Asset Specificity and Firm Value: Evidence from Mergers

Abstract

This study explores the effect of asset specificity on target firms’ value in merger. Using US merger data, I show that shareholders of target firms that consist of highly specialized real assets receive a lower merger premium than shareholders of target firms consisting of generic assets. Results also indicate that the asset specificity discount in the target premium is more pronounced if target firms are financially distressed and high valuation buyers of target assets are financially constrained. Further investigation reveals that firms with specialized assets reduce leverage more than other firms when the risk of liquidation loss is high. Overall, the results are consistent with the hypothesis that asset specificity of a firm is an important determinant of the firm’s selling value as well as the value of its assets as pledgeable collateral.