This paper examines the post-merger operating performance of merged firms using a sample of the 50 largest mergers between U.S. public industrial firms completed between 1979 and 1983. The results indicate that merged firms show significant improvements in asset productivity relative to their industries after the merger, leading to higher post-merger operating cash flow returns. These improvements are not at the expense of long-term investments, as merged firms maintain their capital expenditure and R&D rates relative to their industries. There is a strong positive relationship between post-merger increases in operating cash flows and abnormal stock returns at merger announcements, indicating that expectations of economic improvements underlie the equity revaluations of the merging firms. The study uses post-merger accounting data to directly test for changes in operating performance resulting from mergers. It analyzes the cash flow performance of acquiring and target firms, and explores the sources of merger-induced changes in cash flow performance. The study finds that merged firms have increased post-merger operating cash flow performance relative to their industries, which is attributed to post-merger improvements in asset productivity. The study also finds that the improvement in post-merger cash flows is not achieved at the expense of the merged firms' long-term viability, as the sample firms maintain their capital expenditure and R&D rates relative to their industries. The study also examines the relationship between cash flow measures of post-merger performance and stock market measures used in earlier studies. It finds that improvements in operating cash flow returns in part explain the increase in equity values of the merging firms at the announcement of the merger. This indicates that the stock price reaction to mergers is driven by anticipated economic gains after the merger. The study also finds that the merger-induced improvements in operating performance are not due to tax benefits or increased monopoly rents, but rather to increased asset productivity. The study concludes that merged firms do not reduce their long-term investments after the merger.This paper examines the post-merger operating performance of merged firms using a sample of the 50 largest mergers between U.S. public industrial firms completed between 1979 and 1983. The results indicate that merged firms show significant improvements in asset productivity relative to their industries after the merger, leading to higher post-merger operating cash flow returns. These improvements are not at the expense of long-term investments, as merged firms maintain their capital expenditure and R&D rates relative to their industries. There is a strong positive relationship between post-merger increases in operating cash flows and abnormal stock returns at merger announcements, indicating that expectations of economic improvements underlie the equity revaluations of the merging firms. The study uses post-merger accounting data to directly test for changes in operating performance resulting from mergers. It analyzes the cash flow performance of acquiring and target firms, and explores the sources of merger-induced changes in cash flow performance. The study finds that merged firms have increased post-merger operating cash flow performance relative to their industries, which is attributed to post-merger improvements in asset productivity. The study also finds that the improvement in post-merger cash flows is not achieved at the expense of the merged firms' long-term viability, as the sample firms maintain their capital expenditure and R&D rates relative to their industries. The study also examines the relationship between cash flow measures of post-merger performance and stock market measures used in earlier studies. It finds that improvements in operating cash flow returns in part explain the increase in equity values of the merging firms at the announcement of the merger. This indicates that the stock price reaction to mergers is driven by anticipated economic gains after the merger. The study also finds that the merger-induced improvements in operating performance are not due to tax benefits or increased monopoly rents, but rather to increased asset productivity. The study concludes that merged firms do not reduce their long-term investments after the merger.