Firm size, idiosyncratic risk, and shareholder gains in corporate acquisitions

Small acquirers experience greater abnormal returns upon acquisition announcements (other things equal) than large acquirers. In efficient markets, the persistence of differential abnormal returns over time and across industries would imply that shareholder wealth effects of corporate acquisitions diminish as firms grow, possibly due to greater agency problems at large firms. The evidence presented in this paper is consistent with the hypothesis that the differential market response is related to limits to arbitrage, rather than differential value creation among small and large acquirers. I find a difference in abnormal announcement returns only in acquisitions of private and subsidiary targets: events that are interpreted by the market as positive news. My results suggest that announcements made by small acquirers are associated with costlier short sales and larger abnormal trading volume resulting in greater temporary price pressure. The evidence is inconsistent with the hypothesis that large acquirers overpayment for the target and/or greater operating synergies by small acquirers explain the size effect in shareholder gains.