Asymmetric Cost Behavior and Acquirer Returns: Evidence from U.S. Mergers

Abstract

This paper investigates the asymmetric behavior of the selling, general and administrative (SG&A) costs of acquirers, and reveals its effects on mergers & acquisitions (M&A) performance in a one-year event window. It is based on a sample of 6888 M&As completed in the U.S. during the 2003-2015 period and employs panel data regressions. The results show that 73% of the acquirers display asymmetric cost behavior. A significant negative relation is found between cost stickiness and acquirers' abnormal returns following the merger announcement. Competition in the market for corporate control is positively related with acquirer returns but exacerbates the negative effects of cost-stickiness on abnormal returns of acquirers. The acquirers' risk of default is significantly negatively related to the abnormal returns they generate. This adverse effect of default risk on returns is stronger for acquirers with anti-sticky costs. Acquirer risk offsets the positive effects of competition on returns. Acquirers with sticky costs have lower abnormal returns than those with anti-sticky costs in a one-year window. The present study contributes to the literature by revealing the asymmetric cost behavior of acquirers involved in merger activity during the last decade, and provides evidence for an alternative explanation for the lower abnormal returns of the acquiring firms.