Acquisitions as Lotteries: Do Managerial Gambling Attitudes Influence Takeover Decisions?
University of Mannheim - Department of Business Administration and Finance
Oliver G. Spalt
Tilburg University - Department of Finance
October 12, 2011
Paris December 2011 Finance Meeting EUROFIDAI - AFFI
This paper analyzes takeover announcements for public US targets from 1987 to 2008. Consistent with the hypothesis that gambling attitudes matter for takeover decisions, both acquiror announcement returns and expected synergies are lower in acquisitions where the target's stock has characteristics similar to those of attractive gambles. Offer price premium and target announcement returns are higher in these deals. The effects are stronger in companies where managers are more entrenched, where the disciplining force of product market competition is lower, where recent acquiror performance has been poor, during economic downturns, for younger CEOs in the acquiring firm, and for acquirors headquartered in areas in which local gambling propensity is higher. Targets with lottery features are more likely to receive takeover bids and direct evidence from synergy disclosure data shows that the market reacts less favorably to higher synergy forecasts if they are issued in the context of a lottery acquisition. Overall, our results suggest that corporate acquisitions are influenced by managerial gambling attitudes and that value destruction for acquirors in gambling-related transactions is substantial.
Number of Pages in PDF File: 66
Keywords: Mergers and Acquisitions, Gambling, Managerial Biases
JEL Classification: G34, G14, G3
Date posted: October 12, 2011