What Happens in Acquisitions? Evidence from Brand Ownership Changes and Advertising Investment

Abstract

We study a large sample of brands that are acquired and find that new owners display an abnormal propensity to sharply increase or decrease advertising spending, with large decreases being particularly common. Increased private ownership is associated with a significant downward shift in advertising relative to other deals, primarily reflecting the behavior of private equity purchasers. New owners appear to alter advertising investment to counteract any systematic under or overinvestment by prior owners, and they tend to cut advertising in existing brands that closely overlap with purchased brands. Combined buyer plus seller announcement returns are positively related to measures of post-acquisition cuts in advertising spending and also to indicators of corrections to past investment biases by prior owners. Acquired brands do not on average experience significant losses in market share, even when advertising spending is revised downwards. Our evidence is consistent with the hypothesis that the identity and characteristics of an asset's owner are important determinants of investment policy. The evidence generally supports the notion that changes in investment brought about by an acquisition are efficiency enhancing.

Keywords: Acquisitions, mergers, advertising, investment, brands

JEL Classification: G31, G32, G34, D92, M37