Are Small Firms Less Vulnerable to Overpriced Stock Offers?

Abstract

We document an inverted-U relation between targetiveness (probability of being targeted) and firm size. However, this pattern describes stock offers and is more pronounced during hot markets with greater overvaluations. For cash offers we find a negative and monotonic relation. These contrasting patterns suggest that small firms (in the bottom NYSE size quartile) are less attractive to overpriced stock acquirers, and also that their managers are less receptive to overpriced stock offers which expropriate the wealth of their long-term shareholders. Several additional results support this hypothesis. First, the stock acquirers of small targets are less overvalued than the stock acquirers of large targets, but an opposite result holds for cash acquirers. Second, the acquirer announcement returns following stock offers are less negative for small targets than for large targets. Moreover, this certification effect increases for acquirers facing greater information asymmetry. Third, the stock acquirers of small targets earn higher long-term returns than the stock acquirers of large targets.

Keywords: Firm size effect, mergers and acquisitions, overvaluation, uncertainty, opinion divergence, asymmetric information, equity issuance

JEL Classification: G34, G30