Target Firm Characteristics: What Do Investors Value During Recessions?

Abstract

Prior merger and acquisition (M&A) literature assumes that investors respond to deal announcements in the same way, regardless of the business cycle. The results of this study provide unique insight into investor reactions to M&A activity during recessions when resources are constrained. The results show that target cumulative abnormal returns are 3.53% to 5.72% significantly higher during recessions than in non-recessions. During recessions, the market rewards target firms with smaller market capitalization, lower risk, and lower book-to-market ratios at premiums of 5.68%, 5.65%, and 7.26%, respectively over those earned in non-recessions.