Do the Most Prominent Firms Really Make the Worst Deals? How Selection Issues Affect Inferences from M&A Studies

62 Pages Posted: 12 Nov 2015 Last revised: 15 May 2020

See all articles by Josh Austin

Josh Austin

Ohio University - Department of Economics

Jeremiah Harris

Kent State University - College of Business Administration

William O'Brien

University of Illinois at Chicago

Date Written: May 14, 2020

Abstract

Many studies find a negative relationship between acquirers’ stock returns and their size, past acquisitiveness, and performance. This counter-intuitively suggests that large, well-performing, and acquisitive firms are worse-than-average acquirers. We hypothesize that these findings stem from bias related to an omitted variable: the predictability of acquisitive behavior. We theoretically model the direction of this bias for each variable and test these predictions using Heckman’s two-stage procedure with a relevant and plausibly excludable variable related to tax avoidance. By mitigating this bias, our approach generates several new insights about acquisition value that are obscured by OLS regressions of deal announcement returns.

Keywords: Mergers and acquisitions; Selection bias; Shareholder value

JEL Classification: G34; G14; C52

Suggested Citation

Austin, Josh and Harris, Jeremiah and O'Brien, William, Do the Most Prominent Firms Really Make the Worst Deals? How Selection Issues Affect Inferences from M&A Studies (May 14, 2020). Available at SSRN: https://ssrn.com/abstract=2689158 or http://dx.doi.org/10.2139/ssrn.2689158

Josh Austin

Ohio University - Department of Economics ( email )

Athens, OH 45701-2979
United States

Jeremiah Harris (Contact Author)

Kent State University - College of Business Administration ( email )

P.O. Box 5190
Kent, OH 44242-0001
United States

William O'Brien

University of Illinois at Chicago ( email )

601 S. Morgan St.
Chicago, IL 60607
United States

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