Taking Over the Size Effect: Asset Pricing Implications of Merger Activity
63 Pages Posted: 13 Apr 2022 Last revised: 10 Jan 2023
Date Written: March 11, 2022
We show that merger announcement returns account for virtually all of the measured size premium. An empirical proxy for ex ante takeover exposure positively and robustly relates to cross-sectional expected returns. The relation between size and expected returns becomes positive or insignificant, rather than negative, conditional on this takeover characteristic. Asset pricing models that include a factor based on the takeover characteristic outperform otherwise similar models that include the conventional size factor. We conclude that the takeover factor should replace the conventional size factor in benchmark asset pricing models.
Keywords: Takeovers, mergers, acquisitions, return premia, factor models, expected returns
JEL Classification: G34, G12, G14
Suggested Citation: Suggested Citation