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Determinants of firm‐specific thresholds in acquisition decisions
Author(s) -
Folta Timothy B.,
O'Brien Jonathan P.
Publication year - 2007
Publication title -
managerial and decision economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.288
H-Index - 51
eISSN - 1099-1468
pISSN - 0143-6570
DOI - 10.1002/mde.1388
Subject(s) - corporate governance , competence (human resources) , sample (material) , function (biology) , microeconomics , economics , business , empirical evidence , econometrics , industrial organization , financial economics , finance , management , philosophy , chemistry , chromatography , epistemology , evolutionary biology , biology
We develop a model to explain why some firms make acquisitions, while other firms with equal performance expectations do not. We argue that the decision to acquire is not strictly a function of expected abnormal returns, but also depends on a firm's unique acquisition threshold. Our model posits that the threshold is determined by governance, managerial competence, synergy with assets in place, and synergy with growth options. Our empirical findings, drawn from a sample of over 27 000 US acquisitions, offer strong support for the model, suggesting that firms with low thresholds may choose to invest despite comparatively low abnormal returns. Copyright © 2007 John Wiley & Sons, Ltd.
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