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Acquisitions as Lotteries? The Selection of Target-Firm Risk and its Impact on Merger Outcomes

Critical Finance Review, Vol. 6, Issue 1, pp. 77-132, 2017

62 Pages Posted: 1 Apr 2010 Last revised: 20 Jul 2017

Christoph Schneider

Tilburg University - Department of Finance

Oliver G. Spalt

Tilburg University - Department of Finance

Multiple version iconThere are 2 versions of this paper

Date Written: January 9, 2015

Abstract

From 1987 to 2008, riskier firms were more likely to be taken over. Yet, on average, the acquirer declined in value by 2.8% when it bought a "risky target" (the third tercile, having an annualized idiosyncratic volatility of 61% or more), but only by 0.6% when it bought a "safe target" (the first tercile, 38% or less). The effect was even stronger for risky targets with positively skewed expected returns. The value difference is robust to controlling for acquirer and target characteristics, and carries over to the joint value change. Riskier target acquisitions also had lower post-acquisition accounting returns. An acquiring-firm CEO fixed effect in the data suggests CEO preferences play a role, which we can trace to several proxies for gambling propensity.

Keywords: Behavioral Corporate Finance, Mergers and Acquisitions, Gambling

JEL Classification: G34, G14, G39

Suggested Citation

Schneider, Christoph and Spalt, Oliver G., Acquisitions as Lotteries? The Selection of Target-Firm Risk and its Impact on Merger Outcomes (January 9, 2015). Critical Finance Review, Vol. 6, Issue 1, pp. 77-132, 2017. Available at SSRN: https://ssrn.com/abstract=1572425 or http://dx.doi.org/10.2139/ssrn.1572425

Christoph Schneider

Tilburg University - Department of Finance ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

Oliver G. Spalt (Contact Author)

Tilburg University - Department of Finance ( email )

Department of Finance
Tilburg University
Tilburg, 5000 LE
Netherlands
+31 13 466 3545 (Phone)

HOME PAGE: http://www.oliverspalt.com

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