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Firm size, market conditions and takeover likelihood

Tunyi Tunyi Abongeh

Review of Accounting and Finance, Volume: 18, Issue: 3, Pages: 483 - 507

Swansea University Author: Tunyi Tunyi Abongeh

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DOI (Published version): 10.1108/raf-07-2018-0145

Abstract

Purpose: The firm size hypothesis – takeover likelihood (TALI) decreases with target firm size (SIZE) – has enjoyed little traction in the TALI modelling literature; hence, this paper aims to redevelop this hypothesis while taking account of prevailing market conditions – capital liquidity and marke...

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Published in: Review of Accounting and Finance
ISSN: 1475-7702
Published: Emerald 2019
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URI: https://cronfa.swan.ac.uk/Record/cronfa65116
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spelling v2 65116 2023-11-26 Firm size, market conditions and takeover likelihood eefe2792c8eed5b49feede33981dfa53 Tunyi Tunyi Abongeh Tunyi Tunyi Abongeh true false 2023-11-26 BAF Purpose: The firm size hypothesis – takeover likelihood (TALI) decreases with target firm size (SIZE) – has enjoyed little traction in the TALI modelling literature; hence, this paper aims to redevelop this hypothesis while taking account of prevailing market conditions – capital liquidity and market performance. Design/methodology/approach: The study uses a logit modelling framework to model TALI. Model performance is assessed using receiver operating characteristic (ROC) curve analysis. The empirical analysis is based on a UK sample of 34,661 firm-year observations drawn from 3,105 firms and 1,396 M&A deals over a 30-year period (1987-2016). Findings: While acquirers generally seek smaller targets because of transaction cost constraints, the paper shows that the documented negative relation between SIZE and TALI arises from sampling bias. Over a full sample, mid-sized firms are most at risk of takeovers. Additionally, market conditions moderate the SIZE–TALI relationship, with acquirers more inclined to pursue comparatively larger targets when financing costs are low and market growth or sentiment is high. The results are generally robust to endogeneity. Research limitations/implications: Sample truncation on the basis of SIZE leads to empirical misspecification of the TALI–SIZE relation. In an unbiased sample, an inverse U-shaped specification between TALI and SIZE sufficiently models the underlying relation and leads to improvements in the predictive ability of TALI models. Originality/value: This study advances a new firm size hypothesis which is consistent with classic M&A theories. The study also evidences market conditions as a moderator of the acquirer’s choice of target SIZE. A new model specification which recognises the non-linear relation between TALI and SIZE and accounts for the moderating effect of market conditions on the SIZE-TALI relationship leads to improvements in the performance of TALI prediction models. Journal Article Review of Accounting and Finance 18 3 483 507 Emerald 1475-7702 Prediction, Market performance, Firm size, Takeover likelihood, Capital liquidity 9 8 2019 2019-08-09 10.1108/raf-07-2018-0145 http://dx.doi.org/10.1108/raf-07-2018-0145 COLLEGE NANME Accounting and Finance COLLEGE CODE BAF Swansea University Not Required 2024-01-03T11:26:11.0787313 2023-11-26T11:24:15.8311344 Faculty of Humanities and Social Sciences School of Management - Accounting and Finance Tunyi Tunyi Abongeh 1
title Firm size, market conditions and takeover likelihood
spellingShingle Firm size, market conditions and takeover likelihood
Tunyi Tunyi Abongeh
title_short Firm size, market conditions and takeover likelihood
title_full Firm size, market conditions and takeover likelihood
title_fullStr Firm size, market conditions and takeover likelihood
title_full_unstemmed Firm size, market conditions and takeover likelihood
title_sort Firm size, market conditions and takeover likelihood
author_id_str_mv eefe2792c8eed5b49feede33981dfa53
author_id_fullname_str_mv eefe2792c8eed5b49feede33981dfa53_***_Tunyi Tunyi Abongeh
author Tunyi Tunyi Abongeh
author2 Tunyi Tunyi Abongeh
format Journal article
container_title Review of Accounting and Finance
container_volume 18
container_issue 3
container_start_page 483
publishDate 2019
institution Swansea University
issn 1475-7702
doi_str_mv 10.1108/raf-07-2018-0145
publisher Emerald
college_str Faculty of Humanities and Social Sciences
hierarchytype
hierarchy_top_id facultyofhumanitiesandsocialsciences
hierarchy_top_title Faculty of Humanities and Social Sciences
hierarchy_parent_id facultyofhumanitiesandsocialsciences
hierarchy_parent_title Faculty of Humanities and Social Sciences
department_str School of Management - Accounting and Finance{{{_:::_}}}Faculty of Humanities and Social Sciences{{{_:::_}}}School of Management - Accounting and Finance
url http://dx.doi.org/10.1108/raf-07-2018-0145
document_store_str 0
active_str 0
description Purpose: The firm size hypothesis – takeover likelihood (TALI) decreases with target firm size (SIZE) – has enjoyed little traction in the TALI modelling literature; hence, this paper aims to redevelop this hypothesis while taking account of prevailing market conditions – capital liquidity and market performance. Design/methodology/approach: The study uses a logit modelling framework to model TALI. Model performance is assessed using receiver operating characteristic (ROC) curve analysis. The empirical analysis is based on a UK sample of 34,661 firm-year observations drawn from 3,105 firms and 1,396 M&A deals over a 30-year period (1987-2016). Findings: While acquirers generally seek smaller targets because of transaction cost constraints, the paper shows that the documented negative relation between SIZE and TALI arises from sampling bias. Over a full sample, mid-sized firms are most at risk of takeovers. Additionally, market conditions moderate the SIZE–TALI relationship, with acquirers more inclined to pursue comparatively larger targets when financing costs are low and market growth or sentiment is high. The results are generally robust to endogeneity. Research limitations/implications: Sample truncation on the basis of SIZE leads to empirical misspecification of the TALI–SIZE relation. In an unbiased sample, an inverse U-shaped specification between TALI and SIZE sufficiently models the underlying relation and leads to improvements in the predictive ability of TALI models. Originality/value: This study advances a new firm size hypothesis which is consistent with classic M&A theories. The study also evidences market conditions as a moderator of the acquirer’s choice of target SIZE. A new model specification which recognises the non-linear relation between TALI and SIZE and accounts for the moderating effect of market conditions on the SIZE-TALI relationship leads to improvements in the performance of TALI prediction models.
published_date 2019-08-09T11:26:13Z
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score 11.013731

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