: An Introductory Volume, 8th ed. London, UK: Macmillan (1930).
Masulis, R.; Wang, C.; and Xie, F.. “Corporate Governance and Acquirer Returns.” Journal of Finance, 62 (2007), 18511889.
McGrattan, E. R., and Prescott, E. C.. “Unmeasured Investment and the Puzzling US Boom in the 1990s.” American Economic Journal: Macroeconomics, 2 (2010), 88123.
Moeller, S.; Schlingemann, F.; and Stulz, R.. “Firm Size and the Gains from Acquisitions.” Journal of Financial Economics, 73 (2004), 201228.
Netter, J.; Stegemoller, M.; and Wintoki, M. B.. “Implications of Data Screens on Merger and Acquisition Analysis: A Large Sample Study of Mergers and Acquisitions from 1992 to 2009.” Review of Financial Studies, 24 (2011), 23162357.
Officer, M. S.The Price of Corporate Liquidity: Acquisition Discounts for Unlisted Targets.” Journal of Financial Economics, 83 (2007), 571598.
Officer, M. S.; Poulsen, A. B.; and Stegemoller, M.. “Target-Firm Information Asymmetry and Acquirer Returns.” Review of Finance, 13 (2009), 467493.
Phillips, G., and Zhdanov, A.. “R&D and the Incentives from Merger and Acquisition Activity.” Review of Financial Studies, 26 (2013), 3478.
Pirinsky, C., and Wang, Q.. “Does Corporate Headquarters Location Matter for Stock Returns?Journal of Finance, 61 (2006), 19912015.
Prescott, E., and Visscher, M.. “Organization Capital.” Journal of Political Economy, 88 (1980), 446461.
Rau, P. R., and Vermaelen, T.. “Glamour, Value and the Post-Acquisition Performance of Acquiring Firms.” Journal of Financial Economics, 49 (1998), 223253.
Roberts, M. R., and Whited, T. M.. “Endogeneity in Empirical Corporate Finance.” In Handbook of the Economics of Finance, Vol. 2, Part A, Constantinides, G., Stulz, R., and Harris, M., eds. Amsterdam, The Netherlands: Elsevier/North-Holland (2013), 493572.
Roberts, P. W., and Dowling, G. R.. “Corporate Reputation and Sustained Superior Financial Performance.” Strategic Management Journal, 23 (2002), 10771093.
Rosen, S.Learning by Experience as Joint Production.” Quarterly Journal of Economics, 86 (1972), 366382.
Sargan, J. D.The Estimation of Economic Relationships Using Instrumental Variables.” Econometrica, 26 (1958), 393415.
Smith, A. An Inquiry into the Nature and Causes of the Wealth of Nations (1776).
Stock, J. H., and Yogo, M.. “Testing for Weak Instruments in Linear IV Regression.” In Identification and Inference for Econometric Models: Essays in Honor of Thomas J. Rothenberg, Stock, J. H. and Andrews, D. W. K., eds. Cambridge, UK: Cambridge University Press (2005), 80108.
Tomer, J. Organizational Capital: The Path to Higher Productivity and Wellbeing. New York, NY: Praeger (1987).
Wooldridge, J. Introductory Econometrics: A Modern Approach, 3rd ed. Cincinnati, OH: South-Western (2006).
Recommend this journal

Email your librarian or administrator to recommend adding this journal to your organisation's collection.

Journal of Financial and Quantitative Analysis
  • ISSN: 0022-1090
  • EISSN: 1756-6916
  • URL: /core/journals/journal-of-financial-and-quantitative-analysis
Please enter your name
Please enter a valid email address
Who would you like to send this to? *
Type Description Title
Supplementary materials

Li et al. supplementary material
Li et al. supplementary material 1

 Unknown (117 KB)
117 KB


Full text views

Total number of HTML views: 0
Total number of PDF views: 94 *
Loading metrics...

Abstract views

Total abstract views: 310 *
Loading metrics...

* Views captured on Cambridge Core between 11th May 2018 - 23rd June 2018. This data will be updated every 24 hours.