Why Does Size Matter For Bidder Announcement Returns?
55 Pages Posted: 20 Oct 2015 Last revised: 29 Apr 2021
Date Written: April 29, 2021
Bidder and target size are widely regarded as key drivers of bidder announcement returns. We argue that the leading explanations in the recent M&A literature for why size matters are inconsistent with the data. Those explanations posit that size matters because it is a proxy for some underlying value driver (e.g., overconfidence, agency problems). However, they cannot rationalize 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 one of several challenging patterns for existing explanations we document in the data of US takeovers from 1981 to 2014. We propose that 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 literature, and a “scaling effect" which magnifies per-dollar value created in a given deal. Our results show that the data is consistent with the latter effect dominating the former. A simple scaling framework is consistent with the above patterns for bidder size and 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
JEL Classification: G34, G14
Suggested Citation: Suggested Citation