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Determinants of firm-specific thresholds in acquisition decisions

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  • Timothy B. Folta

    (Purdue University, West Lafayette, IN, USA)

  • Jonathan P. O'Brien

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

Abstract

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.

Suggested Citation

  • Timothy B. Folta & Jonathan P. O'Brien, 2008. "Determinants of firm-specific thresholds in acquisition decisions," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 29(2-3), pages 209-225.
  • Handle: RePEc:wly:mgtdec:v:29:y:2008:i:2-3:p:209-225
    DOI: 10.1002/mde.1388
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    File URL: http://hdl.handle.net/10.1002/mde.1388
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    References listed on IDEAS

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    Cited by:

    1. Arkadiy V. Sakhartov & Timothy B. Folta, 2014. "Resource relatedness, redeployability, and firm value," Strategic Management Journal, Wiley Blackwell, vol. 35(12), pages 1781-1797, December.
    2. McCann, Brian T. & Folta, Timothy B., 2012. "Entrepreneurial entry thresholds," Journal of Economic Behavior & Organization, Elsevier, vol. 84(3), pages 782-800.
    3. Wennberg, Karl & Wiklund, Johan & Hellerstedt, Karin & Nordqvist, Mattias, 2011. "Implications of Intra-Family and External Ownership Transfer Of Family Firms: Short Term and Long Term Performance," Ratio Working Papers 172, The Ratio Institute.

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