Firm Size, Targetiveness, and Acquirer Announcement Returns
45 Pages Posted: 13 Mar 2009 Last revised: 5 Oct 2011
Date Written: February 28, 2010
An acquisition changes the size of an acquirer firm and affects its own attractiveness as a prospective target during future years. We examine the role of this effect in determining the acquirer announcement returns. Using a comprehensive sample of firm-years, we first document an inverted-U relation between the firm size and the probability of becoming the target of a successful acquisition (which we term as the targetiveness). Thus, small acquirers increase their targetiveness by acquiring another firm and moving toward the crest of the targetiveness function while large acquirers do the opposite. We next calibrate the stock price effect of a change in targetiveness by including the stochastic arrival of an acquisition offer in the valuation model. This effect is quite large and it explains a significant part of the difference between the announcement returns of small versus large acquiring firms documented by Moeller, Schlingemann, and Stulz (2004).
Keywords: Mergers and acquisitions, takeovers, targetiveness, acquisition likelihood, acquirer announcement returns
JEL Classification: G34, G30
Suggested Citation: Suggested Citation