A Bold Move or Biting Off More than They Can Chew: Examining the Performance of Small Acquirers

• In Event: Session D: Financial Accounting and Reporting

Abstract

In this study we examine the association between acquirer size and acquisition performance. Moeller, Schlingemann, and Stulz (2004) and Vijh and Yang (2010) find that small acquirers enjoy announcement period returns that are significantly higher than returns for larger acquirers; however, results from Oler (2008) and Harp (2012), among others, suggest that small acquirers significantly underperform after the acquisition is consummated. We attempt to corroborate and better understand how small firms fare as acquirers over the announcement, interim, and post-acquisition periods using announcement period trading volume, returns, fundamental performance, and the likelihood that they become targets themselves in the post-acquisition period. Our results suggest that investors are overly optimistic about the performance of certain small acquirers (i.e., they seem to view acquisition announcements by small firms as “bold moves” that is value-enhancing), and that this effect is concentrated in small acquirers offering stock consideration, acquiring relatively larger targets, and to a smaller degree acquiring targets outside of their industry. However, these positive returns are short lived and are reversed in the interim and post-acquisition period when small acquirers fail to deliver on expectations.

Authors

• Nancy Lee Harp, Clemson University

• Kevin Kim, Texas Tech University

• Derek K Oler, Texas Tech University