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Determinants of firm-specific thresholds in acquisition decisions

  • Timothy B. Folta

    (Purdue University, West Lafayette, IN, USA)

  • Jonathan P. O'Brien

    (University College Dublin, Blackrock, Co Dublin, Ireland)

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    We develop a model to explain why some firms make acquisitions, while other firms with equal performance expectations do not. We argue that the decision to acquire is not strictly a function of expected abnormal returns, but also depends on a firm's unique acquisition threshold. Our model posits that the threshold is determined by governance, managerial competence, synergy with assets in place, and synergy with growth options. Our empirical findings, drawn from a sample of over 27 000 US acquisitions, offer strong support for the model, suggesting that firms with low thresholds may choose to invest despite comparatively low abnormal returns. Copyright © 2007 John Wiley & Sons, Ltd.

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    Article provided by John Wiley & Sons, Ltd. in its journal Managerial and Decision Economics.

    Volume (Year): 29 (2008)
    Issue (Month): 2-3 ()
    Pages: 209-225

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    Handle: RePEc:wly:mgtdec:v:29:y:2008:i:2-3:p:209-225
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