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
Date Written: May 14, 2020
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: Suggested Citation