Why Does Size Matter For Bidder Announcement Returns?

55 Pages Posted: 20 Oct 2015 Last revised: 29 Apr 2021

See all articles by Christoph Schneider

Christoph Schneider

Universität Münster

Oliver G. Spalt

University of Mannheim - Business School; European Corporate Governance Institute (ECGI)

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

Schneider, Christoph and Spalt, Oliver G., Why Does Size Matter For Bidder Announcement Returns? (April 29, 2021). Available at SSRN: https://ssrn.com/abstract=2676189 or http://dx.doi.org/10.2139/ssrn.2676189

Christoph Schneider (Contact Author)

Universität Münster ( email )

Universitätsstraße 14-16
Münster, 48143
+492518322088 (Phone)

Oliver G. Spalt

University of Mannheim - Business School ( email )

L5, 5
Mannheim, 68131

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels

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