Q-Theory and Acquisition Returns

This paper applies the qminus;theory of investment to corporate acquisitions to explain target choice and acquirer returns. The theory predicts that larger acquirers optimally choose larger targets, but of smaller relative size. Dollar gains increase, but percentage returns decrease as acquirers get larger. Since later deals are made by larger acquirers, returns appear to decline with experience. Using a panel dataset of repeat acquirers, empirical tests support the predictions of qminus;theory. In contrast, I find only weak support for an agency explanation and no support for a hubris story. I also reject the theory that declining returns result from market anticipation of later deals