Bidder and target size effects in M&A are not driven by overconfidence or agency problems


Schneider, Christoph ; Spalt, Oliver



Document Type: Article
Year of publication: 2021
The title of a journal, publication series: Critical Finance Review
Volume: tba
Issue number: tba
Page range: tba
Place of publication: Hanover, Mass.
Publishing house: Now Publishers
ISSN: 2164-5744 , 2164-5760
Publication language: English
Institution: Business School > ABWL, Finanzwirtschaft u. Finanzmarktinstitutionen (Spalt 2019-)
Subject: 330 Economics
Classification: JEL: G34, G14,
Keywords (English): mergers and acquisitions, size effects, scaling, proxy variables
Abstract: The impact of size variables on bidder announcement returns can be decomposed into two effects, the "size as proxy effect" which was the focus of the prior M&A literature, and a "scaling effect" which magnifies per-dollar value created in a given deal. Using data of US takeovers from 1981 to 2014, we document that small bidders make better acquisitions than large bidders when they acquire non-public firms, but worse acquisitions when they acquire public firms, which is inconsistent with size as proxy explanations (e.g., size proxying for overconfidence of a firm's managers or agency problems). The pattern is consistent with scaling, because value created for bidders is on average negative for public target deals, but positive for non-public target deals. Scaling creates additional predictions for target size, relative size, and international M&A deals we show are borne out by the data.

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