Do Hubris and the Information Environment Explain the Effect of Acquirers’ Size on Their Gains from Acquisitions?

Abstract

We examine the negative relation between abnormal returns at acquisition announcements and the size of acquiring firms. This so-called size effect was first documented and investigated by Moeller, Schlingemann, and Stulz (2004), who conclude that hubris on the part of large acquirers most likely explains the size effect. Our study is a further investigation of this size effect and makes the following contributions. First, we document that the effect exists monotonically across firm size deciles, not just in a comparison of “small” and “large” firms. Second, using a different methodology than Moeller, Schlingemann, and Stulz (2004), we corroborate their finding that acquisitions by large firms reflect more hubris than those made by small firms, but we also document that acquisitions made by small firms create more synergies than those made by large firms. In addition, we find that the size effect is significantly stronger for the smallest acquirers — who make value-creating acquisitions, on average — than it is for the largest acquirers. Taken together, therefore, our evidence indicates that the size effect is at least as much driven by small firms making superior, synergistic acquisitions as it is driven by large firms making inferior, hubristic acquisitions. Finally, we document that differences in the information environment between small and large firms do not explain the size effect.