Acquisitions as lotteries? The selection of target-firm risk and its impact on merger outcomes

Research output: Contribution to journalArticleScientificpeer-review

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
Original languageEnglish
Pages (from-to)77-132
JournalCritical Finance Review
Volume6
Issue number1
DOIs
Publication statusPublished - 2017

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Lottery
Firm risk
Mergers
Chief executive officer
Idiosyncratic volatility
Value change
Fixed effects
Gambling
Propensity
Expected returns

Keywords

  • Behavioral Corporate Finance
  • Mergers and Acquisitions
  • Gambling

Cite this

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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",
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Acquisitions as lotteries? The selection of target-firm risk and its impact on merger outcomes. / Schneider, C.A.R.; Spalt, Oliver.

In: Critical Finance Review, Vol. 6, No. 1, 2017, p. 77-132.

Research output: Contribution to journalArticleScientificpeer-review

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