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Taking Over the Size Effect: Asset Pricing Implications of Merger Activity

Published online by Cambridge University Press:  31 January 2023

Sara Easterwood ,
Jeffry Netter ,
Bradley Paye  and
Michael Stegemoller Open the ORCID record for Michael Stegemoller [Opens in a new window]
Sara Easterwood
Affiliation:
Virginia Tech Pamplin College of Business [email protected]
Jeffry Netter
Affiliation:
University of Georgia Terry College of Business [email protected]
Bradley Paye
Affiliation:
Virginia Tech Pamplin College of Business [email protected]
Michael Stegemoller*
Affiliation:
Baylor University Hankamer School of Business
*
[email protected] (corresponding author)
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Abstract

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We show that merger announcement returns account for virtually all of the measured size premium. An empirical proxy for ex ante takeover exposure positively and robustly relates to cross-sectional expected returns. The relation between size and expected returns becomes positive or insignificant, rather than negative, conditional on this takeover characteristic. Asset pricing models that include a factor based on the takeover characteristic outperform otherwise similar models that include the conventional size factor. We conclude that the takeover factor should replace the conventional size factor in benchmark asset pricing models.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 59 , Issue 2 , March 2024 , pp. 690 - 726
Copyright
© The Author(s), 2023. Published by Cambridge University Press on behalf of the Michael G. Foster School of Business, University of Washington

Footnotes

We thank Aliaa Bassiouny, Andrew Detzel, John Easterwood, Roger Edelen, Jonas Nygaard Eriksen, Wayne Ferson (UWSFC discussant), Scott Hoover, Jonathan Karpoff, Zhongjin Lu, Andrew MacKinlay, Annette Poulsen, Zhongling Qin, Vijay Singal, Allan Timmermann, and conference and seminar participants at Aarhus University, the 2022 University of Washington Summer Finance Conference (UWSFC), Virginia Tech, and Washington and Lee University for helpful comments. We are especially grateful for many helpful comments made by Christopher Hrdlicka (the referee).

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