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

See all articles by Christoph Schneider

Christoph Schneider

University of Münster - Finance Center Münster

Oliver G. Spalt

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

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

Schneider, Christoph and Spalt, Oliver G., Bidder and Target Size Effects in M&A Are Not Driven by Overconfidence or Agency Problems (November 8, 2021). Critical Finance Review, forthcoming, Available at SSRN: https://ssrn.com/abstract=2676189 or http://dx.doi.org/10.2139/ssrn.2676189

Christoph Schneider (Contact Author)

University of Münster - Finance Center Münster ( email )

Universitätsstraße 14-16
Münster, 48143
Germany

Oliver G. Spalt

University of Mannheim - Business School ( email )

L5, 5
Mannheim, 68131
Germany

European Corporate Governance Institute (ECGI) ( email )

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

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