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
Abstract
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