A sample of cash and stock merger transactions consummated between 197
5 and 1987 is used to form homogeneous groups based on financial chara
cteristics of both bidding and target firms. The results are used to d
etermine how group heterogeneity with respect to financial characteris
tics influences intergroup differences in both bidding firm and target
firm merger returns. Stockholders of bidding firms with attributes th
at fit the free cash flow hypothesis of merger motivation suffer wealt
h losses relative to firms that have characteristics consistent with a
chievement of scale or scope economies or financial synergies. Differe
nces in target and merger portfolio returns are also found.