Acquisitions as Lotteries: The Selection of Target-Firm Risk and its Impact on Merger Outcomes

Schneider Christoph, Spalt Oliver


Abstract
From 1987 to 2008, riskier firms were more likely to be taken over. Yet, on average, the acquirer declined in value by 2.8% when it bought a "risky target" (the third tercile, having an annualized idiosyncratic volatility of 61% or more), but only by 0.6% when it bought a "safe target" (the first tercile, 38% or less). The effect was even stronger for risky targets with positively skewed expected returns. The value difference is robust to controlling for acquirer and target characteristics, and carries over to the joint value change. Riskier target acquisitions also had lower post-acquisition accounting returns. An acquiring-firm CEO fixed effect in the data suggests CEO preferences play a role, which we can trace to several proxies for gambling propensity.

Keywords
Behavioral Corporate Finance; Mergers and Acquisitions; Gambling



Publication type
Article in Journal

Peer reviewed
Yes

Publication status
Published

Year
2017

Journal
Critical Finance Review

Volume
6

Start page
77

End page
132

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