Bidder and Target Size Effects in M&A Are Not Driven by Overconfidence or Agency Problems
Critical Finance Review, forthcoming
57 Pages Posted: 20 Oct 2015 Last revised: 17 Jun 2022
Date Written: November 8, 2021
The impact of size variables on bidder announcement returns can be decomposed into two effects, the "size as proxy effect" which was the focus of the prior M&A literature, and a "scaling effect" which magnifies per-dollar value created in a given deal. Using data of US takeovers from 1981 to 2014, we document that small bidders make better acquisitions than large bidders when they acquire non-public firms, but worse acquisitions when they acquire public firms, which is inconsistent with size as proxy explanations (e.g., size proxying for overconfidence of a firm's managers or agency problems). The pattern is consistent with scaling, because value created for bidders is on average negative for public target deals, but positive for non-public target deals. Scaling creates additional predictions for target size, relative size, and international M&A deals we show are borne out by the data.
Keywords: Mergers and Acquisitions, Size Effects, Scaling, Proxy Variables
JEL Classification: G34, G14
Suggested Citation: Suggested Citation