The Role of Skewness in Mergers and Acquisitions

Abstract

Investors prefer stocks with idiosyncratic skewness in their returns, which may be evidence of behavioral biases. Previous research suggests that skewness is related to the choice of target in corporate acquisitions, which may reflect CEOs’ behavioral biases. However, if the acquiring firms’ stock returns are also skewed, then the acquirer CEOs may rationally use their stock as currency in these deals. We investigate the skewness of the acquiring firm and the method of payment to determine if takeovers involving high skewness stocks are consistent with shareholder wealth maximization. We find that firms with high levels of skewness are more likely to become takeover targets and that takeover premiums increase with skewness, but there is no relation between the target’s skewness level and acquirer announcement returns. We also find that acquirers with high skewness are more likely to pay with stock and have higher announcement returns. We conclude that acquirer CEOs often take advantage of investor preference for skewness when undertaking mergers and acquisitions activity.