respectively. While retaining full responsibility for this paper, the authors would like to thank William Beranek, Dan Givoly, Jeffrey Jaffe, William Margrabe, and anonymous JFQA referees for their comments on earlier drafts of the paper. The authors also thank J. Rock Chung for his assistance in computer work.

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The existing literature on the post-merger performance of acquiring firms is divided. We re-examine this issue, using a nearly exhaustive sample of mergers between NYSE acquirers and NYSE/AMEX targets. We find that stockholders of acquiring firms suffer a statistically significant loss of about 10% over the five-year post-merger period, a result robust to various specifications. Our evidence suggests that neither the firm size effect nor beta estimation problems are the cause of the negative post-merger returns. We examine whether this result is caused by a slow adjustment of the market to the merger event. Our results do not seem consistent with this hypothesis. MERGERS ARE ONE OF the most researched areas in finance, yet some basic issues still remain unresolved. While most empirical research on mergers focuses on daily stock returns surrounding announcement dates, a few studies also look, in passing, at the long-run performance of acquiring firms after mergers. Some conclude that these firms experience significantly negative abnormal returns over one to three years after the merger (for example, Langetieg (1978), Asquith (1983), and Magenheim and Mueller (1988)). These findings led Jensen and Ruback (1983, p. '20) to remark: "These post-outcome negative abnormal returns are unsettling because they are inconsistent with market efficiency and suggest that changes in stock prices during takeovers overestimate the future efficiency gains from mergers." Ruback (1988, p. 262) later writes: "Reluctantly, I think we have to accept this result-significant negative returns over the two years following a merger-as a fact." However, a conclusion of underperformance is not clearly warranted based on prior research. First, the results are not all one-sided. Langetieg (1978) finds that post-merger abnormal performance is not significantly different The Journal of Finance from that of a control firm in the same industry. He appears to place more weight on this finding than on the one mentioned above. Neither Mandelker (1974) nor Malatesta (1983) find significant underperformance after the aquisition. In addition, using Magenheim and Mueller's sample but employing a different methodology, Bradley and Jarrell (1988) do not find significant underperformance in the three years following acquisitions. Recently, using a multifactor benchmark, Franks, Harris, and Titman (1991) also do not find significant underperformance over three years after the acquisition.Furthermore, recent studies typically examined post-merger returns as part of a larger study focusing on announcement period returns. Hence, they generally do not provide thorough analyses of the long-run performance of acquirers. In particular, one problem with prior studies is that they do not properly adjust for the firm size effect.1 Evidence in Dimson and Marsh (1986) suggests that an adjustment for firm size is important in studies of long-run performance. This adjustment is likely to be particularly important in a study of mergers since acquirers are usually large fir...

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