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This paper establishes the relation between the target’s business strategy and M&A transactions. We find that acquirers purchasing an innovation-oriented firm (prospector) experience significantly lower announcement returns and worse long-run operating performance than when they purchase an efficiency-oriented firm (defender). The effect is more pronounced for the acquirer with severe agency problems. Further analysis finds that synergies can be obtained from combining business strategies. We also show that acquirers respond to the presence of a prospector target by using stock payment in their offers.
Liu et al. (Wed,) studied this question.