Bidder and Target Size Effects in M&A Are Not Driven by Overconfidence or Agency Problems

Schneider, Christoph; Spalt, Oliver


Abstract
The impact of size variables on bidder announcement returns can be decomposed into two effects, the "size as proxy effect" which was the focus of the prior M&A literature, and a "scaling effect" which magnifies per-dollar value created in a given deal. Using data of US takeovers from 1981 to 2014, we document that small bidders make better acquisitions than large bidders when they acquire non-public firms, but worse acquisitions when they acquire public firms, which is inconsistent with size as proxy explanations (e.g., size proxying for overconfidence of a firm's managers or agency problems). The pattern is consistent with scaling, because value created for bidders is on average negative for public target deals, but positive for non-public target deals. Scaling creates additional predictions for target size, relative size, and international M&A deals we show are borne out by the data.

Keywords
Mergers and Acquisitions; Size Effects; Scaling; Proxy Variables



Publication type
Research article (journal)

Peer reviewed
Yes

Publication status
accepted / in press (not yet published)

Year
2022

Journal
Critical Finance Review

Volume
forthcoming

Language
English

ISSN
2164-5760

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