Determinants of firm-specific thresholds in acquisition decisions

Timothy B. Folta and Jonathan P. O'Brien
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Timothy B. Folta: Purdue University, West Lafayette, IN, USA, Postal: Purdue University, West Lafayette, IN, USA
Jonathan P. O'Brien: University College Dublin, Blackrock, Co Dublin, Ireland, Postal: University College Dublin, Blackrock, Co Dublin, Ireland

Managerial and Decision Economics, 2008, vol. 29, issue 2-3, pages 209-225

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.

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