What Happens in Acquisitions? Evidence from Brand Ownership Changes and Advertising Investment

56 Pages Posted: 26 Mar 2008 Last revised: 17 Mar 2009

See all articles by C. Edward Fee

C. Edward Fee

Tulane University - A.B. Freeman School of Business

Charles J. Hadlock

Michigan State University - The Eli Broad College of Business and The Eli Broad Graduate School of Management

Joshua R. Pierce

University of Alabama Culverhouse College of Commerce

Date Written: June 7, 2008

Abstract

We study a large sample of brands that are acquired and find that new owners display an abnormal propensity to sharply increase or decrease advertising spending, with large decreases being particularly common. Increased private ownership is associated with a significant downward shift in advertising relative to other deals, primarily reflecting the behavior of private equity purchasers. New owners appear to alter advertising investment to counteract any systematic under or overinvestment by prior owners, and they tend to cut advertising in existing brands that closely overlap with purchased brands. Combined buyer plus seller announcement returns are positively related to measures of post-acquisition cuts in advertising spending and also to indicators of corrections to past investment biases by prior owners. Acquired brands do not on average experience significant losses in market share, even when advertising spending is revised downwards. Our evidence is consistent with the hypothesis that the identity and characteristics of an asset's owner are important determinants of investment policy. The evidence generally supports the notion that changes in investment brought about by an acquisition are efficiency enhancing.

Keywords: Acquisitions, mergers, advertising, investment, brands

JEL Classification: G31, G32, G34, D92, M37

Suggested Citation

Fee, C. Edward and Hadlock, Charles J. and Pierce, Joshua R., What Happens in Acquisitions? Evidence from Brand Ownership Changes and Advertising Investment (June 7, 2008). Available at SSRN: https://ssrn.com/abstract=1007723 or http://dx.doi.org/10.2139/ssrn.1007723

C. Edward Fee (Contact Author)

Tulane University - A.B. Freeman School of Business ( email )

7 McAlister Drive
New Orleans, LA 70118
United States

Charles J. Hadlock

Michigan State University - The Eli Broad College of Business and The Eli Broad Graduate School of Management ( email )

315 Eppley Center
East Lansing, MI 48824-1121
United States
517-353-9330 (Phone)
517-432-1080 (Fax)

Joshua R. Pierce

University of Alabama Culverhouse College of Commerce ( email )

101 Paul W. Bryant Dr.
Box 870382
Tuscaloosa, AL 35487
United States

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