Taking Over the Size Effect: Asset Pricing Implications of Merger Activity

52 Pages Posted: 13 Apr 2022

See all articles by Sara Easterwood

Sara Easterwood

Virginia Polytechnic Institute & State University - Department of Finance, Insurance, and Business Law

Jeffry M. Netter

Department of Finance; University of Georgia Law School

Bradley S. Paye

Virginia Polytechnic Institute & State University - Department of Finance, Insurance, and Business Law

Mike Stegemoller

Baylor University

Date Written: March 11, 2022

Abstract

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

Easterwood, Sara and Netter, Jeffry M. and Paye, Bradley S. and Stegemoller, Michael A., Taking Over the Size Effect: Asset Pricing Implications of Merger Activity (March 11, 2022). Available at SSRN: https://ssrn.com/abstract=4055513 or http://dx.doi.org/10.2139/ssrn.4055513

Sara Easterwood

Virginia Polytechnic Institute & State University - Department of Finance, Insurance, and Business Law ( email )

1016 Pamplin Hall (0221)
Blacksburg, VA 24060-0221
United States

Jeffry M. Netter

Department of Finance ( email )

Terry College of Business
Athens, GA 30602-6253
United States
706-542-4450 (Phone)

HOME PAGE: http://www.terry.uga.edu/directory/profile/jnetter/

University of Georgia Law School

225 Herty Drive
Athens, GA 30602
United States

Bradley S. Paye (Contact Author)

Virginia Polytechnic Institute & State University - Department of Finance, Insurance, and Business Law ( email )

1016 Pamplin Hall (0221)
Blacksburg, VA 24060-0221
United States

Michael A. Stegemoller

Baylor University ( email )

P.O. Box 98004
Waco, TX 76798-8004
United States
254-710-4145 (Phone)

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