Are Takeovers Really Bad Deals for the Acquirers?

I document strong empirical evidence showing that in the face of unexpected industry shocks a majority of acquirers may pursue takeovers to catch up with competitors. This overriding motive for takeover leads to an important selfselection problem that is largely overlooked in previous studies: acquirers are more likely to be the firms that have high potential to create value in takeovers, but may not have performed as well if they were forced to stand alone. Traditional estimates of takeover gains, measured from both post-merger operating performance and stock market reaction, are downward biased, creating puzzles that appear contradictory. I build a dynamic search model to explicitly account for this self-selection problem. Once estimated to match key data moments, the model produces a significantly positive takeover gain of acquirers as high as 12% and implies a sizable bias of -16% in traditional empirical estimates. Moreover, my model yields a few novel implications which I first verify in the data. ∗The author is from Wisconsin School of Business and now visiting Wharton School of Business, University of Pennsylvania. I thank Bjorn Eraker, Ivan Shaliastovich, Randall Wright, Joao Gomes, Luke Taylor, Mathieu Taschereau-Dumouchel, Oliver Levine, Michael Gofman, Mark Ready, Youchang Wu, Elizabeth Odders-White, and seminar participants in London Business School (Trans-Atlantic Doctoral Conference 2012), Econometrics Society North American Summer Meeting 2012, Wharton School of Business and Wisconsin School of Business for helpful comments and discussions.