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Do the most prominent firms really make the worst deals? How selection issues affect inferences from M&A studies

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  • Austin, Josh
  • Harris, Jeremiah
  • O'Brien, William

Abstract

Many studies find a negative relationship between acquirers’ stock returns and their size, past acquisitiveness, and performance. This counter-intuitively suggests that large, well-performing, and acquisitive firms are worse-than-average acquirers. We hypothesize that these findings stem from bias related to an omitted variable: the predictability of acquisitive behavior. We theoretically model the direction of this bias for each variable and test these predictions using Heckman's two-stage procedure with a relevant and plausibly excludable variable related to tax avoidance. By mitigating this bias, our approach generates several new insights about acquisition value that are obscured by OLS regressions of deal announcement returns.

Suggested Citation

  • Austin, Josh & Harris, Jeremiah & O'Brien, William, 2020. "Do the most prominent firms really make the worst deals? How selection issues affect inferences from M&A studies," Journal of Banking & Finance, Elsevier, vol. 118(C).
    • Handle: RePEc:eee:jbfina:v:118:y:2020:i:c:s0378426620301540
    DOI: 10.1016/j.jbankfin.2020.105888
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    1. Doan, Minh Phuong & Sercu, Piet, 2021. "Modelling multiperiod patterns in stock-market reactions to events, with an application to serial acquisitions," International Review of Financial Analysis, Elsevier, vol. 77(C).

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    More about this item

    Keywords

    Mergers and acquisitions; Selection bias; Shareholder value;
    All these keywords.

    JEL classification:

    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection

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