Q-Theory and Acquisition Returns

46 Pages Posted: 15 Mar 2007 Last revised: 27 Apr 2010

See all articles by Kenneth R. Ahern

Kenneth R. Ahern

University of Southern California - Marshall School of Business; National Bureau of Economic Research (NBER)

Date Written: April 7, 2010


This paper applies the q−theory of investment to corporate acquisitions to explain target choice and acquirer returns. The theory predicts that larger acquirers optimally choose larger targets, but of smaller relative size. Dollar gains increase, but percentage returns decrease as acquirers get larger. Since later deals are made by larger acquirers, returns appear to decline with experience. Using a panel dataset of repeat acquirers, empirical tests support the predictions of q−theory. In contrast, I find only weak support for an agency explanation and no support for a hubris story. I also reject the theory that declining returns result from market anticipation of later deals.

Keywords: Mergers and acquisitions, repeat acquirers, q−theory, agency, hubris

JEL Classification: G30, G32, G34

Suggested Citation

Ahern, Kenneth Robinson, Q-Theory and Acquisition Returns (April 7, 2010). AFA 2008 New Orleans Meetings Paper. Available at SSRN: https://ssrn.com/abstract=970345 or http://dx.doi.org/10.2139/ssrn.970345

Kenneth Robinson Ahern (Contact Author)

University of Southern California - Marshall School of Business ( email )

701 Exposition Blvd
Los Angeles, CA 90089
United States

HOME PAGE: http://www-bcf.usc.edu/~kahern/

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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