Why Does Size Matter For Bidder Announcement Returns?

66 Pages Posted: 20 Oct 2015 Last revised: 17 Dec 2019

See all articles by Christoph Schneider

Christoph Schneider

Universität Münster

Oliver G. Spalt

University of Mannheim - Business School; European Corporate Governance Institute (ECGI)

Date Written: December 16, 2019


In the standard regression of bidder announcement returns (ACARs) on bidder size in US data from 1981-2014, the coefficient on bidder size is positive and significant (0.5, t = 3.9) when the target is a public firm, where the average ACAR is negative (−1.4%); but it is negative and significant (−1.2, t = −11.5) when the target is a non-public firm, where average ACAR is positive (1.4%). We show this pattern of flipping signs is general and predictable. For example, using quantile regressions within the public deal subsample, the bidder size coefficient is positive (1.3, t = 11.5) when ACAR is negative (at the 20th percentile, where ACAR = −5.6%), but negative (−0.7, t = −6.4) when ACAR is positive (at the 80th percentile, where ACAR = 2.6%). These pervasive patterns in the data are important for understanding value creation in corporate takeovers: while bidder size is widely regarded to be a central determinant of bidder announcement returns, the patterns are at odds with all leading explanations in the recent M&A literature for why size matters. Because existing explanations assume size is a proxy for some underlying value driver (e.g., overconfidence, agency problems) with stable correlations (e.g., bigger firms have more overconfident managers who make worse deals), they do not predict flipping signs. So: why does size matter for ACARs? We offer a simple alternative model in which size is not a proxy. Instead size scales per-dollar value created (or destroyed) in a given deal. This simple framework is consistent with all the above patterns. It also creates predictions for target size, relative size and a sample of European deals, which we show are both, borne out by the data, and inconsistent with existing proxy explanations.

Keywords: Proxy Variables, Mergers and Acquisitions, Size Effects, Scaling

JEL Classification: G34, G14

Suggested Citation

Schneider, Christoph and Spalt, Oliver G., Why Does Size Matter For Bidder Announcement Returns? (December 16, 2019). Available at SSRN: https://ssrn.com/abstract=2676189 or http://dx.doi.org/10.2139/ssrn.2676189

Christoph Schneider (Contact Author)

Universität Münster ( email )

Universitätsstraße 14-16
Münster, 48143
+492518322088 (Phone)

Oliver G. Spalt

University of Mannheim - Business School ( email )

L5, 5
Mannheim, 68131

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels

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