Innovation distance, deal size, and market reaction: Evidence from cross-province acquisitions

Motivated by the cross-location acquisition literature and the growing trend of innovation-driven acquisitions, we examine the relation between cross-province innovative distance and acquisition announcement returns using a sample of listed firms in the largest emerging market, China. Consistent with the innovation-size synergy prediction, we find that the association between cross-province innovative distance and acquirer abnormal returns around acquisition announcements is positively moderated by deal size. Moreover, we document an overall inverted U-shaped relation between innovation-size synergy and announcement returns. Results from robustness tests, cross-sectional analyses, and additional validation tests support our main inference that investors price innovation-size synergy by weighing potential benefits from economies of scale and innovative knowledge spillovers against increasing agency risks and information asymmetry. While larger deal size and greater innovation distance initially enhance expected value creation, market assessments become less favorable at higher levels of synergy intensity as downside risks become more salient.