The Relative Size of Acquisitions and the Wealth of Acquiring Firms: The Amplification Effect

Abstract

This study proposes an argument that reconciles disparate findings on the relation between acquiring firm abnormal returns and the relative size of acquisitions. We argue and show that relative size amplifies acquisition wealth effects, resulting in a positive relation for value-creating, but a negative relation for value-destroying acquisitions. This observation has an important implication for the functional form of acquisition wealth effects models: relative size should be included as an interactive effect and not - as is the norm in the literature - as an additive, main effect. We show that a regression model thus specified provides significantly greater explanatory power.

Keywords: acquisitions, bidder abnormal returns, relative size

JEL Classification: G34