On the relation between the relative size of acquisitions and the wealth of acquiring firms

Abstract

There are dozens of studies in the mergers and acquisitions literature that include the relative size of an acquisition as an additive control variable in models explaining acquisition wealth effects. A majority of these studies document a positive coefficient estimate on relative size, but many document a negative coefficient estimate instead. Our study demonstrates that these seemingly contradictory findings stem from a misspecification of the functional form of the relation between Cumulative Abnormal Returns (CAR) and relative size.

Keywords:

• acquisitions
• abnormal returns
• bidder
• relative size

JEL Classification:

• G34
• G31
• G32
• G14

Acknowledgement

We thank Daniel Beneish, Angela Morgan, Rich Rosen, Sherrill Shaffer, Mike Stegemoller, Fred Sterbenz, participants at the 2011 Financial Management Association Meetings, the 2011 Southern Finance Association Meetings and workshop participants at Rutgers University – Camden and Temple University for their helpful comments and suggestions.

Notes

¹ For parsimony, we partition on bidder size using a small versus large dichotomy, instead of using bidder size quintiles (as in Table 1).