Bidder and Target Size Effects in M&A Are Not Driven by Overconfidence or Agency Problems

Christoph Schneider and Oliver Spalt

Critical Finance Review, 2025, vol. 14, issue 2, 187-215

Abstract: The impact of size variables on bidder announcement returns can be decomposed into two effects, the “size as proxy effect” which was the focus of the prior M&A literature, and a “scaling effect” which magnifies per-dollar value created in a given deal. Using data of US takeovers from 1981 to 2014, we document that small bidders make better acquisitions than large bidders when they acquire non-public firms, but worse acquisitions when they acquire public firms, which is inconsistent with size as proxy explanations (e.g., size proxying for overconfidence of a firm’s managers or agency problems). The pattern is consistent with scaling, because value created for bidders is on average negative for public target deals, but positive for non-public target deals. Scaling creates additional predictions for target size, relative size, and international M&A deals we show are borne out by the data.

Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:now:jnlcfr:104.00000156

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