Why Do Small Acquirors Do Better?

Abstract

This paper studies why small acquirors realize better announcement window abnormal returns than large acquirors. Using a sample of 12,493 completed mergers announced between 1980 and 2010, it finds that much of the differential is due to market inefficiencies. It finds that (i) the presence of merger arbitrageurs in equity deals for public targets understates the wealth effect for shareholders of large acquirors and (ii) higher diversity of opinion as to share value and short selling restrictions (which apply disproportionately to small acquirors) cause the wealth effect for small acquirors in all cash deals to be overstated. It finds little evidence to suggest that the size effect is due to benefits that mergers bring to small acquirors that they do not bring to large acquirors, such as decreases in information asymmetry, lower idiosyncratic risk or the greater potential to be added to stock indices. This paper does find, however, that the largest part of the size effect can be accounted for by firms in the lowest size decile of acquirors and that part of the size effect is likely due to the very high announcement window abnormal return for acquirors in reverse takeovers, which tend to be small acquirors.