Cost Stickiness, Adjustment Costs and Value Creation in M&A Deals

Abstract

We examine whether cost stickiness is associated with value creation in mergers and acquisitions (M&A). We find that the acquirer’s cost stickiness is negatively associated with the abnormal returns around the acquisition announcement, and deal synergies, and positively associated with post-acquisition divestitures. These findings are consistent with these acquirers facing a higher level of adjustment costs, as suggested by the economic explanation of sticky costs. The target’s cost stickiness is also negatively associated with deal synergies. Relatedly, we show that sticky acquirers purchase sticky targets, confirming the asset complementary theory. In accordance with this finding, we show that sticky acquirers purchase intangible-intensive targets. Collectively, our results highlight the importance of cost stickiness in M&A deals.

Keywords: Cost behavior, mergers and acquisitions, Integration

JEL Classification: M41, G34, G32